Ladies and gentlemen, thank you for standing by. Welcome to the Charles River Laboratories Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.I’d now turn the conference call over to your host Corporate Vice President of Investor Relations, Todd Spencer. Please go ahead.

Thank you, and good morning, and welcome to Charles River Laboratories’ fourth quarter 2019 earnings and 2020 guidance conference call and webcast. This morning, Jim Foster, Chairman, President and Chief Executive Officer; and David Smith, Executive Vice President and Chief Financial Officer, will comment on our results for the fourth quarter and the full-year 2019 and our guidance for 2020. 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 at noon today and can be accessed by calling 866-207-1041. The international access number is 402-970-0847. The access code in either case is 8093484. The replay will be available through February 25. You may also access an archived version of the webcast on our Investor Relations website.I’d like to remind you of our Safe Harbor. Any remarks that we may 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 vary materially from those indicated by any forward-looking statements.During this call, we will primarily discuss results from continuing operations and non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core operating results and future prospects. The non-GAAP financial measures are not meant to be considered superior to or a substitute for results of 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 through the Financial Information link.I will now turn the call over to Jim Foster.

Good morning. I’m very pleased to speak with you today about the conclusion of another excellent year for Charles River, our expectations for 2020 and the accomplishments we’ve made and expect to make as we execute our strategy to achieve our financial targets. We believe the strong finish to 2019 demonstrates what we’ve worked hard to achieve, the breadth of our leading early stage portfolio, which more fully supports the discovery, nonclinical development and safe manufacturer of new therapies for the treatment of disease; the deep relationships we forged with our clients, both large and small, by leveraging our flexible and efficient outsourcing model; investments we’ve made in our scientific capabilities and in the necessary staff and capacity to ensure that we could meet the needs of our clients; and our greater operating efficiency, which has enabled us to improve speed and responsiveness to clients while generating margin expansion.The success of these efforts was evident not only in our outstanding financial performance but also in the fact that we worked on 85% of the drugs approved by the FDA in 2019. This is an accomplishment few CROs can claim and we believe is a testament to the value that our clients place on our contribution to their research efforts.Let me now give you the highlights of our fourth quarter and full year performance. We reported revenue of $691.1 million in the fourth quarter of 2019, an increase of 14.9% on a reported basis. Broad-based growth in all three segments resulted in organic revenue growth of 7.4%, with the largest contribution coming from the DSA segment.For 2019, revenue was $2.62 billion, with a reported growth rate of 15.7% and an organic growth rate of 8.5%. The organic growth rate was consistent with the 8.7% reported in 2018and both years were firmly within the high single-digit range, which is our goal for the next two years. From a client perspective, biotech clients were our fastest-growing client segment in both the quarter and the year as they benefited from the third strongest year of funding from the capital markets and VCs.The operating margin was 21.4% in the fourth quarter, an increase of 110 basis points year-over-year driven primarily by the DSA segment. This marks the second consecutive quarter that the consolidated operating margin has improved year-over-year. As a result of the second half margin expansion, the 2019 full year operating margin improved by 20 basis points to 19%. We’re very pleased with the fourth quarter and full year margin performance as it demonstrates our ability to leverage the investments that we have made in staff, capacity and infrastructure to accommodate the robust growth in a more scalable and efficient manner and also provides a clear line of sight to our 20% goal for the full year 2021. With more balanced investments ahead, coupled with our continued focus on driving greater efficiency, we expect to make meaningful progress towards our 20% two-year target in 2020.Earnings per share were $2.01 for the fourth quarter, an increase of 26.4% from $1.59 in the fourth quarter of 2018. For the full year, earnings per share were $6.73, a 16% increase over the prior year. We exceeded our prior guidance range of $6.50 to $6.60 due primarily to the robust revenue growth and operating margin improvement in the fourth quarter. We believe our 2019 performance thoroughly demonstrates the successful execution of our strategy to position Charles River as the early-stage research partner of choice for our valued clients and that the pace of demand from these clients continues to be robust.Our exceptional market position, the strategic expansion of our unique portfolio and the ongoing enhancement of our culture of continuous improvement give us added confidence in our 2020 guidance. Revenue growth in 2020 is expected to be in a range from 13% to 14.5% on a reported basis and 7.75% to 8.75% on an organic basis. Non-GAAP earnings per share are expected to be in a range of $7.45 to $7.60 or an increase of 10.5% to 13% over last year. These metrics meet our long-term targets of high single-digit organic revenue growth and earnings per share growth at least in the low double digits. I’d like to provide you with additional details on our fourth quarter segment performance and our expectations for 2020 beginning with the RMS segment.RMS revenue in the fourth quarter was $131.3 million, an increase of 2.8% on an organic basis. For the year, RMS organic revenue was 5.2%. We anniversaried the commencement of the insourcing solutions contract with NIAID in September, which resulted in the expected reduction from the mid single-digit growth rate that we had recorded earlier in 2019. Aside from the NIAID anniversary, fourth quarter RMS growth was largely driven by similar trends that characterized the first three quarters of the year, robust demand for research models in China and solid growth through research model services partially offset by lower sales growth for research models outside of China. In 2020, we believe that the RMS segment will perform in line with its two-year target of low to mid single-digit organic growth.The services businesses continued to be a consistent source of revenue growth. Even without the year-over-year benefit from NIAID contract, the insourcing solutions business, or IS, continued to perform very well as clients increasingly adopted flexible models to enhance the operational efficiency of their vivarium management and research efforts. We were awarded new NIH contracts, and while collectively smaller than NIAID, they also drove revenue growth. In 2020, these contract awards will be offset partially by the completion of an IS contract in China.We’re gaining traction with our new biopharma clients through our CRADL initiative, which provides both small and large biopharmaceutical clients with turnkey research capacity in the Boston, Cambridge and South San Francisco biohubs. The South San Francisco CRADL lab opened in January, and has already received very favorable client feedback with a number of clients occupying the space and more committed to it. Through both unique models like CRADL and more traditional in-sourced staffing arrangements, IS has become an important partner for clients who need this type of support for the research programs.Our research models business in China, which represents slightly less than 10% of RMS revenue, had another strong quarter and has continued to deliver double-digit revenue growth annually since the business was acquired in 2013. There is substantial demand for our high-quality models in this rapidly emerging biomedical research market, which we support through continued expansion within China.Overall, expanding our presence supports our goals of market leadership and achieving a market share in China similar to that in Western markets. With respect to the coronavirus outbreak in China, we are closely monitoring the situation but, at this juncture, have only forecast a small financial impact in the first quarter. At this time, we do not believe that there will be a material impact from the restrictions on the transport of research models within and out of China because we believe that we can offset most of the potential impact through other sources.Research models remain an essential regulatory required scientific tool for early-stage research and toxicology and a vital component of our portfolio to support our clients and our own DSA segment, which remains the largest client of our research models business. Researchers view our broad portfolio of high-quality, scientifically defined research models and our exceptional client service as the foundation from which they can discover new molecules.To expand our portfolio of foundational research tools and enhance RMS’ long-term growth profile, in January, we completed the acquisition of HemaCare, a premier provider of human-derived cellular products that are used as critical inputs throughout the cell therapy development and manufacturing process. Combined with our integrated early stage portfolio of discovery, safety assessment and manufacturing support services, the addition of HemaCare creates a unique, comprehensive solution that enables clients to work with one scientific partner from the earliest stages of their cell therapy programs and iteratively throughout the research process in order to accelerate their speed to market. We believe HemaCare will lead more clients to start this cell therapy discovery programs at Charles River and remain with us.In addition to enhancing client retention, the acquisition increases our exposure to high-growth cell therapy market. HemaCare is expected to drive profitable revenue growth with estimated growth of at least 30% annually over the next five years. The RMS operating margin declined by 50 basis points year-over-year to 24.6% in the fourth quarter primarily driven by the research models business outside of China. We strive to offset the impact of the volume declines in mature markets with our ongoing efficiency initiatives aimed at optimizing productivity and reducing the RMS cost structure. Through these efforts, our goal is to maintain the RMS operating margin above 25% as we did in 2019 at 26.2% and intend to do so in 2020.DSA revenue in the fourth quarter was $439.2 million, a 9.4% increase on an organic basis with both Discovery and Safety Assessment business is performing very well. For the full year, DSA organic revenue growth was 9.1%, firmly achieving our high single-digit segment outlook for the sixth consecutive year. Backlog and bookings in both businesses remained strong in the fourth quarter, reinforcing our expectation that the DSA segment is well positioned to generate high single-digit organic growth again in 2020. Biotech clients continue to drive revenue growth in 2019, demonstrating that these small and midsized clients remain laser-focused on innovation and moving their programs forward and are largely unaffected by short-term fluctuations in the funding environment because it’s estimated that they have three to four years of cash on hand.Clients continue to choose our flexible and efficient outsourcing model for early-stage drug development in lieu of maintaining the in-house expertise. The Discovery business had an exceptional quarter and a strong year, with broad-based growth across the majority of its business lines. Our continuing efforts to build scientific expertise for the discovery of novel therapeutics to create targeted and flexible sales strategies and to harmonize the discovery portfolio have proven to be successful. We have enhanced our scientific capabilities across our clients’ major therapeutic areas of focus, from oncology to – and CNS to rare diseases. Our ability to work with clients for a single project for an integrated program and to structure flexible relationships to meet their specific outsourcing needs is resonating with clients and has led to a number of new business opportunities recently, including the Takeda collaboration.In order to accommodate our clients’ diverse outsourcing needs, we will continue to strengthen our discovery toolkit through our partnering strategy. Our partnerships with BitBio to expand our translational drug discovery platform related to stem cells and with Fios Genomics to provide bioinformatics expertise are two recent examples of the continued expansion of our discovery portfolio. And our exclusive partnership with Distributed Bio, which commenced in October 2018, enhances our large molecule discovery capabilities and fills a gap in our portfolio. It has continued to perform very well as our collaborative offering is gaining traction with our clients.We firmly believe our unique ability to serve as a single source partner to support our clients’ early-stage research needs will continue to attract new discovery business opportunities and further incentivize clients to stay with us into safety assessment. Our Safety Assessment business had a strong quarter with balanced growth driven primarily by higher study volume and increased pricing. These factors, coupled with the acquisition of Citoxlab resulted in another strong year for the Safety Assessment business.Citoxlab continued to perform very well with all major integration milestones remaining on track and its financial performance exceeding the acquisition plan after a strong fourth quarter. Citoxlab, as well as the acquisitions of MPI Research in 2018 and WIL Research in 2016, have meaningfully enhanced our leading position in the safety assessment market and solidified our scientific capabilities and global scale, allowing us to fully support our clients’ early-stage development needs. We are pleased with the extensive depth and breadth of our Safety Assessment portfolio and remain intently focused on continuing to enhance the business and value we provide to our clients.In addition to M&A, we are evaluating opportunities to add new niche capabilities, both through internal investment and through our partnership strategy. We believe that our focus on broadening our portfolio, our scientific capabilities and our global scale over the past several years have further differentiated Charles River from the competition and positioned us very well for 2020 as the partner of choice for our clients’ broad safety assessment needs.The DSA operating margin was 25.6% in the fourth quarter, a 240 basis point improvement from the fourth quarter of 2018driven by both the Discovery and Safety Assessment businesses. The robust margin performance reflects greater leverage of top line growth, now that staffing levels are appropriately balanced with client demand. We continue to hire in 2020 to accommodate increasing demand but expect to do so at a more measured pace than in recent years. The margin increase also reflects our continued focus on operating efficiency as well as some improvement in Citoxlab’s operating margin. Citoxlab’s margin is expected to continue to improve in 2020 primarily through the attainment of incremental synergies.In 2020, we expect all of these factors to contribute to meaningful progress towards our two-year target of a mid-20% operating margin. Manufacturing Support revenue was $120.6 million for the fourth quarter with growth rate of 6.3% on an organic basis, primarily driven by robust client demand in the Biologics Testing Solutions business. The slow growth rates for the manufacturing segment in the fourth quarter was due primarily to the Microbial Solutions business and, to a lesser extent, Avian.Organic revenue growth for the year was 10.8%, in line with our low double-digit target for the segment for the year and over the longer term. As we have said in the past, our business is not linear and there can be quarterly fluctuations across our portfolio. But on an annual basis, we are confident that the manufacturing segment will continue to grow at low double-digit rate organically.Microbial Solutions revenue increased in the quarter but at a slower rate than in prior quarters. This was due principally to the timing of orders for both Endosafe and Celsis products and the availability of new systems. For the year, revenue increased at a low double-digit organic growth rate once again. Microbial Solutions is also expected to return to low double-digit growth rate after the first quarter of 2020 because the first quarter year-over-year comparison will be affected by last year’s large stocking order for Celsis products from our strategic partner in certain non-pharma markets. David will discuss the impact of the stocking order when he discusses our first quarter outlook.Overall, we continue to firmly believe that our ability to provide clients with a total rapid microbial testing solution, as well as the quality and accuracy of our testing platform, are key differentiators from the competition, which will lead clients to continue to choose Charles River for the critical quality-controlled testing requirements.The Biologics business reported strong revenue growth for the fourth quarter and for the full year. This performance is indicative of the sustained rapid increase in the number of biologics in development as well as new opportunities such as cell and gene therapies that continue to propel market growth in the low double digits. We have been successful at gaining business because of our extensive portfolio of services to support the safe manufacture of biologics. To accommodate robust client demand, we have invested in capacity expansions. The transition to the largest site in Pennsylvania is effectively complete. We are booking new business and continuing to ramp up utilization while working with the remaining clients who are finalizing their validation efforts. We believe this expansion and smaller ongoing expansions globally as well as our focus on adding new services to our biologics portfolio, particularly in cell and gene therapy, will support the robust growth we expect this business to generate for the foreseeable future.The Manufacturing Support segment’s operating margin was 37.2% in the fourth quarter, consistent with the 37.4% reported last year. We were pleased that Microbial Solutions, despite the slower growth rate in the fourth quarter, continued to benefit from the investments in process improvements that are resulting in better operating leverage for the business. The Biologics business faced headwinds from higher costs due in part to growth-related initiatives, including capacity expansions, but now that we have eliminated the duplicate costs in Pennsylvania, the manufacturing segment operating margin reached its highest level of the year.We believe we are extremely well positioned to modestly improve manufacturing’s full year operating margin in 2020 from the 33.9% in 2019 and to achieve our target in the mid-30% range. We continue to focus on the execution of our strategy to maintain our position as the early-stage CRO partner of choice for our clients’ drug research, development and manufacturing support efforts. As we look to the future, it’s imperative that we continue to expand our portfolio of essential products and services to enhance our ability to comprehensively support our clients’ drug research efforts. We intend to do so through strategic acquisitions, which is always our preferred use of capital.Our pipeline of M&A candidates remains robust, and we continue to evaluate a number of opportunities, ranging from unique research tools to discovery capabilities to manufacturing support activities. We also must stay current with new technologies and modalities for which we will increasingly utilize our partnership strategy to add innovative capabilities in cutting-edge technologies with limited upfront risk. We have also spent the past several years investing internally in capacity and staffing levels that are commensurate with growing demand while striving to enhance the scalability of the business. While we need to continue to invest, we believe that we have achieved an appropriate balance. We now have an enhanced ability to leverage top line growth and drive greater efficiency.As a result, we’re optimistic as we turn the page to 2020. We believe our annual guidance is achievable and our two-year targets are squarely in sight. Our strong business is delivering value to clients and to employees and to shareholders as a result of our position in robust end markets, our attractive growth profile and the incremental value that will be derived from achieving meaningful operating margin improvement over the next two years.In conclusion, I’d like to thank our clients and shareholders for their support and our employees for their exceptional work and commitment.Now, I’d like David Smith to give you additional details on our financial performance and 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 from continuing operations, which exclude amortization and other acquisition-related charges, costs related primarily to our global efficiency initiatives 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.My discussion this morning will focus primarily on our 2020 financial guidance. We believe that we will deliver strong revenue growth this year and achieve meaningful operating margin expansion, which gives us confidence that we are well positioned to deliver non-GAAP earnings per share between $7.45 and $7.60. Supported by a healthy funding environment, we expect client demand will continue to be robust. Consequently, we expect organic revenue growth this year in the range of 7.75% to 8.75% and reported revenue growth of 13% to 14.5%, both of which are consistent with our two-year revenue growth target.The trends in each of our business segments in 2020 are expected to be similar to last year. The RMS segment is expected to achieve low-to-mid single-digit organic revenue growth with HemaCare acquisition adding at least $50 million or approximately 10% to the reported RMS growth rate. In addition to the HemaCare contribution, the RMS segment is expected to benefit from robust demand for research models in China, broad-based growth in the services business from GEMS, RADS and insourcing solution and price.We expect the DSA segment to deliver high single-digit organic revenue growth based on continued strong contributions from both the Safety Assessment and Discovery Services businesses. The Manufacturing segment is expected to grow low double-digit organic revenue growth again in 2020, with both the Microbial Solutions and Biologics businesses driving the increase. Foreign exchange is expected to contribute 100 to 150 basis points of our reported revenue growth guidance based primarily on bank forecasts of forward rates, which are slightly more favorable than the current spot rates for most currencies.On Slide 29, we have provided information on our 2019 revenue by currency and the foreign exchange rate that we are assuming for 2020. We are very pleased with the collective efforts of our businesses that have positioned us to generate profitable revenue growth and meaningful operating margin improvement. We believe that our operating margin performance in the second half of 2019 reflected our ability to leverage the scalable investments that we have made in staff, capacity and infrastructure as well as the continuing focus on operational excellence and cost management. In light of the investments over the last few years, we were very pleased that the operating margin improved in 2019 by 20 basis points to 19%. This result included a 30 basis point headwind from a number of items, including the compensation structure adjustment, Biologics capacity expansion in Pennsylvania, Citoxlab acquisition and the NIAID contract, all of which have now been largely anniversaried.Operating margin improvement will continue to be a top priority this year. For the full year, we expect to make meaningful progress towards our two-year target of a 20% operating margin. The DSA segment and leverage of unallocated corporate costs are expected to be the most significant contributors to margin improvement. The DSA operating margin is expected to make meaningful progress in 2020 towards this mid-20% target. The primary driver of the improvement is enhanced leverage of revenue growth as a result of more measured hiring, along with the attainment of incremental acquisition synergies and other operational efficiencies.The RMS and Manufacturing segments’ operating margins are expected to be consistent with the two-year target of above 25% and the mid-30% range, respectively. While HemaCare has an operating margin that is moderately below the RMS segment average, it will not prevent us from achieving our RMS margin target as we expect this headwind will be offset by RMS operational efficiency. The Manufacturing segment’s operating margin will benefit primarily from the elimination of duplicate costs from the Biologics expansion in Pennsylvania and the continued ramp-up of that site.Unallocated corporate expenses in 2020 are expected to be approximately 5.5% of revenue compared to 6% of revenue last year. We have successfully reduced these costs by approximately 50 basis points per year from a peak of 7.5% in 2016 as a result of investments that we have made to build a more scalable infrastructure to leverage growth.Total adjusted net interest expense is expected to be in the range of $78 million to $80 million compared to $67 million in 2019. The increase will be driven by higher average debt balances in 2020, resulting from our recent acquisitions, including HemaCare in January, as well as a higher blended interest rate primarily associated with the issuance of $500 million of senior notes last October. As a reminder, adjusted net interest expense is calculated as the net of interest expense, interest income, and an FX adjustment related to forward FX contracts recorded in other income.We continuously evaluate our capital priorities and, as always, intend to provide capital to the areas that we believe will generate the greatest returns. Strategic acquisitions remain our top priority for capital allocation, followed by debt repayment. Our gross leverage ratio was 2.76 times at the end of 2019, below three times as anticipated when we acquired Citoxlab last April. The pro forma leverage ratio increased to modestly above three times following the January acquisition of HemaCare. Absent any acquisitions, we will continue to repay debt and work towards our preferred leverage target of below three times. Currently, we do not intend to repurchase any shares in 2020 and expect to exit the year with our diluted share count slightly more than 50 million shares.The non-GAAP tax rate for 2020 is expected to be in the range of 22% to 23.5%, which is slightly higher than the 2019 tax rate of 22% as a result of discrete tax benefits in 2019 that are not expected to recur this year. As a reminder, the first quarter tax rate has been meaningfully lower in recent years due primarily to the excess tax benefits related to stock compensation. Given our current stock price, we also expect this to be true in 2020, resulting in a non-GAAP tax rate in the mid to high teens in the first quarter.In addition to driving profitable revenue growth, free cash flow generation is a key measure of our financial performance. In 2019, free cash flow was $340.4 million, an increase of $39.3 million or 13% from 2018 and well above our full year guidance. The increase was due to the strong underlying operating performance of our businesses, along with our continued focus on working capital management.Capital expenditures were $140.5 million or 5.4% of revenue in 2019 and essentially unchanged from 2018. For 2020, we expect free cash flow to be in the range of $350 million to $360 million representing a mid-single-digit increase year-over-year. Included in this outlook is a cash headwind of approximately $15 million primarily associated with pension-related payments that we will incur in 2020. Adjusted for this headwind, free cash flow would increase at a high single-digit rate. Capital expenditures this year are expected to total approximately $150 million comprised primarily of capital projects in many of our businesses to support continued growth as well as for the capital requirements of recently acquired businesses.A summary of our 2020 financial guidance can be found on Slide 38. Looking ahead to the first quarter of 2020, our outlook includes year-over-year revenue growth in the mid-teens on a reported basis. Organic revenue growth will be affected by the compensation to last year’s large Microbial Solutions stocking order that Jim mentioned, which is expected to be more than a 500 basis point headwind to the manufacturing growth rate and approximate 100 basis point headwind to the consolidated growth rate.In addition, we have currently forecast only a small impact from the coronavirus to our RMS China business in the first quarter, but we will continue to monitor the situation closely. As a reminder, China represents slightly less than 10% of RMS revenue. Both of these headwinds will limit our operating margin improvement in the first quarter when compared to the prior year. In addition, the operating margin is typically at its lowest point of the year in the first quarter due to the seasonality in the biologics business and fringe costs. These headwinds, combined with the first quarter tax rate in the mid to high teens, are expected to result in low double-digit earnings per share growth in the first quarter from $1.40 last year.In conclusion, we are very pleased with our financial performance in 2019 and believe that we are well positioned to have another strong year in 2020. We are confident in our ability to consistently grow revenue, earnings and cash flow as well as to achieve our targets of high single-digit organic revenue growth and an operating margin of 20% for the full year 2021. Thank you.

That concludes our comments. Operator, we will now take questions. Thanks.

Thank you. [Operator Instructions] Our first question will come from the line of Eric Coldwell with Baird. Please go ahead.

Congrats on the nice outlook. Question on microbials. You made a couple of comments about the timing of orders. I was curious if you’re really focused more on prior year demand comparisons or maybe just some sluggishness in 4Q development for whatever reason?And then secondarily, the availability of new systems was brought up a couple of times. I’m hoping you can dig into exactly what you’re speaking about, about the availability and the issues you’ve had there, if any, and when those might be resolved. Thanks so much.

Yes. So, I guess, to start, we continue to be pleased with the growth rate of that business and it grew at double digits for 2019. We’ll grow it double digits for 2020 and it’s essentially growing at double digits since we’ve owned it. And we’re constantly talking about the nonlinearity of our businesses pretty much in every call. So, I want to remind you again on this one. So nothing really unusual. It’s the way the orders fell. We’re constantly upgrading our systems in terms of new generations of both hardware and software, staying multiple generations ahead of the competition. And sometimes, you don’t have that right in terms of having – put something new in the marketplace and people will wait for that. So there’ll be harmony between new products and software, new hardware and software in 2020 and going forward. It was a bit out of sync, and it’s tough to sort of predict what systems people will buy when, if we had a stronger third quarter, for instance.So, nothing particularly unusual. It’s just the continued cadence of the business and continued innovation of the business and continue to really enhance the systems we have out in the marketplace based upon feedback and input from our clients, who are using them.

We will next go to the line of Tycho Peterson with JPMorgan. Go ahead, please. [Operator Instructions] One moment, please. And Mr. Peterson, your line should be open now.

Okay, thanks. Jim, I’ll start with HemaCare. You talked at our conference about the opportunity to drive more clients to start cell therapy discovery program. So, can you talk a little bit about cross-selling? I think you said that you can tap at about 75% of the cell therapy market. Is there an opportunity to expand that? Is there an opportunity to do additional M&A around HemaCare? And then overall, for cell and gene therapy or expanded capacity, can you just talk a little bit about the incremental capacity adds and how we think about that in the context of the margin targets?

Sure. We are really thrilled with this deal. I was just visiting the location. It’s a really great and enthused management team. The technology is terrific and the demand is meeting our expectations. The terrific sales organization, which is being enhanced by the Charles River sales organization, who’s out with a bunch of clients that they wouldn’t otherwise have previously accessed. The continuity and ability to hand off cell therapy drugs from product and service within the Charles River portfolio is really, really powerful and not something anybody else can do. And I think we reported that we have about between $140 million and $160 million worth of revenue in this space. It’s obviously going to increase dramatically. HemaCare is going to grow at least at least 30%. It’ll be terrific for the research models segment but also really expand the initiation of so much of this work, whether it’s an R&D process improvement or manufacturing with clients, who are in this space who can count on us. And like all clients, they’re always going to rush to market, and the ability not to have to find new providers of particular products or services in this space will be quite powerful.We’re enhancing our portfolio of assays in our biologics business. We have capabilities in our microbial business to test these products. We have special immunocompromised animal models in the research model business. And of course, we’re going to do these combination studies between Discovery and Safety which will be powerful as well. So, it’s a wonderful fit in our portfolio. It enhances it nicely. Like a lot of other things that we’ve been doing in the Discovery space, in particular, gets us to start really early with the clients. There are other acquisitions in the cell and also in the gene therapy space, both on the product and the service side that we are pursuing at various stages. We’re thinking about geographic expansion of this business. The capacity they have right now is a California-based operation. The capacity they have right now in California is relatively new and will help them grow in that locale for a while, but we want to take advantage of other locations. So, we’re seriously pursuing that. I think I’ll stay away from the specifics of exactly where that is.

We will move now to the line of Robert Jones with Goldman Sachs.

Question. I guess, just on DSA and probably more specifically, on Safety Assessment. Jim, you talked about Citoxlab being largely integrated at this point. Obviously, you guys have successfully integrated a few other large deals in the last few years in that space. I was wondering if maybe you could comment just on where you’re running today from a capacity standpoint. And then as it relates to that, on the margin side, you guys feel very confident about the mid-20s operating margin target but it seems like your – I know there’s some seasonality. It seems like you’re getting pretty close to that already. So just was hoping maybe you could just talk about capacity and then the path and how comfortable you are with getting to that 25% or mid-20s and maybe beyond.

Sure. As a general proposition, capacity is well utilized pretty much across the board. And having said that, we have, and we’ll continue to add, strategic amounts of space at multiple facilities pretty much simultaneously because we can’t drive all of our clients to a particular site. So we want them to be able to have the benefit of proximity and the specialization services at certain of our sites. Having said that, we still have a meaningful amount of space at our MPI site, which is a very large building. We had the space when we bought that site. We’re continuing to fill it up, but we have that additional lever to be able to open runs that are already built out, which we’re very happy to have.We also have some small amount of space, available space that came with the CiTox deal. So between those two locations, and remember, CiTox has big locations in France and Canada and smaller ones in other parts of Europe. So the geographic dispersion is very powerful. The margins for WIL, which were in the mid-teens, have been improving. The margins for Citoxlab will continue to improve in that business. We will continue to get price and volume, and we hope the mix between specialty and general tox is favorable, so that should continue to drive margins, certainly in the mid-20s and longer. Maybe David wants to say some more about margins.

Well, we’ve been talking about Safety Assessment or DSA being the most important driver for getting Charles River to the 20% target that we’ve committed to getting to for the end of next year, along with unallocated corporate costs. But DSA, yes, that’s a key driver for getting there and we’ve been signaling that for a while. It’s pleasing to see the second half results for DSA coming in the way that we had signaled. I know you’re talking about – you mentioned on the call that we’re kind of at the mid-20s, we have for quarter four. But for the full year, we’re still at 22%. So, there’s still some opportunities available to us to continue to grow that DSA segment up to the mid-20s for a full year basis, and that’s how we’ll see the Charles River performance get to the 20%.

Our next question will come from the line of Jack Meehan from Barclays. Go ahead, please.

Yes, thank you. Good morning and congrats on the quarter. I wanted to stick with the DSA topic. I was hoping you could just comment a little bit more on the Discovery side. In the deck, I think you called it out as having an exceptional quarter. I was wondering just if you look at the third quarter growth relative to the fourth quarter step-up on both organic and margins, how much did Discovery contribute to that versus kind of the base Safety Assessment progress?

If you’ll bear with us, we’re going to not peel that onion back too much. We want – we look at the DSA segment as a continuum and we want you to do that as well. So, our guide is about high single-digit top line growth, and operating margin getting to the mid-20s is the composite. I would say that Discovery is the aggregation of several acquisitions, most small, one sort of medium size. We bought all of those businesses with the goal and assumption that they could grow it at least low double digits. And we bought them with the assumption that they would have at least a 20% operating margin. So, I think all I would say is they’re continuing to move in that direction. And both the margins have been improving and the top line growth has been improving. We’ve been particularly pleased for the last couple of years with our Early Discovery business, which is a larger piece and sort of one of the things that really crystallized and solidified the Discovery strategy for us starting very, very early with the clients.So, we’re seeing some nice, nice growth rate there. I think we’ve also called out an oncology franchise throughout the year. Obviously, given the significant amount of investment by our clients in cancer, we should and are the beneficiaries of that. So, we’re very pleased with Discovery, pleased that 20% of those clients are also doing Safety with us, that will only be enhanced and continue to be improved. And we’re seeing some nice pull-through from one service offering to another. We’re also seeing Integrated Discovery, Complex Integrated Discovery deals across multiple sites that are getting some traction.

We’ll go now to the line of David Windley with Jefferies. Go ahead, please.

Hi, thanks for taking my question. Good morning, congratulations. I wanted to also focus on Discovery, but more around the longer-term build-out of that business. Jim, we’ve certainly watched the company be very acquisitive in Safety Assessment. As you said, you’ve built Discovery by a lot of mostly small acquisitions. You’ve laid out a path of kind of a commitment to acquire another $1 billion of revenue. And I think I or maybe many of us think that Discovery is maybe a logical place for that to happen. Is that right? Do you think there are – is the path another or a continuing series of relatively small acquisitions? It’s my sense that that’s probably what’s out there. And then how does that influence or how does your desire to get to the mid20s margin on a full year basis influence what you’re willing to buy between now and the end of 2021?

Yes. So, I would say that Discovery is an area of focus for M&A. It’s not – certainly not the only one. We have opportunities in RMS and we have opportunities across other parts of the portfolio as well, including Biologics and Microbial. So it’s a robust marketplace for us to look at deals, many of which are private equity owned. So, they’re sort of always for sale, just depending on the timing and the price. So, there are some straight-up Discovery opportunities that we’re looking at, we are interested in adding to our therapeutic area of capabilities, and we’re interested in other services in Discovery. What you should pay attention to are the technology deals that we have been and will continue to announce. So just to reiterate, the strategy there, we need to be, if not cutting-edge, close to it. And it’s very hard to assess the strength of all of these new technologies and to place bets.So, to enhance the probability that the bets that we place are successful, we’re making small equity investments or providing some debt financing to a host of companies, primarily in the Discovery space. We have large molecule discovery. We have an AI deal. We have a – we have a bioinformatics deal and several others and several more in conversation. And so typically, the structure of the deal will be for us to be a sales and marketing partner for these companies, which will allow us to interface with the clients and get direct feedback on how responsive they are and whether the science is really as good as the companies say they are. In certain instances, we will prenegotiate buyouts at a predetermined price. So with a certain point in time, we can buy the companies if we want.So as I’ve said previously, if we have a portfolio of, let’s say, a dozen companies, maybe three or four, we’ll just stop working with, because they didn’t look very good. Maybe three or four, but they won’t want to buy, they won’t want to sell, and we’ll continue to work with them and offer their services or occasionally products and several of them, perhaps also three or four, we’ll acquire. So it’s, I think, a much more thoughtful and low-risk way of continuing to buy additional services in the Discovery space. So we’re thrilled with the – with regard to your question about the margins. They’re going to have margins all over the place. So, we’ll try not to buy anything that provides too much of a headwind. Having said that, some of them will be small and some of them will have lower margins, but we won’t do the deal unless we think we can get at least the 20% or higher. So, it’s a very good pipeline right now. We’re quite active in the things we’re looking at and they will just continue to enhance and distinguish the portfolio from a competitive point of view and provide a greater ability to service our clients in a more holistic fashion.

Great. thank you.

And for our next question, we’ll go to John Kreger from William Blair. Please go ahead.

Hi, thanks very much. Can we go back to your remarks about China? It’s encouraging that it doesn’t sound like it’s going to be that big of an impact. Curious, you said it’s close to 10% of your RMS business. What about the rest of the portfolio? And then, I guess, a quick follow-on to that. Do you expect any weakness to sort of bleed into the second quarter? Do you think it’s just kind of an isolated first quarter impact? Thanks.

We’re closely monitoring the impact and relative to movement of animals and people in and out of China. So, we feel quite confident that there will only be a small impact in the first quarter. Since it’s kind of an evolving situation day to day, I think it’s kind of dangerous for us to predict the impact on the balance of the year. Having said that, the sort of issues that we think could impact us, we think that we backstopped them pretty well so far and we think that we will be able to backstop them in a way that it doesn’t impact or adversely impact our forecast. I would say that – I don’t know, we haven’t said this in a while, but we always have a meaningful contingency in our operating plan that can cover a whole host of things. Most of the things we intend to cover are things that have happened in the business from time to time. And while we don’t expect them, we know that they’re always out there. And then when you think of things like big pharma mergers that could have an adverse impact on the business and just things beyond our control.So, this certainly falls into the category of things beyond our control. We’ll manage our activities in China as best as possible. I think we’re a very important part of the drug development and discovery paradigm in China. We’re very interested in making sure that our colleagues and clients are healthy. And we hope to be able to work with some of our clients to – as they begin the search for vaccines. So we feel that it’s a manageable situation for us with what we know right now. And I think your first question was what other parts of the business does it impact. We have a very successful but rather small microbial detection business in China that we’ve had for years. That’s in our forecast thinking about having only a very small impact in the first quarter that we think is quite manageable from a guidance point of view.

Thanks much.

For our next question, we’ll go to Patrick Donnelly with Citi. Go ahead, please.

Great, thanks. Jim, maybe just at a high level, you guys obviously have a pretty comprehensive view of the biotech funding environment. Can you just update us on what you’re seeing there? Obviously, the guidance seems to suggest a pretty high level of confidence, but I just wanted to get your view of the overall funding environment as we head into 2020 here.

Sure. It was the third best year in the history of biotech, and in and of itself, just a lot of money went into – directly into the biotech companies. So I think that’s a commentary on the strength of the businesses, the success rates, the number of IPOs, the number of companies that are being sold and just the new modalities to treat diseases, which are working. So these are places that invest, these are companies in which investors want to place bets, because the companies are providing a really nice returns. So, we think they have at least three or four years of cash in the bank, more money coming in from the capital markets, more money coming in directly into the VC funds, which seem to have accelerated the historical five year – five to seven-year fundraises seem to be two to three years.So, they have a whole bunch of companies to either create or to finance right off the bat. So – and you also have money, for sure, coming directly from big pharma directly into biotech because they become the discovery engine. So, we don’t hear our biotech clients talk about any concern about funding either presently or in the future. They seem to be busy at work and have pretty full pipelines and we would expect that certainly to continue strongly through 2020. And we look at the year and look at the world in five-year increments because we do a five-year strategic plan, then we would expect that funding would remain strong throughout that time frame.

Appreciate it.

We’ll move now to the line of Dan Brennan with UBS. go ahead, please.

Great, thank you. Thanks for the question. I just wanted to go back to the HemaCare deal. So, you just closed this not too long ago. I just wanted a little flavor, Jim, from you in terms of what’s been some of the earlier – early customer feedback that you’re receiving. And then more broadly, as you look at this opportunity, I think you’ve talked about filling in some adjacencies. And how should we think about the opportunity around HemaCare to build out your exposure in this market? Thanks.

So, customer feedback to us acquiring the company has been extremely positive because it gives them, I don’t know, it gives greater – gives HemaCare greater context. It gives HemaCare a greater sales ability, technical ability, ability to expand geographically and have a more professional back office, et cetera. And when I say context, it’s part of a large portfolio where we already do a significant amount of work in cell and gene therapy in the cell therapy space. I happen to – the day that I was there, they’re largest client happened to be there. And I don’t think he was just saying this, because we had just acquired the company. But this wasn’t a brand-new company. It’s been around for about 15 years. And this was the founder, and he said to me that he would not have been able to grow his company at all without HemaCare.His reliance on the quality of these cellular products was everything and he couldn’t rely on anybody else. And he was very happy that we were involved, and then he was hoping that we would maintain, if not enhance, the quality of the company. So, we feel really good about the asset that we bought. We feel really good about its ability to enhance our portfolio. As I said earlier, we do have several other acquisition opportunities squarely in the cell therapy product arena and also service arena. And also, we’re looking at gene therapy as well. We want to be able to support clients. There are so many INDs that have been filed by so many companies in this space, who all need outside resources to develop their drugs, because most of them are biotech companies that don’t have internal capabilities.So, our ability to do all of this work is really a necessity for these companies. So we take our responsibility seriously. We’re going to continue to add to and enhance our own infrastructure while, hopefully, acquiring additional companies in the space so we can provide the core tools for them to do cell and gene therapy, both discovery and scale-up and, ultimately, manufacturing the products to go into the clinic.

We have a question in queue from the line of – one moment, please, while we – having some difficulty. Okay. We have a question here from the line of Donald Hooker with KeyBanc. Your line is open.

Great. Good morning. I wanted to sort of hear a little bit more context around your progress in the IS-based in-sourcing solutions space within the RMS segment. You commented that there would be a large contract in China rolling off, offset by some new wins in the U.S. with the government. Just maybe, given you had a huge deal last year, is there any way to kind of size this, contextualize this for us in terms of ebbs and flows there? And would love to hear your general commentary around – do you see like any kind of turning point with clients with regards to the service?

Yes. Thanks for that question. It’s a successful service offering that we don’t get to talk about that much on these calls, which is growing quite nicely around the world. It’s not just a U.S. phenomenon. We do it everywhere that we do business. It’s this taking off – taking the management to these complex laboratory and animal facilities off of the client’s hands, the clients that already have them, and the client could be, obviously, the government an academic institution, biotech or pharma. We never literally sized this business, but it’s a meaningful business, it’s growing nicely. It has some great opportunities. It has good legs.So, while the NIAID contract was particularly large, there are other government contracts of significant size, and we signed several during 2019. Also, this CRADL initiative, so we have this sort of incubator space in Cambridge, Mass, where clients go and we house their animals for them and we either can do the work for them or with them or they can just simply come in and use their space. Obviously, you’ve got this huge concentration of biotech and pharma companies in Cambridge, and the space is really well utilized. The growth rates are terrific and the margins are terrific as well. We’ve opened another one of these facilities just in South San Francisco. We should have the same uptick and we’re considering, on a longer-term basis, opening additional of these CRADL facilities in other strong geographies where there’s a big concentration of biotech companies. I do think, as I’ve said, historically, I don’t want you to overread this, but there’s no reason why the big pharma companies that have these big facilities and big staffs to do this work in some of the big biotech companies don’t outsource the work to us in the same way that they’ve outsourced much of Safety and, increasingly, Discovery.We can run these facilities more efficiently, reduce the cost and I think, enhance the science. So, we have felt for a long time that this business could pop for us. It hasn’t, so which is – I don’t want you to overread it. But while it hasn’t popped, it’s growing very nicely and the constituent puts and pieces coming together in a meaningful way. So, this will continue to be an important business for us, particularly as large clients have to look at their cost structures in more aggressive ways and get comfortable outsourcing it.

And if I heard your question right, just a clarification. I think you described it as a large China contract that was running off, partially offset by the U.S. contract. It’s actually the other way around. The contract that we have won in the U.S. is larger, and therefore, it’s been partially offset by the Chinese contract that is being completed.

We’ll move on to the line of Elizabeth Anderson. Just one moment while we open your lines. And Mr. Anderson with Evercore ISI, your line is open.

Hi, guys. Congrats on a nice quarter. I had a specific question about the Biologics capacity buildout. You mentioned, obviously, that you’re sort of finished with the duplicate costs, but how do you see the capacity filling up over the course of maybe 2020?

Yes. So, Biologics had a really nice, nice growth rate in 2019, notwithstanding the fact that I would say we were slightly capacity-constrained. So, demand is fabulous. There’s just a whole cadre new biologics being developed, pretty competitive business for us, but all of the competitors are doing well, because there’s so much work. We have a broader geographic portfolio than the competition. So, we added small amounts of space at several of our sites that weren’t in the U.S. And we added this very, very large facility in Pennsylvania, which – that’s where we had the duplicate costs and which have now run off and we’re largely using the space. That building in Pennsylvania is going to give us sort of three, maybe five – three to five years of incremental growth capacity there. I hope it’s three and not five. I do think the uptake will be – well, could be significant. We added a lot of – we added some capacity to a German operation of ours, which is quite large and really, really good science. And we have some space there, but that should be taken up quickly as well.So we’ll probably have to continue to add capacity. Certainly, nothing meaningful in 2020, but the having sufficient capacity and getting new assays up and running, particularly in areas like cell and gene therapy, are absolutely essential to continuing to grow this business at the growth rate that we think the market will drive us to. So feeling very good about where we stand, having gotten the new Pennsylvania facility in a good place as we go into 2020.

Okay. That’s very helpful. Thank you.

Sure.

We have a question in queue from the line of Juan Avendano with Bank of America. Go ahead, please.

Hi. Congrats on the quarter. Related to the last question, I guess, would you say that the capacity expansion that you just completed in Biologics Testing Solutions, did that expansion primarily serve to maintain the low double-digit growth profile in this business? Or would you expect to see an acceleration in the growth rate as you leverage the new increased capacity? And related to that, I guess, you already exited 2019 with an operating margin in Manufacturing Support in the high-30s. So what costs or investments outside of incremental capacity possibly are you looking to undertake over the next year that would keep the margin profile in Manufacturing Support in the mid-30s?

Yes. So we’ve – for a long time now, been commenting that the margin expectation for Manufacturing is mid-30s. And for a while, we’ve been knocking on the door of the – well, we’ve been in the mid-30s for a while. 2019 was slightly different because we had to double running costs of Biologics and that dragged it down. But we’ve never really committed to growing the margins above mid-30s for Manufacturing.There are other things we can do to invest in the sales force, for instance. There is some R&D that we can do in Microbial. There are other things we can do in Biologics, for instance, to enable us to grow that top line, continue to get the double-digit growth rates in Manufacturing and enjoy the sort of mid-30s margins. So that has been a signal that we have given to The Street for a while, and we see no reason to change that at this stage.

In terms of the growth rate, we – as I said, we had terrific growth rate in 2019 notwithstanding, I would say, tight capacity. So having additional capacity, having additional assays, getting some price, having the mix of business continue to improve should help the growth rate in a meaningful way.

Thank you.

And for our next question, we will go to the line of Erin Wright with Credit Suisse. Your line is open.

Great. Thanks. We’ve covered a lot here, but can you describe where you stand now in terms of the hiring, staffing levels? Are you where you want to be? And how much wage pressure, if any, kind of, are you seeing? And then also, you commented on M&A opportunities, but I’m curious, are you just more willing to also do more partnership-type models, such as the BitBio partnership as opposed to outright M&A? And what could some of those partnerships potentially look like? Thanks.

Sure. We were hustling in 2017 and 2018 because demand exceeded our operating plan essentially, which is a high-class problem. We’re really hustling to get sufficient numbers of people in the door and getting them trained to accommodate the demand. And as you recall and based upon your question, we also ran into some wage inefficiencies or ineffective wage levels as starting pace. So we feel that we’ve caught up nicely from a capacity and an IT and a head count point of view. We corrected those starting wage anomalies.Generally, I think you can stay ahead of that. Every once in a while, you have a geographic locale. We had one or two in particular. It just changes on you where you get some big competitors that come in and start businesses out of nowhere and they’re hiring a bunch of people and paying whatever it takes. So we had a little bit of that. So I think the onetime midcourse correction was quite effective. We’ve got a really good, focused, staying-ahead-of-the-game HR analysis on every geographic locale. So I think it’s highly unlikely we have to go in and do that again.We feel really good about the headcount. I go to most of the big safety sites every year and you can see that people are much uncomfortable with the pace of work and the pace of training. And so we’ll have to hire people to keep pace with the basic growth rate of that business, but really nothing extraordinary.On the M&A front, I think the answer to your question is really both. So we’re going to do – we have done and we’ll continue to do a bunch of these partnerships, for sure. Some of them will turn into acquisitions, for sure. As I’ve said earlier, some of the prices for the deals will already be prenegotiated, in other words, the terms of the deals, which is terrific. So some of those will turn into acquisitions, a lot of those would be in the Discovery space. We have other fully baked companies that are further along in their life cycle than some of these that will help fill out the portfolio really, really nicely. So we’ll do both.I would remind you, we have no artificial goals for M&A or we’re not interested in just being bigger for the sake of being bigger. We will pursue deals that are strategic in nature, that make our portfolio better than it is now and that are affordable and meet our return metrics. Otherwise, we will walk, and that goes for the technology deals. If we want to do them, and we don’t have a prenegotiated purchase price and the prices are too high, we’ll walk. So we feel really good about both of those ways of increasing and growing the portfolio, and I think you’ll see us be doing a combination of both going forward.

Okay. Thank you.

We do have time for one more question. That will be from the line of Tycho Peterson [JPMorgan]. Please go ahead.

Thanks for taking the follow-up. I wanted to ask on Takeda, just how we should think about the $50 million in milestones flowing through. And anything embedded in guidance this year? And then, Jim, you mentioned at our conference that you may see other similar deals to Takeda. Just curious what the pipeline looks like there. Thanks.

Yes. So enthused about the deal. Very creative, I think, on both of our parts. Yes. They’ve offered us a small portfolio of potential molecules to develop. We can pass on whichever ones we want. Obviously, we’ll do some of them. They’re across four different TAs. And they’re milestone-based payments, notwithstanding a small upfront payment that we get from them, which will offset some of the discovery cost. We don’t have anything meaningful baked into our guidance.So we don’t know – I don’t – I think it’s unlikely, no matter how much we hustle, that we’re going to get through much in 2020, although we do have some upfront payments from them. So I don’t think it will be not a headwind or a tailwind, but we should be progressing with maybe one or two molecules. I think that it’s further down the road, and we wanted to – we’re excited with it. We had a release, but we didn’t want to get ahead of ourselves in terms of its financial contribution.We’re open to doing deals like this. I wouldn’t – I don’t think we’re out looking for them. If clients want to work that way and if clients only want to work that way, and we think the structures of the deals make sense. When we think this one does and we like the client, and we like the fact that they’ve just done big M&A and it’s an interesting portfolio, it’s something that we’ll pursue. So we have a tiny amount of our revenue associated with these milestone deals right now.We hope – as we said, I think, at your conference, if one of these goes all the way through to market approval, it will be a nice financial return and we’d like to keep the expectations modest. And we hope to please ourselves as well as the shareholder base.

Thank you.

That will conclude our question-and-answer session. I’ll now turn the conference call back over to Todd Spencer for closing remarks.

Thank you. That concludes our – thank you for joining us on the call this morning. We look forward to seeing you at an upcoming investor conference. This concludes the conference call.

Ladies and gentlemen, that does conclude your call for today. Thank you for your participation and for using AT&T’s executive teleconference service. You may now disconnect.