CRL - NYSE

Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories Third Quarter 2025 Earnings Conference Call. This call is being recorded. [Operator Instructions] I would now like to turn the conference over to our host, Todd Spencer, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Charles River Laboratories Third Quarter 2025 Earnings Conference Call and Webcast. This morning, I am joined by Jim Foster, Chair, President and Chief Executive Officer; and Mike Knell, Senior Vice President, Interim Chief Financial Officer and Chief Accounting Officer. They will comment on our third quarter results for 2025. Following the presentation, they 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 webcast replay of this call will be available beginning approximately 2 hours after the call today and can be also accessed on our Investor Relations website. The replay will be available through next quarter's conference call. I'd like to remind you of our safe harbor. All remarks that we make about future expectations, plans and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated. During the call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core operating results and guidance. The non-GAAP financial measures are not meant to be considered superior to or a substitute for the 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. I will now turn the call over to Jim Foster.

Thank you, Todd, and good morning. Before I comment on our third quarter results, I'd like to discuss our strategic review. As you know from today's press release, we provided an update on our comprehensive strategic review. The Board strongly supports the company's strategic direction and believes we should continue to focus on strengthening our leading scientific portfolio within our core markets, divesting underperforming or non-core assets, maximizing our financial performance and maintaining a disciplined approach to capital deployment. I would like to thank our Board for the progress that it has made in such a thorough and collaborative review process, which has and will continue to evaluate a wide range of value creation options to help ensure the best strategic path forward for the company. As we move forward to support our strategy, we will focus on several strategic actions to help drive long-term shareholder value creation. The first action is continuing to strengthen our portfolio by investing in core growth initiatives, including through M&A, partnerships and internal development efforts. We have built a scientifically differentiated portfolio, which enables us to take advantage of the unique opportunities that are present across the evolving biopharmaceutical landscape. Our focus on science and innovative solutions designed to enhance the efficiency and speed to market of our clients' life-saving therapeutic programs has positioned us extremely well to continue to adapt and lead the industry through advances in drug development such as NAMs or new approach methodologies. We have identified areas of future growth, all of which are well within our core competencies, including opportunities across our 3 business segments. Specifically, we will evaluate opportunities to enhance our scientific capabilities in the areas of bioanalysis, in vitro services and NAMs as well as to continue to evaluate our geographic presence. The second action to refine our portfolio addresses our ongoing efforts to streamline operations and maximize our financial performance. As part of our portfolio review over the past several months, we have evaluated the strategic fit and fundamental performance of our global businesses and infrastructure. And as appropriate, we'll take actions to drive long-term value creation. These actions are expected to result in the sale of certain underperforming or non-core businesses, which will enable us to focus on more profitable growth opportunities. In aggregate, these businesses represent approximately 7% of our estimated 2025 revenue. Once completed, the proposed divestitures are expected to result in non-GAAP earnings accretion of at least $0.30 per share on an annualized basis. This does not include any benefit from the reinvestment of the transaction proceeds or impact to net interest expense. We will strive to complete any potential divestitures by the middle of 2026. We will also continue to focus on new initiatives to drive greater efficiency in our business and maximize our financial performance. As you know, we have taken extensive action with a goal to protect our operating margin and reinvigorate earnings growth. Over the past few years, we have already implemented restructuring initiatives that are expected to result in approximately $225 million in cumulative annualized cost savings in 2026, which represents a reduction of more than 5% of our cost structure. In addition to these actions, we are also implementing initiatives designed to drive process improvement and greater operating efficiencies, including through procurement synergies and implementation of a global business services model. These additional initiatives are expected to generate incremental net cost savings of approximately $70 million annually, which will be fully realized in 2026. We also expect to continue to transform our relationships with our clients through best-in-class technology platforms and access to clinical data, becoming an even more efficient partner for them. Finally, we remain committed to deploying capital in a disciplined and value-enhancing manner. We will continue to regularly review the optimal balance between strategic acquisitions, stock repurchases, debt repayment and other uses of capital. As part of our capital allocation strategy, the Board of Directors approved a new $1 billion stock repurchase authorization. This replaces the previous stock repurchase authorization for which we had repurchased $450.7 million in common stock since August 2024. We will regularly and carefully evaluate the prudent level of stock repurchases going forward and we will take into consideration valuation, future growth prospects, expected returns and earnings accretion from repurchases as well as our leverage and other uses of cash. With these actions clearly outlined, we are intently focused on executing this plan to enhance the company's long-term value by building upon the core strengths of our unique portfolio, advancing scientific innovation and driving greater efficiency in both our operations and our clients' R&D and manufacturing efforts. Moving on to our quarterly results and demand trends. We are continuing to see clear signs that client demand has stabilized. Many of our global biopharmaceutical clients appear to have progressed through their restructuring efforts and the biotech funding environment showed increasing signs of improvement throughout the third quarter. These are positive signals that the industry may be on a path towards recovery and the improvement we saw in DSA proposal activity during the third quarter strongly supports this view. At the same time, there is still some uncertainty in our end markets. Therefore, we will continue to remain cautious at this time and focused on strong execution to drive further wallet share gains with our clients. The business trends in the third quarter were consistent with those that we described in August, with RMS performance benefiting from the favorable timing of NHP shipments in the quarter. DSA revenue declining sequentially as the first quarter bookings strength that contributed to meaningful outperformance in the first half of the year returned to recent historical levels and manufacturing revenue declining primarily due to the completion of work for a commercial CDMO client. Collectively, trends were slightly better than we had expected, which led to modest outperformance in the third quarter. Before I provide more details on these trends, let me provide highlights of our third quarter performance and updated outlook for the year. We reported revenue of $1 billion in the third quarter of 2025, a 0.5% decrease year-over-year. On an organic basis, revenue declined 1.6% as declines in both the DSA and Manufacturing segments were partially offset by an increase in the RMS segment. Third quarter revenue slightly outperformed the outlook provided in August. By client segment, revenue for small and midsized biotech clients declined, reflecting tighter budgets likely driven by the softer biotech funding environment as we exited 2024 and in the first half of this year. Revenue for global biopharmaceutical clients remained below last year's level, but that was primarily due to the loss of a large commercial client in the CDMO business whose work at our Memphis site wound down in the second quarter. Revenue increased for global biopharmaceutical clients in both the RMS and DSA segments, demonstrating that preclinical demand from this client base had bottomed and is beginning to improve, consistent with the upward trajectory in the DSA booking activity at the beginning of this year. Revenue for global academic and government clients increased slightly in the quarter, we have not experienced any meaningful impact from NIH budget uncertainty or the government shutdown to date. The operating margin was 19.7% in the quarter, a decrease of 20 basis points year-over-year, also driven by the DSA and Manufacturing segment. This anticipated margin decline primarily reflected lower sales volume in the DSA segment and lower commercial CDMO revenue in the Manufacturing segment. For the full year, we continue to expect the operating margin will be flat to a 30 basis point decline, unchanged from our prior outlook. Earnings per share were $2.43 in the third quarter, a 6.2% decline from the third quarter of last year, but modestly above our prior outlook. The tax rate was the most significant year-over-year headwind as we had anticipated, totaling $0.24 per share in the quarter due to the enactment of new tax legislation. Mike will provide additional details on the nonoperating items shortly. With 1 quarter remaining, we are narrowing our revenue and non-GAAP earnings per share guidance ranges for the year. We now expect 2025 organic revenue will be in the range of 1.5% to 2.5% decrease or the middle of our prior range. We also expect our non-GAAP earnings per share will be at the top end of our prior range at $10.10 to $10.30, reflecting a $0.10 increase from the midpoint of our prior guidance range. I will now provide details on the third quarter segment performance, beginning with the DSA segment. Revenue for the DSA segment was $600.7 million in the third quarter, a 3.1% year-over-year decrease on an organic basis, driven by lower revenue for both Discovery and Safety Assessment Services. As was the case during the first half of the year, lower sales volume was partially offset by a modest benefit from favorable study mix. We can also report that spot pricing remains stable overall. Although the DSA backlog declined to $1.80 billion at the end of the third quarter from $1.93 billion at the end of June, DSA demand KPIs were stable in the third quarter. The DSA demand environment remained quite stable from the trends that I described 1 quarter ago, including a third quarter net book-to-bill ratio of 0.82x, which was identical to the level reported in the second quarter. The cancellation rate improved in the third quarter and continued to normalize toward historical levels. Net bookings decreased slightly on a sequential basis to $494 million in the third quarter, reflecting lighter booking activity for small and midsized biotech clients during the summer months. However, booking activity from biotech clients has improved since the summer, leaving us cautiously optimistic that biotech demand will accelerate over the coming quarters, assuming clients continue to have access to more robust funding for their IND-enabling programs. Booking trends for global biopharmaceutical clients remained healthy in the third quarter and were stable on both a sequential and year-over-year basis. We were encouraged by these overall booking trends that led to a steady increase in the DSA net book-to-bill in each month since the beginning of the third quarter. We were also pleased to see DSA proposal activity improved in the third quarter, particularly for biotech clients for which proposals increased at a high single-digit rate, both year-over-year and sequentially. Collectively, this reinforces our cautious optimism that booking activity for biotech clients will continue to improve. For the year, we expect DSA revenue will decline 2.5% to 3.5% on an organic basis as the focus for us, our clients and many of you on the Street begins to shift to 2026. We are closely monitoring the level of bookings that are needed to drive DSA revenue growth next year. It's still too early to provide even a preliminary outlook because we are still fully engaged in the budgeting process, and we'll need to monitor demand activity over the next several quarters. Bookings at the end of the year and the first quarter of next year will meaningfully influence our growth potential as will other drivers such as backlog, conversion, change orders, study mix and related factors. That said, we firmly believe that DSA business demand trends are stable, and there are positive signs indicating biopharma demand will rebound, including improved biotech funding and proposal activity in the third quarter as well as more certainty around tariffs and drug pricing in the global biopharmaceutical sector. For the third quarter, the DSA operating margin declined by 200 basis points year-over-year to 25.4%. The decline was primarily due to the impact of lower study volume. We expect the fourth quarter DSA operating margin will face additional pressure from 2 primary factors. First, we expect higher staffing costs due to hiring in part to backfill open positions, and we also expect higher third-party NHP sourcing costs due to the procurement of additional models to support the better-than-expected demand this year. RMS revenue was $213.5 million, an increase of 6.5% on an organic basis compared to the third quarter of 2024 and essentially unchanged on a sequential basis. The higher RMS growth rate this quarter was driven by the favorable timing of NHP shipments. As we previously noted, NHP shipments were accelerated into the third quarter. And as a result, NHP shipments are expected to be a modest headwind to year-over-year revenue growth in the fourth quarter. For the year, we continue to expect RMS will report flat to slightly positive organic revenue growth as the quarterly fluctuations from NHP shipments largely normalize on an annual basis and the underlying RMS demand environment remains stable. From a client perspective, revenue from both our academic and government client segments increased again in the third quarter, including a slight increase in North America. Aside from a small $3 million reduction in scope of an NIH agent contract that I referenced last quarter, we have not experienced any meaningful revenue loss related to NIH budgets and the uncertainty in Washington to date. Demand from small and midsized biotech clients has been more challenging this year, having a notable effect on the growth rates for small models, particularly in North America this quarter as well as CRADL site occupancy. In the third quarter, revenue for small research models was essentially flat as revenue increases in Europe and China were offset by North America, where price increases could not fully offset unit volume declines, particularly for biotech clients. Revenue for research model services increased slightly in the third quarter, driven principally by the GEMS business. Insourcing Solutions revenue was flat because CRADL occupancy has remained relatively stable this year, but overall demand from early-stage biotech clients for these services remain constrained due to funding challenges. In the third quarter, the RMS operating margin increased by 400 basis points to 25%. The improvement was primarily due to a favorable mix resulting from higher NHP revenue as well as the benefit of cost savings resulting from our restructuring initiatives. We anticipate that the third quarter RMS operating margin would be robust due to the favorable timing of NHP shipments and we expect -- and we continue to expect the fourth quarter RMS operating margin will moderate due to the timing of NHP revenue and normal seasonality in small models business. Revenue for the Manufacturing segment was $190.7 million, a 5.1% decrease on an organic basis from the third quarter of last year, largely driven by lower commercial revenue from CDMO clients. The CDMO business as well as biologics testing are also driving a slightly less favorable outlook for the segment as we now expect manufacturing revenue to be flat to slightly lower on an organic basis this year compared to our prior outlook of approximately flat. However, the Microbial Solutions business continued to perform very well, reporting high single-digit revenue growth in the quarter. As we have discussed throughout the year, our relationship with one commercial cell therapy client has ended and the work for that client wound down during the second quarter. This creates an approximate $20 million revenue headwind for the CDMO business in the second half of the year when compared to the first half. However, we are pleased to report that we are continuing to work with another commercial cell therapy client at our Memphis site. The Biologics Testing business reported lower revenue again in the third quarter, driven by the continued impact of lower sample volumes this year for both biopharma and CDMO clients, particularly several large clients facing project delays or regulatory challenges. Booking activity did improve during the third quarter, so we are cautiously optimistic that demand trends in the biologics testing business will stabilize. The Microbial Solutions business generated robust revenue growth and remains on track to grow at a high single-digit rate for the year. We experienced strong demand across our comprehensive manufacturing quality control testing portfolio, including Accugenix microbial identification services led by increased access instrument placements, share gains for our Endosafe endotoxin testing platform and higher sales of Celsis microbial detection products. Clients continue to choose our Endosafe cartridge-based platform for rapid test results, and we have been increasingly able to gain share due to the placement of automated systems and technology that drives efficiency in our clients' quality control testing labs. The Manufacturing segment's operating margin decreased by 200 basis points year-over-year to 26.7% in the third quarter due principally to lower commercial revenue from CDMO clients. Before I conclude, I'd like to provide an update on our strategy for NAMs or new approach methods. You may have recently read our press release announcing our Scientific Advisory Board. former FDA Principal Deputy Commissioner, Dr. Namandje Bumpus, will lead the Advisory Board, whose mission is to provide strategic guidance to our team of internal scientists and business leaders in evolving the company's comprehensive commercial and regulatory strategy to advance NAMs in the biopharmaceutical industry. We are extremely pleased that Dr. Bumpus has agreed to oversee this important initiative to drive alternative method innovation and adoption. Last quarter, I spoke of some of the in vitro capabilities that we are developing across our DSA sites. Today, I will highlight some of our NAMs capabilities utilized across our portfolio, including next-generation sequencing solutions in our biologics testing business to provide an in vitro approach for pathogen testing as well as genetic characterization of cell lines and drug products produced under GMP conditions. Additionally, our Endosafe Trillium recombinant bacterial endotoxin test is an animal-free product that reduces reliance on horseshoe crab-derived LAL for endotoxin testing. We continue to see increased client adoption of Trillium, albeit from a small base after its launch last year. In our DSA business, we are developing an in vitro assessment of human immunogenicity to support clients developing biotherapeutics including monoclonal antibodies and cell and gene therapies as well as to gain share in the biosimilars market for which animal testing is minimal and no longer required. By providing clients with valuable immunogenicity data, we will be able to help offer insights into the potential immune response against the drug. We continue to believe that adoption of more NAMs-enabled approaches will be a gradual long-term transition by our clients because the scientific capabilities to fully replace animal models do not exist today. As a leader in drug development and manufacturing support solutions, we have the breadth of scientific capabilities, regulatory expertise and access to data that will enable us to be at the forefront of NAMs innovation. and that makes us the logical partner for biopharmaceutical companies to advance their use of NAMs as alternative technologies over time. Before I conclude my remarks, I'd like to introduce Mike Knell, our Interim Chief Financial Officer. Mike has been with the company since 2017 as the Senior Vice President and Chief Accounting Officer and has agreed to lead the finance organization through the transition until a new CFO can be named. Mike is a valuable member of our management team and has worked closely with the CFOs during his tenure. He has a deep knowledge of our business, financial reporting and forecasting processes as well as the finance team. We are working together collaboratively to ensure a seamless transition of the CFO role. Now Mike will provide additional details on our third quarter financial performance and updated 2025 guidance.

Thank you, Jim, and good morning. I'm pleased to join today's call as Interim Chief Financial Officer. Throughout my 8 years at Charles River, I have gained a great understanding of our global business and have tremendous confidence in our team's ability to execute on the company's strategic and financial priorities. I want to thank Jim and the Board for their support. Before I begin, may I remind you that I will be speaking primarily to non-GAAP results, which exclude amortization and other acquisition-related adjustments, costs related primarily to restructuring initiatives, 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 with our third quarter performance, which included revenue and non-GAAP earnings per share that modestly exceeded the outlook we provided in August. As a result of the third quarter outperformance, we are narrowing our revenue and non-GAAP earnings per share guidance. We now expect full year reported revenue will decline 0.5% to 1.5% and organic revenue will decline 1.5% to 2.5% or at the middle of our prior ranges. Non-GAAP earnings per share are now expected to be in a range of $10.10 to $10.30 or at the upper end of the prior range. The $0.10 guidance improvement at midpoint was largely driven by the third quarter operational outperformance. By segment, our updated revenue outlook for 2025 can be found on Slide 29. We have narrowed the organic revenue outlook for the DSA segment to a decline of 2.5% to 3.5% to reflect better-than-expected performance to date. You may recall that we started the year with initial DSA outlook of a mid- to high single-digit organic revenue decline. We have slightly tempered the Manufacturing segment's revenue outlook to flat to a slightly negative organic decline, and the RMS outlook is essentially unchanged. The outlook for the operating margin is also unchanged at flat to a 30 basis point decline. Unallocated corporate costs totaled $58.9 million in the third quarter or 5.9% of revenue compared to 6.6% of revenue in the same period last year. The decrease was primarily due to lower health and fringe-related costs. For the full year, we continue to expect unallocated corporate costs will be approximately 5.5% of total revenue, unchanged from the prior outlook. I will now provide an update on the nonoperating items. Total adjusted net interest expense was $24 million in the third quarter, which represented both a sequential and year-over-year decline. The reductions were primarily the result of shifting debt to lower interest rate geographies. For the full year, we expect total net interest expense will be in a range of $100 million to $105 million, consistent with the prior outlook. At the end of the third quarter, we had outstanding debt of $2.2 billion with approximately 70% at a fixed interest rate compared to $2.3 billion at the end of the second quarter. In addition to lowering our interest expense, continued debt repayment resulted in gross and net leverage ratios of 2.1x at the end of the third quarter. The non-GAAP tax rate in the third quarter was 28.3%, representing an increase of 700 basis points year-over-year. As expected, the increase primarily reflected the impact of the One Big Beautiful Bill Act, or OB3, as well as the impact of the enactment of certain global minimum tax provisions. For the full year, we continue to expect our non-GAAP tax rate will be in the range of 23.5% to 24.5%, which is unchanged from our prior outlook. Free cash flow for the third quarter was $178.2 million compared to a record $213.1 million achieved in the same period last year. The year-over-year decrease was primarily driven by lower earnings. However, free cash flow improved sequentially by $8.9 million as a result of continued improvement in working capital. CapEx was $35.6 million or approximately 3.5% of revenue in the third quarter compared to $38.7 million last year, reflecting our focus on disciplined capital spending. For the full year, we expect free cash flow to be in the range of $470 million to $500 million, an increase from our prior outlook of $430 million to $470 million due to the robust third quarter cash generation. CapEx will be approximately $200 million, a decrease from our prior outlook and at approximately 5% of 2025 revenue, it will be well below our peak capital spending in recent years. The improved free cash flow outlook reflects our tightly managed capital spending and disciplined working capital management. As Jim mentioned, the Board refreshed our stock repurchase authorization in October to a new $1 billion, all of which is available for future repurchase activity. We will continue to evaluate the optimal balance between strategic acquisitions, stock repurchases, debt repayment and other uses of capital as part of our capital allocation strategy. With our strong free cash flow generation, we will regularly evaluate making additional stock repurchases under this authorization. As part of the strategic review, we will continue to work diligently to maximize our financial performance, including through disciplined capital deployment and by actively managing our cost structure. A summary of our 2025 financial guidance can be found on Slide 35. With 1 quarter remaining, our fourth quarter outlook is effectively embedded in our full year guidance. For the fourth quarter, we expect reported revenue to be in a range of flat to a low single-digit decline and organic revenue will decline at a low to mid-single-digit rate year-over-year. Looking at the sequential progression from the third quarter, RMS revenue will be lower due to the acceleration of NHP shipments into the third quarter as well as normal fourth quarter seasonality. DSA revenue is expected to be stable to modestly below the third quarter level and manufacturing revenue is expected to improve due to the year-end ordering patterns in the Microbial Solutions business. Non-GAAP earnings per share are expected to be flat to 10% below the third quarter level of $2.43, reflecting margin pressure in the DSA segment due in part to higher staffing and NHP sourcing costs and in the RMS segment due to timing of NHP shipments and normal seasonal trends. In conclusion, we are pleased with our third quarter performance, which modestly exceeded our expectations and with the actions that we will undertake as part of the Board's strategic review. The initiatives we are taking to strengthen our portfolio, maximize our financial performance and maintain a disciplined capital allocation strategy will further strengthen our market position and lead to long-term shareholder value creation. Thank you.

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

[Operator Instructions] Our first question comes from Patrick Donnelly with Citi.

Jim, maybe one just on the overall backdrop here, back-to-back quarters in that low 0.8 range on book-to-bill. Can you talk about what you're seeing from customers? Is the biotech market loosening up a little bit? I know you guys leaned in a little bit on hiring last quarter. What's the right way to think about just the demand trends going forward here and what you're seeing from customers?

Yes, sure. We're seeing proposals up pretty much with our pharma -- large pharma clients and our biotech clients as well. We're seeing cancellation levels decline, which is definitely a good thing. We're seeing net bookings up for the pharmaceutical folks and biotech folks still not. We had kind of a slow summer for our biotech clients in particular, but things have strengthened post the summer, and we had actually an improvement in monthly book-to-bill for the last sort of 3 to 4 months, which we're really pleased to see. I think as everybody knows, but if not, just let me state the fact that biotech funding was way up in Q3 and biotech funding for October was the second highest month in the history of all of biotech. So one of the things that we've been watching, obviously, very closely is that because lack of funding for the last, I'd say, 18 months has definitely constrained expenditures by our biotech clients. I think we're going to have to see the continued opening up of the capital markets and access to capital for those folks to feel confident that they'll stay open, but that's a really positive sign for us. And we're seeing definitely an improvement in the demand from those folks. And we'll just have to continue to watch it and see what the situation is there. But I would say that things have bottomed out. The pharmaceutical companies have finished reducing their portfolios, biotech has a lot of work going on. I guess one last thing that's actually quite relevant. We've been talking a lot about we've been doing a lot of post-IND work, which is sort of the more expensive specialty work, which is great, great margins, nice growth rate, but we want both. And so we have begun to see more general Tox studies, more early work, more IND filings. And as -- I think we're seeing 2 things in the marketplace as biotech funding begins to strengthen, you're seeing more work going on with the clinical CROs, but also we're seeing this early pre-IND work for us. And I think as the capital markets continue to open up or stay open, maybe I should say, we should see more spending by biotech because pharma is quite strong.

Okay. That's helpful. And I guess given that commentary, given the bookings that we've seen in DSA in the last couple of quarters, is there a path to DSA growing in '26? And what does that mean maybe for the margins? Obviously, you guys had the cost outs, which is nice to see. But what is the DSA set up given the bookings and given, again, to your point, maybe a little bit of improving trends over the last couple of months as we head into '26?

Yes, sure. So we definitely want to see the conclusion of the year as we always do, and we want to see the beginning of next year. We also want to finish our 2026 budget, but also more importantly, we want our clients to finalize their '26 budgets. A lot of the pharma companies don't do that until sort of mid or sometime the end of the first quarter. But assuming that happens as predicted, we would want to see continuing improvement in book-to-bill over a sustained period of time, which we are hopeful that we will see. And there are other things to take into consideration in addition to that, I should say, not instead of, which is what does the backlog look like, how fast do we move through the backlog and also what's the nature of the studies that we get. In other words, are they longer short-term studies, if they're short-term studies and they start relatively quickly, that certainly could generate incremental sales. So we're going to -- we'll obviously watch the bookings very closely, and we'll report to you folks whether things continue to improve.

Our next question comes from Dave Windley with Jefferies.

Jim, I wanted to drill in on a couple of topics there. You mentioned the long-term studies and wanting a balance of both inferring -- want to see more short term. Are you seeing that? And what is the difference and say, what's flowing through revenue versus what you're seeing coming in short term versus long term in the bookings or backlog?

Yes. So we're beginning to see more short-term work or pre-IND work, which is an important part of what we do and always do. We like a balance of short and long term, and you typically don't get the long-term work until you have the short-term work. So I think, as I said a moment ago, that's clearly a commentary on comfort level of our clients to spend more earlier because access to capital has improved over the last -- what is it, over the last 4 months. And those -- and the backlogs now are sort of 9 months-ish. And you'll remember, Dave, that we were sort of 9 months -- 6 to 9 months, I would say, for many, many years. And that's a nice backlog number because it allows you to slot studies when stuff slips and it also allows you to get the bookings -- get the revenue relatively quickly because the studies are shorter. So I think that's only good news and a positive indication of incremental spending, particularly by the biotech folks. And given all the things that we just said, we should see that playing hopefully through enhanced bookings and revenue as well.

Got it. So relatedly, to your point about slotting studies, one of your peers, I believe, talked about RFP flow bookings and then study start timing, where the first 2 were okay, but it was the study start timing that was problematic. Are you seeing anything like that? Is that something maybe you've already seen and it's flowed through or you haven't seen yet? I'm just wondering if like the study start timing and your ability to kind of move slots in your own calendar would be impacted by clients' willingness to move study starts.

Yes. So we have read and heard that some of our competitors are in that situation. I would say that we're able to start studies relatively quickly and in concert with the time frames that are important to our clients. As I said, so we have a nice backlog, but a shorter backlog with studies that are starting more rapidly, particularly when -- since we have availability. So that lines up really well for us. I mean, all 3 of those factors. So we're very much focused on being as flexible and accommodating to our clients as possible and getting the work started on a time frame that they're interested in.

Okay. And if I could just slide in one more, which is, would you be willing -- on the divestiture, the strategic review, the 7% that you quantify, it seems like the CDMO is probably part of that, but not all of that. Would you be willing to provide some color on what those targeted divestitures are?

Yes. We're going to stay away from the specificity of that, except for the fact that it's around 7% of our revenue and should generate $0.30 accretion on an annualized basis. It's important to the divestiture process, but I think we may not be specific about those assets.

Our next question comes from Elizabeth Anderson with Evercore ISI.

I appreciate the updated commentary, Jim, on the NAMs. Can you talk about whether you're starting to see any change in behavior among any of your client groups regarding NAMs? Are there certain people who are thinking about it, not thinking -- no one is thinking about it, et cetera? And then two, for the incremental $70 million in cost savings, could you maybe double-click on that slightly more and just sort of help us think about the pacing of that and sort of any other details you could provide as to where those savings are coming from?

Sure, sure. I'll let Mike take the cost savings question in a minute. On NAMs, the pronouncements by the FDA and others is a recognition or a focus on the fact that if possible and when the technology is available and works that other technologies could be used or should be used in lieu of or at least in addition to research models. And I think that that's a philosophy that everybody embraces, including us that if there are legitimate alternatives, that's great. The scientific reality is that most of these technologies are relatively nascent and somewhat crude and provide some valuable somewhat anecdotal information relatively early in the drug development process, particularly around the discovery phase. And by the way, that will be really beneficial for the companies to focus on a lead compound to hopefully get those lead compounds into the clinic faster. And as a result of that, to get them into the market faster, it should also allow them to spend less time working on drugs that aren't promising. And except for a very small sliver, monoclonal antibodies is sort of poster child, we don't see them having much impact on safety. So we're hearing very little from our clients, except until the alternatives are scientifically robust. They're going to keep doing things the way they have always done them. And there's some internal investment by our clients in NAMs, particularly in the discovery phase. So -- we're thrilled with the Scientific Advisory Board we put together run by this #2 -- former #2 person at the FDA. And we have a host of NAMs technologies in our portfolio and some others that we're looking at from an M&A point of view, which should allow us to provide a leadership -- be in a leadership position with our clients and the FDA because we're going to have to validate this stuff. And as you've heard us say before, I think that ultimately, we'll probably be filing or our clients will be filing data, both the NAMs data and animal data simultaneously. So I think that's how it's going to move. And Mike, why don't you take the cost savings question?

Yes, sure. Elizabeth. So we previously disclosed we've identified $225 million of annualized cost savings, and then this morning's press release, we talked about an additional $70 million. And when you think about where they're coming from, really think about 5 different categories. The first one, network planning or facility consolidation, site closings, that's been going on for some time. Second one is really around workforce rightsizing, so not only in the business to rightsize for the demand, but also in our G&A pretty extensively throughout the company. Third one is in procurement savings. So we took a pretty extensive review of our procurement spend this year, and we've made -- we've got some significant savings from that. We talked -- the fourth one is really around GBS. So we talked about this -- it's really about being more scalable, more flexible, operating more efficiently, and that program is just starting now. And then the last one is really some internal efficiencies and automation. We've done a lot of digital investments over the years, and we're expecting to see some benefits around just internally how we operate. And so with the carryover from some of the initiatives we've implemented this year and the additional $70 million next year, you should think about $100 million of incremental savings in 2026. Now those all won't fall and drop to the bottom line next year. We're going to use those as a lever to offset a lot of the inflationary and cost pressures that we have and really other headwinds and protect the operating income given the demand environment we're in right now.

We'll take our next question from Eric Coldwell with Baird.

Quite a few of mine have already been covered. I wanted to -- just on those last comments about the $100 million of incremental savings in '26, but not all of it falling to the bottom line. Can you possibly give us a sense on how much you would expect to fall to the bottom line? If I missed that, I apologize.

Yes. I don't think we -- we have -- as we're in the middle of our planning process right now, Eric, and it's hard to tell how much will fall through. I know we are focused on generating and reinvigorating earnings growth next year. And so that's -- we've been really judicial and prudent in focusing on these cost savings with the intent of expanding earnings next year. But it's a little too early to tell just how much will fall through the bottom.

Jim, I'm going to circle back on a question that's going to bug you and probably isn't fair. But I think one of the biggest things the Street is struggling with this morning is the outlook for DSA growth next year, and I fully realize that bookings over the next 2 quarters are incredibly important on many fronts. But as you sit here now in November, a couple of months from the start of the new year, if you were in our seat on the buy side, on the sell side, Wall Street looking in, where would you be framing DSA to start the year? I mean we're coming off of 4 of the last 5 quarters, I think, have had book-to-bills in the 0.8

Yes. I mean -- we want to be careful not to get too deep into '26, but I certainly understand the nature of the question. I think the factors that we outlined that I talked about in the first couple of questions are, I think the most relevant thing. So the big drug companies seem to be pretty much done with their work. We're seeing greater access to capital for the last certainly 4 months or so by biotech. We've seen improvement in book-to-bill over the last 3 or 4 months. Proposals are way up. Cancellations are down, and we're seeing net bookings improve for our global clients where we have significant market shares. And so really, everything that sort of caused a decline in our PSA business over the last 18 months or so has been like 100% related to access to capital markets by the biotech clients. So we are guardedly optimistic that if they -- if those factors remain positive and/or improve, that obviously will be extremely beneficial for us going into next year. But we need to see that continue -- some benefits continue for the fourth quarter and as we move into the first quarter. So we just have to stop short of predicting what the actual numbers will be for '26. I just think it's just too early.

Just a quick other one outside of the scope of what people are asking today. There was some news and updates around the BIOSECURE Act back in October. I'm curious if you have any updated thoughts on what that might lead to.

Yes. We haven't really seen any impact. We don't -- interestingly, we hear virtually nothing about BIOSECURE Act and others from our clients. So it's either an essential part of what they're doing every day and they just deal with it or they don't think it's significant. So we're not hearing anything additionally from them. So we really don't have any updates on that. .

Our next question comes from Justin Bowers with Deutsche Bank.

So Jim, it sounds like proposals were pretty healthy in 3Q, up high singles year-over-year and sequentially as well. Was that consistent across globals or biotechs? Or was it weighted one way or the other? And then can you also give us an indication of the slope of how DSA bookings progressed during the quarter and if that slope continued or how the slope continued into October?

Yes, sure. So proposals for mid-tier were up over the prior year and the previous quarter. So we were really pleased to see that after kind of a slow summer. For Global, they were up over the prior year and not up over the prior quarter. As I said earlier, cancellations were down for both -- for all of our client base. So that's an extreme positive. Gross bookings for Globals were kind of flat, but net bookings were up. And we still have a gross to net bookings issue with the mid-tiers, which we hope will ameliorate as access to capital continues to free up for them. So obviously, really pleased to see a significant increase in proposals.

Got it. And then just a quick one on the timing of the asset divestitures. Do you have LOIs for any of those assets? And do you plan on treating that as discontinued ops going forward? Or are you going to keep it in continuing ops?

So we're actively working to divest certain assets. We hope that -- I think we said on the call, we hope that will be done by the middle of the year. We're not in an LOI stage yet. But obviously, we'll move forward with new speed and some sense of urgency to make that happen. And Mike, why don't you take the accounting question?

Yes. So the accounting rules have pretty specific criteria when to go into discontinued operations and one of those being a materiality concept. And just based on the nature of the businesses, their impact to our operations and financial results that just don't qualify for -- Disco Ops. So they will continue to be in our continuing operations until sometime as they're divested.

Our next question comes from Casey Woodring with JPMorgan.

Great. On DSA margins in 4Q, you mentioned higher third-party NHP sourcing costs. Can you just elaborate on that and if that's expected to be a drag on DSA margins next year? And then my follow-up here quickly is just you've talked a lot about how book-to-bill has improved each month. Is there any way to quantify what book-to-bill was in September or -- and how much that stepped up in October? I think one of the questions is if you can kind of continue this trend of sequential month-over-month bookings growth, if you can exit the year at over 1 book-to-bill in 4Q. So any color on that would be helpful.

I'll leave that to you, Mike.

Yes. In the beginning of the year, we -- remember in DSA, we had expected a mid- to high single decline rate, and we're meaningfully improved over that outlook by the end of the year. So when we are exceeding the expectations, we have to source from third-party NHPs that come with a higher cost since we have to procure additional models to meet that additional expected demand. So as far as 2026, no, I mean, as long as we can plan and we are consistent with the demand levels, it shouldn't be a continuing drag on the business.

And then just on that month-over-month book-to-bill, any sort of color on where September kind of shook out and maybe where October landed too?

Yes. Casey, this is Todd. We're not going to provide any specificity into the months. We really don't like to call out the months because we like to look at the trends overall. I think just as Jim mentioned earlier, what we're really looking for and what we saw over the past kind of 3 or 4 months is that, that trend continued to improve. And obviously, we'll be closely monitoring to see given the strength of some of the proposal activity and biotech funding that we are cautiously optimistic that, that will continue.

Our next question comes from Michael Ryskin with Bank of America.

First, I want to ask on the strategic review update, a lot of different bits here. I guess in a way, is this a final update? Or are there more discussions in progress? Is there an opportunity for further updates 6 months from now, a year from now, kind of the point that you've announced several incremental cost savings initiatives. Do you feel like you sort of finished your analysis and there's nothing more to get? Or should we kind of view this as still being open-ended?

Yes. So maybe a review of your assets is never complete. But certainly, we've gone through a deep portfolio review, sort of our strategic direction. And how we intend to allocate capital. So I would say that, that part has been completed at least for now. And we're moving on to the implementation phase, which is trying to divest certain assets. I think we do a really good job with the strategic planning and capital allocation committee of our Board, reviewing our portfolio sort of on a continual basis and looking at assets that aren't generating the returns that we would like, making sure that we're investing capital appropriately, both in M&A and occasionally buying back our stock and continuing to pay down our debt. So that's why I say maybe it's never complete. But certainly, in process, which has been going on for the last 3 or 4 months. I'd say the first phase of that is complete. We're really pleased with the sort of focus and initiatives that we're taking both to invigorate the top line and the bottom line and to get some of the assets in our portfolio that are definitely headwinds out so we can spend more time on things that have higher growth potential and greater opportunity to be accretive to the bottom line. So I think it was a very thoughtful and thorough and robust process.

Okay. That's helpful. And then a lot has been asked on DSA and next year and things like that. I want to ask it sort of from a more qualitative perspective. Do you feel like visibility into customer demand, sponsor demand? Do you feel like conversations with customers are becoming more stable? I know it's been a very uncertain time over the last 6, 12, 18 months. Just kind of want to talk about the planning process and how much forward visibility you have and how comfortable you feel with plans? Is that settling down at all a little bit even though we talk about the actual bookings and things like that?

I think that things are definitely more stable with sort of both client segments. The big drug companies have been reducing their infrastructures. We reported over the last quarter or 2 that we have very large multiyear contracts with most of the big pharma companies, and we've been sort of working through re-ups of those. So there's definitely stability there and sort of visibility and predictability. We have a lot of biotech clients who obviously have no internal capacity to do any of the things that we do. They're very innovative, and they've got a bunch of drugs in development that have paused. Some they're trying to push into the clinic with the money that they have and some they're going back and getting the IND filed. So yes, I think there is increasing stability and visibility. We like the backlog at 9 months. When it got to 14, 15, 18 months, it actually was too long. And by the time clients got to the point where they should be starting studies, they actually oftentimes didn't have them. So 9 months gives you a significant backlog to fill the gap when things stall. -- which happens all the time, but also gives you the much, much greater predictability of your business model. So we're encouraged by the access to capital. We're encouraged by the third quarter. We're encouraged by what we're hearing for our clients. We're encouraged by book-to-bill improving sequentially over the last 4 months. We need to have all of that continue through the back half of the fourth quarter and the beginning of the first quarter and all of our clients to put their operating plans to bed for 2026 before we feel that we'll have our arms around what the growth rate ought to be for that for the next fiscal year.

Our next question comes from Ann Hynes with Mizuho Securities.

Great. Just in DSA, like I know you don't want to give 2026 guidance. But if the biotech IPO really heats up market in Q4, how long does that usually end up? And how long does that take to show up in your backlog and revenue? And then my second thing would be about capacity. I know you've been reducing capacity in the segment. Could you remind us how much you have reduced capacity to date and what capacity utilization you're running at and maybe where you would like that to go just to see growth again?

Yes. So we used to give exact percentages of capacity utilization. It used to be sort of optimal utilization. It used to be in the low 80s, which surprised everybody. But if you're 95% full, it's actually inefficient to turn over new rooms. So that's sort of where we like it. We stopped giving those numbers. But capacity utilization is below that. So that's not maximum efficiency. By the same token, it's good to have incremental capacity when and as the demand heats up. And there was a question earlier about how quickly we can start studies and having incremental capacity allows us the ability to do that. So we try to stay ahead of the demand curve historically by building incremental space and now by holding on to. We've been building some incremental space in our laboratory sciences aspect of our Safety Assessment business. which is important. If we don't have the space when the clients have the work, that's obviously a problem. And it takes, I don't know, 18 to 24 months to build some new space and a longer period of time to validate it. So I would say capacity for us is in a good place as we finish the fiscal year and move into the next one. And hopefully, as demand increases, we should be able to accommodate that. Just tell me -- remind me the first part of your question had something to do with backlog in the fourth quarter.

No, if the funding environment really heats up, say, in Q4. How long does that take to...

There was a lag. Always tough to predict. I would say that while they're sort of waiting for the capital markets to open up and they've got some work backed up, they tend to be kind of judicious and thoughtful about how they spend their money because they want to make sure that the capital -- that access to capital will remain. So it's typically not overnight. It usually takes a couple of quarters anyway. But I think once they have the confidence that the capital markets are open for some period of time for private companies that want to do IPOs or relatively recent IPO biotech companies that were counting on secondaries that are worrying about access to capital. I mean that definitely changes the slope of demand. These are the discovery engines for the big drug companies, and this is where a lot of the innovation is coming from. And as we continue to say they have no internal capacity to do the work that we do. So it obviously will be a positive. It's a little bit tough to discern how quickly they begin to spend, except to tell you what they've done historically, which is to be a little bit careful. This could be different because I do think there's a fair amount of pent-up demand and a desire to get INDs filed, which is something that these companies focus on intently every year. And we know that there's a bunch of drugs that sort of stalled before they got the INDs filed. So hopefully, we'll see that pick up.

Next question comes from Max Smock with William Blair.

I know we're over here, so I'll keep it to one. I just wanted to ask a higher-level one, Jim, on your comment about still seeing some uncertainty out there from clients. And it sounds like on the biotech side, another month or 2 of good funding will take care of that uncertainty. But on the large pharma side, what do you think they're really waiting to see before accelerating spend? It feels like the MFN and tariff headwinds that we've discussed seem to be resolved or at least kind of moving in the process of being resolved. Does further progress there eliminate the remaining uncertainty? Or are there any other factors out there that we should consider as having an impact on pharma spend here over the next couple of quarters?

Yes. We feel very good about pharma spend given net bookings, proposal volumes, et cetera. given these long-term contracts that we have and given the fact that a lot of the reductions in their cost structure in anticipation of the patent cliff has happened. Obviously, the drug companies have plenty of money. So ability to spend is never a problem with them. And they spend in their -- for their -- to support their own R&D shops, but they also access molecules from the biotech community, either licensing them or buying entire company. So I think they're in a good place generally and increasingly for us should be stable to growing part of our client demand. And we have significantly higher shares than the competition in pharma. But biotech has I'd say, for the last decade or 1.5 decades been the principal driver of our growth, just given how many companies there are, how many new companies are created every year, how innovative they are and how much they need our capabilities. So we are intently focused on biotech and being accessible to them and flexible with them and guiding them through the regulatory process to get the drugs into the clinic and ultimately into the market. So we're very pleased to see the capital markets begin to open up. We've been looking forward to this for a while, but they need to really open and stay open for a while for things to substantially invigorate.

Jim, if I could just ask a quick follow-up there. On your point about replenishing their pipelines with licensing and M&A, there has been a nice uptick in both so far year-to-date. Just wondering to what extent M&A either helps or hurts how you think about that recovery. And in particular, licensing from China, what impact that would have relative to maybe some of the licensing deals that have been more U.S.-centric. Does that limit your opportunity to benefit from large pharma replenishing their pipelines? Or is it more of a net neutral?

No, I think that that's kind of an always the buying and accessing molecules from China. I wouldn't say it's brand new, but it's relatively new and increasing somewhat because there's a fair amount of innovation coming out of China. So I mean, I think that's fine. the extent to which the big drug companies need to further develop molecules that they access either from China or somewhere in the U.S. or Europe, that we're certainly thrilled to have that work. Since we have with very few exceptions, principal market shares with all of the big drug companies, it's likely that we'll get work if further work needs to be done on those molecules, it depends on what stage they're at. And for a lot of the, obviously, U.S. and European small biotech companies, we're already doing work for them. So it's unlikely that a pharma acquirer would change horses midstream. So we're likely to keep that work and get the incremental work as well.

Next question comes from Luke Sergott with Barclays.

I just wanted to think -- talk about the increased staffing on the DSA. And from a timing perspective of how you guys continue to add the service piece to match the oncoming volumes. Is that still in line with what you had done in the past, like, let's say, like 3 to 6 months as you continue to look out there?

Yes. I mean the cremental hiring is -- it's essential. We need to do it to accommodate demand. We need to backfill some positions because we have some turnover like all companies. We're adding headcount to our laboratory sciences part of Safety Assessment, which has been growing nicely and is a major focus for our clients. So we're really -- we're adding capacity where we're seeing growth. And I just want to remind you that what we're seeing in our DSA business, particularly the Safety Assessment business is we have a level of demand that's meaningfully above what we initially thought for this year in terms of our operating plan, and we have provided guidance to that. So having the people in place is obviously essential to being able to do the work. So we're happy to have some incremental capacity. We were getting to the point where it was tight on having sufficient staff to do the work in a time frame that our clients want. And obviously, everything with us is about both the quality of our execution and the speed of our execution because all of our clients are in a rush to get their drugs into the clinic and ultimately into the market. So we feel that as we move through the back half or the rest of the fourth quarter and as we move into next year that these incremental jobs will be essential to be able to accommodate the work in 2026.

Great. And then from a follow-up, just as you guys think about the investments going forward, I understand there's a lot of moving pieces with divestiture and cost outs, et cetera. But you also talked about from a strategic review, adding new technologies or capabilities. Elizabeth talked a little bit about the NAMs. Just talk about appetite here from an inorganic sense on bolt-on versus on more strategic -- and then kind of where you would be willing to take the balance sheet or your leverage levels given that you're continuing to take those down right now, but if you need to do something more strategic.

Yes. We've always felt that strategic acquisitions was the best use of our capital and still believe that. There are some areas that we pointed out in our prepared remarks that where we have a lot of focus by our clients and where we need to continue to look and invest to invigorate our pipeline. But we're going to stay in our core. So we're looking at things like bioanalysis, which is part of our laboratory sciences capability. We're looking at some geographic expansions in some of our businesses that maybe something in Europe that we don't have in the States or vice versa. We're looking at a host of in vitro technologies that sort of fall squarely under the NAMs nomenclature. So it's -- there are several things that we're looking at that will be important to our growth, to our margins, to our competitive strength. Our leverage is in the low 2s. We're certainly comfortable levering up to the mid or even the high 2s because almost always, we've been able to reduce our leverage substantially within 12 months. And so our free cash flows are really quite substantial. Debt is coming down, interest related to that debt is coming down as well. So balance sheet is in good shape. We're certainly comfortable in the mid-2s or even the high 2s once we get it down. We're pretty much committed to keep it under 3 turns.

Our final question comes from Rob Cottrell with Cleveland Research.

I guess I'm just encouraged to hear you say that spot pricing is stable for the second straight quarter. Is the selected discounting that you all were discussing last year still a headwind year-over-year into the fourth quarter? And at what point do you expect pricing to flip from a headwind to a tailwind?

Yes. I'm not sure it's a headwind. I mean we're trying to do it very strategically. And so the extent to which it minimally allows us to protect share, that's obviously important. And maximum allows us to take share, which obviously helps our growth rate and could help our margins as well from just covering that level of volume. I think we're using it really well. If a new client calls and wants to get a price on something, well, we'll give them pretty healthy prices. A lot of the big clients that we have long-term contracts with prices are prenegotiated and so we know what that is going to be. So and pricing, absolutely, if you look historically and as we look to the future, as demand picks up and space gets tighter, pricing will be available and easier for all of us. And nobody -- I can just speak for us, certainly, there'll be no need to reduce prices to compete in the marketplace. So we feel that we're using it thoughtfully and strategically and beneficially -- and there's -- while our shares are pretty good versus the competition, there's still pieces of business that we're desirous of getting. And if that's what's required initially to get the business, then we'll play that card.

And then along those lines, any change in win rate during the quarter?

I don't know if we -- Todd, will we ever disclose that?

No. I mean we didn't really -- we haven't disclosed that. I would just kind of echo Jim's comments that we continue to look at price selectively to -- at a minimum, we try to -- the goal is to maintain share, if not win share.

We have no further questions in queue. I will turn the conference back to Todd Spencer for closing remarks.

Great. Thank you, Angela, and thank you, everyone, for joining us on the conference call this morning. This concludes the call.