Q1 2025 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories First 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. You may go ahead.

Good morning, and welcome to Charles River Laboratories' First Quarter 2025 Earnings Conference Call and Webcast. This morning, I am joined by Jim Foster, Chair, President and Chief Executive Officer; and Flavia Pease, Executive Vice President and Chief Financial Officer. They will comment on our results for the first quarter of 2025. Following the presentation, they will respond to questions. There is a slide presentation associated with today's remarks, which will be posted on the Investor Relations section of our website at ir.criver.com.

A replay of this call will be available beginning approximately 2 hours after the call today and can also be accessed on our Investor Relations website. The replay will be available through the next quarter's conference call. I'd like to remind you of our safe harbor. All remarks that we make about future expectations, plans and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated.

During this call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain meaningful understanding of our core operating results and guidance. The non-GAAP financial measures are not meant to be considered superior to or a substitute for results from operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on the Investor Relations section of our website. I will now turn the call over to Jim Foster.

Thank you, Todd, and thank you all for joining us today. Before discussing our first quarter results, I'd like to take a few minutes to directly address an important regulatory development, the FDA's announcement last month outlining their goal to accelerate the validation and adoption of New Approach Methods, or NAMs, to reduce the animal testing in preclinical safety assessment. I will also provide an update on our own ongoing strategy around alternative methods which we will continue to incorporate into our business in the future. Charles River supports the FDA's vision to leverage scientific advancement to safely advance innovative technologies, including alternatives to animal use.

As the leader in preclinical drug development, our long-standing mission is aligned with this vision as we continue to drive greater efficiency in the drug development process and reduce costs, enhance scientific innovation and promote the responsible use of animals in biomedical research. Our perspective on leading through a NAMs-enabled future is as follows: First, the evolution of NAMs is not new and demonstrates that scientific advancements are continuing to move forward. For more than 50 years, efforts to reduce animal use by Charles River and industry have led to a gradual decline in research model volumes.

These efforts include better translational models and technologies, such as genetically modified and immunodeficient models that can mimic human disease. For example, our volumes of outbred rodents often used in safety assessment have been roughly halved over the past 10 years due to the use of more complex and predictive models, technologies and services, including imaging and in vitro applications, all while our revenue has increased significantly. NAMs are part of this broader trend. For many years, CROs like Charles River, the biopharmaceutical industry and the FDA and international regulatory agencies have been evaluating strategies to use NAMs as tools to complement traditional methods, and in some cases, to potentially eliminate certain animal tests.

Through this evolution, the promise of NAMs will be balanced with the importance of patient safety and science. NAMs are beginning to offer exciting opportunities for the future, but they are not capable of fully replacing animal studies in biomedical research and safety testing. Each NAMs tool will require rigorous validation to prove it can consistently replicate the complexity of living systems and ensure patient safety. There are applications where NAMs may play a valuable role more quickly, such as monoclonal antibodies, but significant scientific advancements and validation will be required before alternative methods can become more widely adopted.

This technology to mimic a complex living organism doesn't exist today. Therefore, we believe there will be incremental progress over time, and the broader adoption of NAMs will be a longer-term journey, one that is much longer than 3 to 5 years. As the science continues to advance, we believe the biopharmaceutical industry and regulators will maintain a keen focus on ensuring patient safety without compromise. As NAMs evolve, we intend to advance hybrid study designs by complementing traditional in vivo and in vitro methods with NAMs and other nonanimal technologies.

Given the current state of science and technology, NAMs are still primarily used in drug discovery because of the narrower focus on drug design and optimization, whereas in safety assessment, a more comprehensive approach is required to determine the full systemic or multi-organ impacts of a drug. Chronic or longer-term assessments of a drug's impact are also critical, as well as off-target or unintended effects, which NAMs can't fully replicate at this time. However, similar to applications in drug discovery, we believe a hybrid model submitting NAMs data in parallel with animal data will prove to be the best approach to ensure patient safety for regulated safety testing over the long term.

Ultimately, we believe the future isn't binary. The use of animals will remain beneficial to support certain complex safety and efficacy endpoints even as hybrid study designs that incorporate both NAMs and animal data gain traction. As a result, we view this as an opportunity for Charles River, and we will continue to expand our non-animal platforms. Our leadership in preclinical drug development is not confined to animal models.

It is rooted in science and innovation, regulatory insights and translational expertise. That expertise is equally applicable to NAMs for which we have a growing portfolio of capabilities. We will continue to invest heavily in these capabilities through organic innovation, technology partnerships and targeted M&A. As regulatory expectations continue to evolve, our clients are seeking trusted partners to help them navigate the transition.

Charles River is the logical partner to assist biopharmaceutical clients to validate and advance the use of NAMs because of the scientific data that we possess and our regulatory expertise. Drug development is ultimately about scientific data, and we have generated significant client databases of toxicology information over our 25 years in the industry that can help create more predictive and efficient safety methodologies that do not compromise patient safety. Charles River has a well-established commitment to and track record for the replacement, reduction and refinement or the 3 Rs of ethical animal use for biomedical research and has supported the FDA's efforts as well as the NIH's to advance the validation and adoption of NAMs over many years.

We have recognized this trajectory of science and technology for many years. And in April 2024, we formalized our own Alternative Methods Advancement Project, or AMAP initiative, dedicated to advancing the development of alternatives to reducing animal testing. We have made strategic investments over the past decade in areas that are central to the NAMs ecosystem with growing capabilities that include steroid, organoid and organ-on-a-chip platforms, human tissue models, in silico modeling, advanced in vitro toxicology and predictive immunotoxicology assays. We have also invested in projects using computational modeling to increase efficiency and reduce animal usage, as exemplified by our Logica platform pairing AI with traditional methods.

We acquired the Retrogenix's cell microarray technology for off-target screening and toxicity. And we also launched a pilot program to replace animals with virtual control groups for safety assessment studies. Slide 9 in our earnings presentation showcases the current state of NAMs and our capabilities across the various NAMs platforms. In total, we generate approximately $200 million of annual DSA revenue from NAMs, much of which is in the discovery phase.

We believe our NAMs capabilities and associated revenue will grow meaningfully over time as gradual technological progress continues. I'd like to take a moment to address the potential financial impact to Charles River from the FDA announcement. The FDA has focused on monoclonal antibodies for its pilot program, specifically to reduce the duration of chronic NHP studies. We believe the FDA chose this path because on a case-by-case basis, it has already been waiving certain chronic post-IND NHP studies for monoclonal antibodies for many years using a weighted evidence model because the scientific data has demonstrated that in many cases, there is limited benefit to conducting additional chronic NHP studies.

This is likely because monoclonal antibodies generally show less toxicity than small molecule drugs and have a lower risk for unexpected reactions. In addition, certain monoclonal antibodies have no relevant research models to use in safety testing. Chronic NHP studies longer than 3 months in monoclonal antibodies represented $50 million of our annual revenue. We do not expect any immediate impact on our business.

On Slide 11, we have provided an updated view of our Safety Assessment revenue by drug modality for reference. As you can see, the bulk of our revenue is from small molecule and newer advanced biological drugs, including cell and gene therapies. The FDA has not yet focused on these other drug modalities because understanding the safety profile can be more complex and less predictable than monoclonal antibodies. And in the case of newer biologic drugs, there is also less data available to support non-animal-based risk assessments.

Therefore, extensive validation work and scientific advancements are needed to safely complement the current in vivo protocols with new alternative methods. This will take a significant amount of time and require resources and collaboration between the FDA, NIH and other agencies, as well as the biopharmaceutical industry. We applaud the FDA's ongoing efforts to reduce animal use. And while the transition to NAMs is evolutionary, rather than revolutionary, it's an important one for biomedical research and one that Charles River is prepared to lead.

In the coming years, we look forward to continuing to work with regulatory agencies, the biopharmaceutical industry and other stakeholders to help develop, validate and implement an efficient process for our clients' regulatory submissions that supports the use of nonanimal technologies and new alternative methods. As we always have, Charles River will remain committed to following the best and latest science to ensure patient safety. Now I'd like to provide an update on the market trends. Despite considerable uncertainty in the broader market environment, our first quarter financial results demonstrated continued signs of stabilization with a better-than-expected DSA performance, leading us to modestly increase our financial guidance for the year.

We were pleased to see the DSA net book-to-bill return to just above 1x for the first time in over 2 years due to improved quarterly bookings. While this is a positive development for the DSA segment, we remain cautious in light of recent market dynamics, including government funding cuts, particularly at the NIH and FDA, the slower start for biotech funding and tariffs. These developments have understandably contributed to a broader sense of uncertainty in the marketplace. While we have not yet seen a meaningful impact on client demand, which continues to show signs of stabilization, we have taken a measured and prudent approach to our outlook for the year.

I'll now provide highlights of our first quarter performance. We reported revenue of $984.2 million in the first quarter of 2025, a 2.7% decrease compared to last year. On an organic basis, revenue declined 1.8%, driven by low single-digit organic decreases in each of our 3 business segments. Our first quarter revenue performance was above our February outlook for a mid-single-digit decline due primarily to the DSA segment's performance, for which I will provide more details shortly.

By client segment, revenue for small and midsized biotech clients grew for a second consecutive quarter. Revenue for global biopharmaceutical clients declined in the first quarter, but this was due at least in part to the fact that we have not yet anniversaried the spending reductions which began in the second half of last year. Collectively, our global academic and government revenue increased slightly in the quarter. The operating margin was 19.1%, an increase of 60 basis points year-over-year.

The improvement was primarily driven by the benefit of cost savings resulting from restructuring initiatives that promoted margin expansion in the DSA segment. Favorable mix in the DSA segment also contributed, as did unallocated corporate costs, which declined year-over-year as expected. Earnings per share were $2.34 in the first quarter, an increase of 3.1% from the first quarter of last year. In addition to operating margin improvement, below the line items, including reductions in the tax rate, interest expense and diluted shares outstanding were contributors to earnings growth.

Flavia will provide more details on these items. Based primarily on the first quarter DSA outperformance and our current visibility, balanced by a cautious approach to the second half of the year, we are modestly raising our 2025 revenue guidance by 100 basis points to a 2.5% to 4.5% decrease organically and our non-GAAP earnings per share guidance by $0.20 at midpoint to $9.30 to $9.80. I'd now like to provide you with additional details on our first quarter segment performance, beginning with the DSA segment's results. DSA revenue in the first quarter was $592.6 million, a decrease of 1.4% on an organic basis driven primarily by lower revenue for Discovery Services.

DSA pricing improved slightly in the first quarter. This was primarily driven by favorable mix, specifically an increase in longer duration specialty studies. We do not believe this signals broader improvement in the spot pricing environment, which we would continue to characterize as stable overall. Moving to the DSA demand KPIs on Slide 19. The DSA backlog was $1.99 billion at the end of the first quarter, up slightly from $1.97 billion at year-end.

You should note that beginning this quarter, we have disclosed our net bookings and net book-to-bill data. This is the first time we are providing this information because we believe it will provide additional transparency into these important KPIs, particularly when foreign exchange can have a notable impact on backlog, as it did in the fourth quarter. As I mentioned earlier, we were pleased that the net book-to-bill improved to 1.04x in the first quarter, above 1x for the first time since the second half of 2022. This was primarily a result of quarterly net booking activity, which improved to $616 million, representing a more than 20% increase on both a year-over-year and sequential basis.

This improvement was driven by higher gross bookings, principally from global biopharmaceutical clients, as well as a continued decline in study cancellations moving towards targeted levels across all client segments, including small and midsize biotechs. The incremental first quarter booking activity could largely be characterized for studies with quicker start dates, which is more reflective of our current shorter-term booking behaviors in the current market environment. We expect this will benefit revenue in the first half of this year, including the studies that were already started in the first quarter that led to the better-than-expected performance.

Based on this trend, we are modestly increasing our full year revenue guidance for the DSA segment. We now expect DSA organic revenue will decline in the mid-single-digit range, rather than our prior outlook of a mid- to high single-digit decline. As I mentioned, we expect the improved first quarter bookings will generate incremental revenue during the first half of the year, also augmented by the favorable study mix during the first quarter. At this point, given the current visibility, the generally conscious sentiment in the sector and our expectation that the study mix will normalize, we are not assuming that a similar bookings tailwind will continue to benefit second half revenue.

However, as I said earlier, we have not seen any meaningful evidence of deterioration in our markets. The DSA operating margin increased 40 basis points year-over-year to 23.9% in the first quarter. The year-over-year improvement primarily reflected cost savings generated from our restructuring initiatives, as well as the favorable study mix in the first quarter. RMS revenue was $213.1 million, a decrease of 2.5% on an organic basis compared to the first quarter of 2024. RMS performed in line with expectations to start the year.

The year-over-year revenue decline was primarily driven by the timing of NHP shipments in China and lower revenue for the Cell Solutions business, partially offset by higher revenue for small research models in all geographic regions, driven primarily by higher pricing. Small research models remain essential, low-cost tools for biomedical research, which enhances our ability to continue to realize price increases globally. However, there have been growing concerns from our academic and government clients that propose NIH budget cuts, and uncertainty in Washington could impact their future funding levels.

We have not experienced any meaningful revenue loss related to NIH budgets to date, and first quarter revenue from our North American academic and government clients increased slightly. As a reminder, this North American client base represents just over 20% of total RMS revenue, or approximately 6% of total company revenue. Any potential NIH budget cuts would be unlikely to impact client spending levels until later this year or into 2026. In addition, demand from early-stage biotech clients for our CRADL services is expected to be constrained this year due to their funding challenges. We believe this will slow the anticipated utilization of CRADL capacity during the year.

As a result of these 2 potential headwinds, we are moderating our RMS outlook for the year to flat to slightly positive revenue growth on an organic basis compared to our previous expectation of low single-digit growth. In the first quarter, the RMS operating margin decreased by 50 basis points to 27.1%. The decline was primarily a result of the lower NHP revenue, partially offset by the benefit of cost savings resulting from our restructuring initiatives. Revenue for the Manufacturing segment was $178.5 million, a 2.2% decrease on an organic basis from the first quarter of last year.

The revenue decline was driven primarily by lower commercial revenue in the CDMO business and a slow start to the year for the Biologics Testing business. Overall, the Manufacturing segment started the year in line with our expectations, and we are maintaining our prior outlook that Manufacturing revenue will be essentially flat on an organic basis in 2025. As you know, first quarter testing volumes in the Biologics Testing business can fluctuate based on seasonal trends. The business had a stronger start last year. However, we continue to expect that Biologics Testing revenue will grow in 2025, and this outlook was supported by solid booking activity in the first quarter.

Our cell and gene therapy CDMO business was impacted by the lower revenue from 2 commercial cell therapy clients, which we discussed earlier in the year. The loss of commercial CDMO revenue reduced the Manufacturing Solutions growth rate by approximately 500 basis points in the first quarter and is expected to have a similar impact for the full year. We are continuing to make progress to enhance the quality of our CDMO operations. We were also pleased to see that our gene therapy CDMO revenue grew in the quarter.

We have a healthy pipeline of biotech clients with early-stage clinical candidates ready to help move the CDMO business forward and continue to believe attractive long-term growth opportunities exist. Offsetting these headwinds, the Microbial Solutions business reported another quarter of solid growth across its leading portfolio of rapid manufacturing quality control testing solutions, led by Accugenix microbial identification services. Endosafe also performed well as a result of growth for testing consumables, and a strong high throughput, automated NEXUS instrument placements last year are driving incremental cartridge demand.

We expect Microbial Solutions will remain a stable source of high single-digit revenue growth for Charles River, demonstrating that clients are increasingly utilizing our comprehensive testing solutions to enhance their product release testing speed and efficiency. The Manufacturing segment's operating margin declined by 220 basis points to 23.1% in the first quarter of 2025 due principally to the impact of lower commercial revenue in the CDMO business. We believe the Manufacturing segment's margin will rebound as sales volume improves, particularly in the Biologics Testing business, and will move closer to the 30% level during the year.

Before I turn it over to Flavia, I would also like to discuss this morning's announcement regarding our actions to enhance value creation opportunities at the company in conjunction with our new shareholders, Elliott Investment Management. First, we are pleased to welcome Steven Barg, Abe Ceesay, Mark Enyedy and Paul Graves to our Board. Each brings significant professional and industry experience and will add fresh perspectives as we continue to execute our strategy and identify the best avenues for further growth and value creation. I would also like to sincerely thank the 4 members of our Board who are not seeking reelection: Bob Bertolini, Debbie Kochevar, George Massaro and Richard Wallman.

I appreciate the expertise and strategic counsel that each of you have provided to the company and to me over the many years that you have served on our Board, which have contributed to our enduring industry leadership, and we wish each of you the very best. In addition, the Strategic Planning and Capital Allocation Committee of our Board will undertake a comprehensive strategic review of our business to evaluate initiatives to unlock additional value. We will report back on the outcome of the Board's review once complete. I look forward to working with each of our new and continuing Board members and the Elliott team as we focus on maximizing long-term value for our investors, clients and employees.

I firmly believe the company shares are significantly undervalued, particularly after the FDA's announcement last month, so implementing additional value creation initiative is both necessary and timely. I'd like to thank our employees for their exceptional work and commitment and our clients and shareholders for their continued support. Now Flavia will provide additional details on our first quarter financial performance and updated 2025 guidance.

Thank you, Jim, and good morning. Before I begin, may I remind you that I'll be speaking primarily to non-GAAP results, which exclude amortization and other acquisition-related adjustments, costs related primarily to restructuring actions, gains or losses from certain venture capital and other strategic investments and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures and foreign currency translation. We are pleased that our first quarter revenue and non-GAAP earnings per share exceeded our prior outlook.

This outcome was primarily driven by better-than-expected DSA results and, to a lesser extent, a lower tax rate. These results also reflect the actions we have taken to protect the operating margin. For the past 2 years, we have taken aggressive actions through our restructuring program to reduce our cost structure by over 5% and align our infrastructure with the current demand, which contributed to the first quarter operating margin improvement and earnings growth, even with a modest revenue decline. We remain on track to deliver annualized cost savings of over $175 million in 2025 and approximately $225 million in 2026. We are also continuing to deploy capital in a disciplined and shareholder-focused manner.

As announced last quarter, we're leveraging our solid annual free cash flow generation and completed the repurchase of $350 million in shares during the first quarter of 2025. For modeling purposes, including the stock repurchases to date, we will have slightly below 50 million average diluted shares outstanding for the full year. In just over 2 quarters, since the $1 billion stock repurchase program was authorized, we have repurchased nearly half of this amount. As Jim referenced, we currently believe the company is significantly undervalued, and we'll closely review opportunities for value creation, including additional stock repurchases.

We also experienced a significant increase in quarterly free cash flow, with $112.4 million generated in the first quarter compared to $50.7 million last year. The improvement was primarily driven by lower performance-based cash bonus payments for 2024, which are paid in the first quarter, and by lower capital expenditures. CapEx was $59.3 million or approximately 6% of revenue in the first quarter compared to $79.1 million last year, reflecting the ongoing moderation of our capacity investments in the current demand environment. For the year, we expect that free cash flow will be $350 million to $390 million, and CapEx will be approximately $230 million, consistent with our prior outlook.

As Jim mentioned, we have modestly raised our revenue and non-GAAP earnings per share guidance. We now expect full year reported revenue will decline 3.5% to 5.5% and organic revenue will decline 2.5% to 4.5%. FX rates have been volatile since the election. And as a result, we now expect foreign exchange will represent an approximately 1% headwind to 2025 revenue based on recent bank forecasts, which is favorable to our prior outlook of a 1% to 1.5% headwind.

Non-GAAP earnings per share are now expected to be in a range of $9.30 to $9.80. Our updated segment revenue outlook for 2025 can be found on Slide 36. We are raising our DSA outlook to reflect the solid first quarter performance, including improved bookings, which give us greater confidence in the near term. We're also tempering our IMS outlook, reflecting headwinds related to our CRADL business and potentially on our academic and government client base later in the year. Our Manufacturing outlook is unchanged on an organic basis. We expect the consolidated operating margin will decline 20 to 50 basis points in 2025, or largely consistent with our prior outlook of modestly lower.

I will now provide details on the nonoperating items that benefited our first quarter performance versus the prior year. Unallocated corporate costs totaled $52.4 million in the first quarter, or 5.3% of revenue, compared to 6.2% of revenue last year. The decrease was primarily due to the benefits of cost savings actions. For the full year, we expect unallocated corporate costs will be in the range of 5% to 5.5% of total revenue.

The non-GAAP tax rate in the first quarter was 22.7%, representing a decrease of 60 basis points year-over-year. The first quarter tax rate was slightly favorable to our prior outlook, due primarily to the timing of the enactment of certain global minimum taxes, as well as higher R&D tax credits. For the full year, we continue to expect our non-GAAP tax rate will be in the range of 22.5% to 23.5%, consistent with our prior outlook. I'd like to briefly address the recent headlines around tariffs.

Based on the current universal tariffs in place as of May 7, we expect a limited direct impact on an annual basis principally related to NHP supply and other study-related items, and we plan to offset most of these estimated tariffs by passing along the higher costs. This has been factored in our current guidance. Total adjusted net interest expense was $26.5 million in the first quarter, essentially unchanged sequentially. For the full year, we expect total net interest expense will be at the lower end of our prior outlook of $112 million to $117 million.

At the end of the first quarter, we had outstanding debt of $2.5 billion, with approximately 60% at a fixed interest rate compared to $2.2 billion at the end of the fourth quarter. As a result of the higher debt at the end of the first quarter, gross leverage increased to 2.5x and net leverage increased to 2.4x. The sequential increases in debt and the leverage ratios were primarily attributable to the short-term borrowings for stock repurchases, which we expect to largely repay through our cash flow over the course of the year. A summary of our 2025 financial guidance can be found on Slide 40. Looking ahead to the second quarter, we expect reported and organic revenue will decline at a low to mid-single-digit rate year-over-year.

Earnings per share are expected to improve nicely from the first quarter level with a mid- to high single-digit sequential increase over the $2.34. In summary, we were pleased that our financial performance in the first quarter benefited from the disciplined implementation of the cost-saving initiatives that we undertook, and we'll remain focused on continuing to evaluate additional opportunities to drive future savings and operating efficiencies. These actions are important not only to align our operations with current demand and to protect the operating margin, but also as a means to allow us to continue to invest in our businesses.

We are committed to being at the forefront of scientific innovation, particularly as the industry continues to evolve. Our strategic investments and scientific expertise will position us to actively shape the changing regulatory landscape, while maintaining the highest standards of safety and efficacy. We will also evaluate all opportunities to unlock value with the support of our new and continuing Board members and Elliott Investment Management. We're proud of the foundation we've built, and we are energized by the opportunities ahead.

Thank you.

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

[Operator Instructions] Our first question will come from Max Smock with William Blair.

Maybe just starting off with the FDA guidance. And really on the news yesterday. I'm wondering if you have any thoughts on whether some of the mixed messaging from the FDA will prevent drug developers from really leaning into the guidance about reducing animal testing? I mean on one hand, there's been a lot of talk about improving the drug development process, making it easier to bring drugs to market.

But then yesterday, we had the announcement of Dr. Prasad as Head of CBER, which -- the feedback we got was basically that, that sends a conflicting message based on some of his past comments. So based on your conversations with pharma, in particular, could this be more like what we saw with the FDA Modernization 2.0 Act, where it didn't really lead to any real changes? Or is this more real to you?

Really interesting way you phrased that. It's difficult to predict. There's lots of changes at the FDA that, obviously, everybody has different opinions on the impact of those. A lot of -- there are less people, and there's new leadership.

So it's difficult to judge where that is all going. I guess we would just say that this is really not new, this initiative. This has been going on for a significant amount of time. We and others have been participating in the development of NAMs.

I think their focus on monoclonal antibodies is probably an intelligent place to test this and do a pilot. We're excited about the opportunity, however this develops, to be -- to lead the charge and sort of get our clients sync with the regulatory agencies, both in this country and in other places. So the fact that we all would like to see -- continue to refine it and reductions in utilization of research models, which has been going on for a significant amount of time. That will continue, but the science will be the principal driver of all of this.

A lot of validation will be required, and we're going to play a key role in the validation. So I think your question is really around the pace and the cadence of this. Really, really difficult to say. I think if there were no changes in the FDA in terms of staffing or leadership, the validation methodology is significant and will take a meaningful amount of time, probably a little bit less with monoclonal antibodies, longer-term, NHP monoclonal antibody studies, which is where they started, and that's going to be sort of a proof of principle.

So there'll be some development, and we will participate sort of regardless of what's going on at the FDA.

Got it. Makes sense. Super helpful commentary. Maybe just following up, and I appreciate the detail you shared during the call around how alternative approaches are being used today.

A lot of the inbounds we've gotten have been around biosimulation, in particular, PBPK and QSP. Just wondering if you can provide some more detail around how each of those offerings are being used currently and why they aren't being used more frequently already in preclinical? And then what you view as kind of the biggest hurdle before adoption of those biosimulation approaches moving forward?

I mean, a lot of those technologies are used successfully early on in drug discovery more than safety because you're looking for a single answer with something that you're questioning or prosecuting or developing. And by the way, I'd say that most of the drug companies, certainly, the large ones have their own proprietary technologies, and we've been using those for long periods of time and certainly not sharing them with others. To move this into a regulated tox and be looking at the systemic reaction of a drug and the multi-organ reaction of a drug is really complicated science. And so trying to simulate things that happen inside of the human body as opposed to actually using a whole animal system to actually see how it works inside of a living mammalian system is quite different, and that's a huge leap of faith.

So I think it's going to be a slow build. Some of those technologies are going to be beneficial. Some won't at all. Some of them will be beneficial to discovery and maybe not to safety.

And I think that continued investment by us and others, and as I said, in a proprietary nature by our clients is necessary and important. But in the final analysis, the FDA and all the other regulatory agencies are principally concerned about ensuring the safety of patients who take these drugs, and they're not going to cut any corners to do that, even with what looks like exciting technology. So it's going to be a slow continual build.

Our next question will come from Eric Coldwell with Baird.

I guess I'll stick with the same general line of questioning from Max. I'm curious on NAMs, you list upwards of a dozen areas of investment, things that you've been doing, $200 million of annualized revenue broadly defined. Where does Charles River -- where do you feel you stand out the most, where you're truly an industry thought leader, have maybe higher share versus competitors? And then what areas do you feel you're underrepresented in today, but might step up investment?

And I guess part C of that is, are you in a position or willing to interested in doing additional M&A to further supplement or complement what you're doing in the NAMs category?

So I'm going to start with the last piece, Eric, because it's an interesting history lesson. So we bought our Microbial business almost 30 years ago as the only FDA-approved alternative to using research models. And it's been a very successful business for us, as you know. And we assumed and presumed that by now, 30 years later, we would have made, I don't know, dozens of acquisitions in this space, just because of the trajectory of new science and the necessity to be more sophisticated and have additional refinements.

And we see, I don't know, a dozen or so companies annually who come to us and you may have heard me say this before and say, we have a new technology that comes out of some August academic institution or the government and you bet a bias Charles River because we're going to -- this technology is going to put you out of business. It's usually the way the conversation starts. And the technologies always look interesting. But they're not practical, and they're not consistent, and they're not validatable and they're certainly not replacements for whole animal systems or even anything that could be augmented.

So there are a few companies out there that we look at periodically, some that we've spoken to recently and not just because of this FDA thing. And so I would say as a general proposition, we're quite interested in licensing or acquiring technologies that really work, really help accelerate drug development and don't cut any corners and risk patient safety. So very much committed to that. And we've done a whole host of things.

We have bought some companies. We have a company called Retrogenix that has a cell microarray technology looking for off-target effects. And off-target effects are things that are really, really important to find. We launched the pilot program to use virtual control groups instead of whole animals in some of our toxicology studies.

We have a collaborative deal going which pairs a company's AI technology with our traditional methods to see whether we can accelerate helping our clients sign lead compounds. And we've had a couple of AI deals previously that didn't pan out very well. We'll certainly continue to look at those. We also think that there's a way -- and we started this probably 15 years ago, and our clients were not really -- our clients had some problems with this, but we have years and years of toxicology data from thousands of clients.

And we would like to use that on an anonymized basis, in other words, not indicating what the client is or what the drug was, but helping to design more predictive preclinical trials. So I think that that's something that we will lead -- can lead and will lead, I think we have the best technology doing that. I think that's underrepresented to go back to your question. So we have a stated commitment.

We have an Alternative Methods Advancement project. We have a Board committee that's focused on this. We have a bunch of KOLs that we bring in periodically to say, okay, what's the nature of the science, what's the best technology out there, what's practical, what's beneficial, what should we have in our portfolio. And we will continue to do that thoughtfully.

We will continue to spend money doing that without being wasteful. And again, first and foremost, we will continue to be all about the science and not in any way cause our clients to be risking patient safety.

Our next question comes from Elizabeth Anderson with Evercore ISI.

I have two questions. My first question, maybe to continue on a theme is just -- in the short term, as you talk to customers since this FDA announcement, are they taking any actions like specifically now that they're starting to get more -- change their study procedures, et cetera? Or are they still sort of in digestion mode on this? And then my second question, just as sort of we look at the strength in the bookings in the first quarter, that was nice to see.

Were there any onetiming items just in terms of are you still seeing sort of continue -- would you characterize that you're still seeing sort of a continued environment into the second quarter?

So I think that our customers were pleased with the general tone of the FDA's pronouncement, albeit pretty dramatic from a headline point of view, that they want to participate in additional technologies and methodologies to accelerate getting the drugs to market, maybe reduce the cost and maybe have more sophisticated technologies. And as I said, a lot of them, I think, have their own technologies. I don't think we're going to see any sort of dramatic change in the methodology for doing safety studies. As you may or may not have read, the FDA's focus on longer-term NHP studies for monoclonal antibodies is something that they have been waiving the necessity to do those longer-term studies for some period of time.

So the drug companies are already participating in that. You get much less toxicity signals with monoclonal antibodies, and they tend to lend themselves to this sort of initiative. So that will save the drug companies time and money, and we're certainly happy to participate in that. So I guess they're digesting it, I mean, the pronouncement doesn't fundamentally change anything that they're doing because as I've just said a couple of times with the previous questions, their job is to develop drugs that are effective against certain diseases, but ensure patient safety.

So they'll do everything they can to do that. If they can do that partially with new technologies, that's great. We think that longer term, there'll be a hybrid approach where clients will submit animal data and NAMs data at the same time. And the combination of those will answer much of the questions that the FDA and other regulatory agencies have.

So as I said, this will be a journey. These new technologies will be beneficial for certain types of drugs, particularly at the moment, monoclonal antibody, it's going to be a lot harder to go after small molecules or other large molecules like cell and gene therapy, there's just much less data around them, and the toxicity issue is much more complex to deal with and you really want to use the whole animal system to see what the multiple organ response is to the drug. So whether it's swallowed or injected. And your second question was about bookings?

I think Flavia is going to answer that.

Yes. Elizabeth, the strength of bookings in the first quarter was indeed encouraging. It's the first time that net book-to-bill went above 1x for over 2 years. And there was really no onetimer impacting that.

It was broadly based. Gross bookings, particularly in large pharma, was strong, but cancellations were down across all client segments. So it's just really operationally strong, although still only 1 quarter.

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

Great. Thanks for all the details, very helpful. I guess like when I listened to your presentation, I feel like you don't think that this FDA issue will have a big negative impact on growth. So if I look at your long-term CAGR that you gave pre- this market downturn was 6% to 8% in DSA and RMS, assuming things like none of this market downturn has happened, what do you think, over time, this FDA change would -- how would that impact that kind of long-term growth algorithm for your company?

That would be my first question, if at all. And then my second question, can you just comment on pricing? I know pricing has been a pressure, but it's definitely better than maybe what happened during the Great Recession. So can you tell us what happened during that period versus what pricing is doing now?

That would be great.

I think in terms of long-term growth trajectory and the impact of the FDA initiative, we have to spend some time refreshing our long-term growth rate. We've said that for a while. We have to take this new information into consideration with our own assessment, feedback from our clients and experts in the field. We'll have a refreshment of our long-term financial goals, probably when we have an Investor Day and have a comprehensive review and assessment of that.

So I would stop short of throwing out numbers at this early date. And do you want to take the pricing question?

Sure. So yes, pricing environment improved slightly in the first quarter, driven primarily by mix, especially longer duration specialty studies where we tend to have a little bit more of, let's say, price power or not have to discount as much. So that was encouraging. And when you talk about comparing the price -- the current price environment to the great financial crisis, indeed, very, very different situation.

Capacity has been better managed. There's -- outsourcing is more prevalent now. So we're definitely not seeing the severity, I would say, of price pressure, price decline compared to great financial crisis. Although as we said last year, we and others in the industry, as the demand contracted a bit, we had to selectively adjust pricing.

So it's obviously not as strong as it had been during sort of COVID dates. But we were pleased that in the first quarter, things were stable from a spot perspective, and that mix helped with our price/mix results.

Our next question will come from Dave Windley with Jefferies.

Ann just asked this, I'm going to try to ask it in a slightly different way. But Flavia, you just walked through some of the history on pricing. I think if I remember your comments from last year correctly that sometime in the earlier part of the year was when pricing demand -- volume demand tended to drop or did drop and the price levels kind of dropped in the spot market. And you described that as kind of stepping down once and then continuing at a plateau.

And then that going into the backlog and then that backlog beginning to produce revenue that lapped that lower -- or I guess, lapped the higher pricing, and you started to see lower pricing in the fourth quarter. So I guess what I'm trying to understand, because you had described that as a plateau, a lower plateau that we would see fairly consistently pressured pricing 4Q, 1Q, 2Q and forward. So I wanted to understand why that cadence is fluctuating, number one? And then number two, at SOT, the discussion there really was about another step down in price pressure by all players in the market.

And so I just want to make sure I'm understanding or maybe I'm misunderstanding nuance or something like that? But we really did hear from a number of players that the price environment started 2025 more pressured than how it exited 2024. I appreciate comments on that.

Sure, Dave. Yes, let me take the second part of your question. So I cannot comment on others. But from our pricing perspective, I would say, as we indicated in our prepared remarks that the spot price is stable in the first quarter sort of compared to how we were exiting last year.

And then just more broadly around price, you're correct in how you were interpreting the selective discounting that we started doing last year and how that would matriculate through the backlog and eventually, revenue. I think what was positive and favorable, which may be a little bit of a surprise is the impact of mix, as I said before. So the favorability in the first quarter of price/mix being slightly improved is primarily driven by that mix impact.

Got it. And then if I could ask a separate topic. If you could remind us how the NIH funding and academic business, kind of how that funding flows? I think your -- maybe your direct NIH exposure is very, very low, and so maybe the direct risk is not really significant at all.

I wonder if you have a clear assessment of how many customers, say, away from NIH are dependent on NIH funding? And I think you've said in the past that, that funding tends to get let out on kind of 3-year rolling basis. And I'm wondering if that provides some protection as it relates to the current NIH proposed cuts.

We have a couple of percentage points of our revenue directly related to NIH. They're a big client, principally of the Research Model business. We have a lot of long-term contracts. I can't predict what the government will do in terms of interrupting those contracts.

Now we would hope not. And these are, in a lot of ways, the production of really specialized animal models for different agencies of NIH. Of course, there's been -- there's a lot of dialogue now about reductions of the NIH. So we would just be speculating.

We haven't heard anything, so we don't have any adverse impacts from the government yet. If you look at academic and government U.S., it's probably 20% of the RMS revenue. Again, that's indirect money from the government and other places. Again, we have no indications yet of what the impact might be.

As we said, we're being very cautious in terms of our long-term guidance for this year, just assuming that we will have some adverse impacts from that. We also said that since it's already May and nothing has happened yet, that whatever impact we have will probably be in the back half of this year or perhaps next year, but we would just be speculating. So we'll let you all know what actually transpires as opposed to sort of predicting something that hasn't happened yet. And while we're obviously biased, we think that the contracts that we have directly with the government are really important for basic research and a whole bunch of different agencies, and it would be pretty shortsighted for the government to do anything with those, but we'll see.

And just to -- I think Jim quoted correctly, NIH Direct is 2% of total company. And then I think he talked about NIH plus academia being about 20% -- North America academia being 20% of RMS. That's about 6% of total revenue, total company, just to clarify.

Our next question will come from Michael Ryskin with Bank of America.

I have 2 hopefully quick ones. One on the -- going back to the DSA strength and the bookings activity in the quarter. I just want to dive in a little bit deeper into the improvement you saw in 1Q. You specifically called out studies with quicker start dates reflective of the short-term booking behavior.

Just -- I mean, could you expand on that? What do you think exactly drove that? And then just a question on, could that be sustainable for the rest of the year? Could that be a little bit of a pull forward versus 2Q?

Just what are the dynamics there with pharma and biotech and DSA bookings?

You've got clients that were anxious to start studies at a time where we had available capacity. So that worked really well. So quick starts was obviously extremely beneficial to the first quarter DSA results vis-a-vis our guidance. What we've said is we can't anticipate that, that will continue.

It would be nice, but that would be -- we don't have any indications that, that will continue. So I would say anything is possible, but that's definitely not our guidance. That -- we think that's a 1 quarter phenomenon. If that continues, we'll obviously let you folks know, but we don't anticipate that.

It's a little bit unusual. Again, it's tied to having the capacity. So that's a positive. But we may have used up the people that our large clients that want to start studies relatively quickly.

That hasn't been our case for the last few years. It's a little bit unusual. So this is sort of backup work that people wanted to get done quickly. So not guiding to the continuation, I guess, is the punchline of this answer.

Okay. And then for my follow-up, in terms of the changes to the Board and the agreement with Elliott, realize you're just beginning the strategic review, but could you lay out what are the directions you will be looking at, whether -- what are you considering? Is it sale of part of the business divestment, any type of reorg, maybe potential whole company transaction? Just what are the different avenues you're exploring?

So as you said, it hasn't started. We have a committee of the Board that has always existed, which is a Capital Allocation Committee. We do -- we've done always sort of some of the parts analysis, looked at our whole portfolio, looked at returns on our M&A and see whether we're happy with them. And we talk strategically about things that we should add to the portfolio.

So we have the same committee. We have 3 new members. And those are 3 of the 4 new directors that we have, one of whom is actually a senior employee of Elliott. So -- and I'm on that committee and one of our former directors, but it's an opportunity to take a fresh look at the whole portfolio, the competitive dynamic of every business that we're in, where we think we're going, what the proper geographies are, what, if anything, is missing in the portfolio, and what, if anything, do we think is not contributing the way we would like.

So it would be premature to sort of guess what the outcome would be. I think we're going to try to be open-minded and flexible and very objective about our decisions. I do think this committee is going to be hard at work evaluating and analyzing the entire company, both where we thought we would be and where we think those businesses are going, and we'll see what -- when we're done with that process, which we hope will be relatively quickly without rushing, we'll obviously let everybody know what our decisions are.

Our next question comes from Justin Bowers with Deutsche Bank.

So Jim, I wanted to go back to Mike's first question on the faster study starts. Is that something that you've seen continue through May, number one? Number two, I wasn't sure if you said that, that was isolated to large pharma or that was something that you saw more broadly? And then part 3 of that would just be any change in booking patterns or studies or programs for the large pharma customers? -- the outlook for the year.

Yes. So tough to predict what they'll be doing. The fast starts was sort of across the board. So clients have had things speed up were excited to get going.

Revenue in the first quarter was stronger and up with our smaller biotech clients and down with pharma. Bookings were stronger with pharma. Some of the pharma companies have worked through reduction in their infrastructures and portfolios. And I think a lot of the biotech companies are still struggling a bit with access to capital, having hope to presume that the capital markets will be open this year, and clearly, they're not.

So the fast starts is probably a 1 quarter phenomenon, but we'll see how that unfolds. As I said earlier, that's a bit unusual and really just sort of utilization of our excess capacity at the time when these guys had studies to do, but typically not something we see or that we would predict it would continue.

And I think just to add, we -- these, let's say, faster study types, even though, again, we don't provide a lot of detail intra-quarter. So what we've seen in Q1 also does give us visibility to the second quarter. So I'd say the quicker starts are going to be affecting both Q1 and Q2, so the first half of the year. I think what Jim correctly said is we're not necessarily counting or assuming that that's going to continue given that current visibility is somewhat shorter, but it's certainly affecting positively the first half.

Okay. And then just pivoting a bit, there's been a decent uptick in licensing deals out of China over the last few quarters. And I was just hoping you could help us think through sort of the pushes and pulls on the business, both here and the U.S. and then even locally in China, what are some of the opportunities and maybe threats there from that dynamic?

I mean, this is a continuing saga by the big drug companies, right, that smaller biotech companies are quite innovative and have become the discovery engines to big pharma. So you've seen lots of licensing and acquisitions of other drugs or entire companies in the U.S. And we're certainly beginning to see an intensification of that out of China. There's a fair amount of investment in biotech companies in China as well.

So I think that will continue. I think that's a smart thing for them to do. That doesn't -- neither of those has a particularly significant impact on us, one way or another. We have a research model business in China that continues to do really well, supporting the investment in biotech and big pharma in China.

So I think that will continue. And we hope to continue to do work on the preclinical side for the larger companies when they make these acquisitions, whether the targets are Chinese or not. I mean that [indiscernible] I think we get the preponderance of that work since we do so much work for pharma right now and most of the large biotech companies. So that sort of cadence is definitely going to continue by the big drug companies, particularly as they face the impending patent cliff.

It's better for them to make that in drugs that are further along than to start from scratch, although they'll do that as well.

Our next question will come from Kyle Crews with UBS.

Briefly going to the Manufacturing segment, could you discuss what you're seeing within the CDMO and the end market demand within that business and how you view Charles River's current competitive positioning there? And what happened with Biologics Testing in Q1?

Yes. So Biologics Testing often has a seasonal impact and often a first quarter impact. So difficult to predict. And those -- that work comes in very quickly, almost without warning, and goes out very quickly.

And as we said, we're quite confident and positive about the cadence of the Biologics business for the balance of the year. So I think that business will be high. On the CDMO cell therapy manufacturing business, we have a reduction in revenue from a couple of big commercial clients we've talked about significantly previously. I'd say that if you put those aside, the underlying demand is pretty good right now, both on the cell therapy side and on the gene therapy side as well.

We have several clients that are in late-stage clinical and a couple that are talking to us about the commercialization of those drugs. We have really strong staff there in a facility that's in great shape. We've developed much more sophisticated capabilities to support the commercial clients, even though our revenue with them is declining. And so we feel -- even though we said that the overarching demand for cell and gene therapy is not what we thought it would be when we first acquired these companies, I think that's just an overarching reality that there's a lot of concern about the safety profile of these drugs and they'll be slow to uptick, slow to get in the market.

There's still a lot of them in the preclinical arena and moving into the clinic. So we're working hard on that business. We're committed to growing it. And as I said, the client base is reasonably strong right now.

Our next question comes from Patrick Donnelly with Citi.

Jim, you talked a little bit about some of the trends in the DSA bookings side. Nice to see the book-to-bill over 1x, to your point, for the first time in a couple of years. I guess now that it's over 1x, is the expectation that it kind of stays here? I know you guys don't guide for quarterly book-to-bill.

But what's the sense? It sounds like you guys want to remain a little bit cautious with what's going on in the backdrop. But how do you think about just the book-to-bill trends going forward given what you're seeing on the bookings environment and the customer conversations?

I think we were thrilled by it and we have been anxiously awaiting a point where we got back here. We're also being particularly thoughtful, I think, and cautious about the fact that while we're thrilled with 1 quarter, it's only 1 quarter. And we'd have to see that sustained level for several quarters in a row before we really start to get a fundamental shift in the bookings trend. So we're hopeful that, that will happen.

And then Flavia, maybe just -- sorry, Jim, go ahead.

Go ahead, Patrick.

Yes. Sorry, Flavia. And just on the margin side, I think previously you guys were talking about DSA down a bit this year. How are you thinking about just the moving pieces on the segment margins and the right way to think about the go forward?

Yes. I think we're encouraged that the DSA performance in the first quarter started with a strong performance. As I said, we're being -- or Jim just said we're being cautious in the second half. On the other hand, we still predict that manufacturing is going to improve margin throughout the year.

It was a little lighter in the first quarter, given the headwinds from CDMO as well as on a relative basis, a little slower start on Biologics Testing. So I think when we think about the margin, I think we took all of you guys' input and tried to finesse for you a little bit and provide specificity on the margin guidance, minus 20 to minus 50 bps versus last year as opposed to modestly, still consistent with the prior guidance. We just tried to tighten it for you a little bit. But overall, we're pleased with the cost saving efforts that we put in place over the last 18 months to help protect the operating margin in the face of demand contraction, and we're going to continue to work hard to protect and enhance margin as much as possible.

Our next question comes from Casey Woodring with JPMorgan.

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

Yes. So on the second part of your question, Casey, on tariffs. Obviously, we continue to monitor the news like everybody else. And just yesterday, again, I think the sector was pressured given some indication that maybe tariffs were going to be back on the table.

I think in terms of how that is translating to dialogue and activity with our pharma clients, nothing in particular. It's not necessarily impacting their R&D dollars as of now. I think everybody will continue to monitor that and hope that, I would say, good sense prevails and that the tariffs are not implemented, but we obviously can't control that. Tariffs impact directly to our business, as I said in my prepared remarks, is very modest, and we'll pass that small impact along.

Jim, do you want to take on biotech trends in large pharma?

Yes. I mean, it's tough to predict. I mean, the funding situation is not improving for biotech. So I don't think we would anticipate any sort of dramatic change in the demand curve from them.

They're going to do everything they can to get as many drugs into the clinic as possible. So they should continue to be an important part of our client base. I think the clients that want high-quality science and some regulatory expertise will continue to primarily use Charles River. I think that's worked really well for us.

And we're being very thoughtful with the way we're pricing these studies. So I wouldn't anticipate any fundamental change.

Our next question comes from Charles Rhyee with TD Cowen.

Maybe I want to ask about DSA in a slightly different way. Just obviously, you mentioned earlier that you're seeing cancellation rates kind of continue to decline here. Can you talk about sort of risks to cancellations maybe ticking back up, given sort of the short time cycles and the quick study starts, it would seem that that's a much lower risk than it has been in the past? And then secondly, any update on -- for CDMO, the FDA's Form 483 would be helpful.

So cancellation rates -- cancellations are always part of our business, and have been for years and will continue to be. And so it's a normal part of the planning process and changes in priorities with our clients. And so we sort of build that into our business. And that's why we like the meaningful backlogs we can slot in new studies, and there's a penalty for cancellations by the way.

I think the fact that cancellations have been coming down nicely for a while now, I think it's well over a year and sort of getting to target levels is really an important indication that the stability from a demand point of view in the market. Obviously, we want to see that business grow again, but we're obviously delighted with the first quarter that the decline was much less than we had guided to and anticipated. So there's a fair amount of work out there, fast study starts, much more complex expensive studies. And since the backlogs are sufficient, but they haven't elongated to the point where there weren't studies associated with the booking slots.

We don't see the cancellation rate that we saw. We had a backlog that got up to, I think, 18 months and clients were just canceling and they got to that point because they were just saving the slot without having a corresponding study. So I think we're past all of that, it's a much more measured and thoughtful approach. So again, we want to see that continue, but cancellation rates continue to come down, and that's definitely a positive for us.

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

Yes. So we have had the FDA in there with one of our commercial clients. We have been working really closely with the FDA back and forth to respond to their requests for things that they wanted to see improved. They wanted more information.

They wanted more details. I think that's going really well, continues to give us confidence if and when current clients move into a commercial milieu that our facilities will be in good shape to accommodate their needs.

Our next question comes from Tejas Savant with Morgan Stanley.

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

Yes. So clients are going to continue to utilize the methodology that ensures patient safety. And so as we said in our prepared remarks, none of the NAMs can substitute for whole animal systems right now. You have this little narrow niche right now, which is longer-term monoclonal antibody studies for chronic studies.

And the determination is that there's no need to continue to elongate those. So I think that's a thoughtful and smart thing to do. And as we said in the prepared remarks, they've actually been doing that for a period of time. So this pilot study will probably prove itself out, but they have to do that.

So it's a very small proportion. It's about $50 million of our business that's sort of tied up in these longer-term chronic NHP studies for monoclonals and other large molecules and certainly small molecules, any sort of NAM -- fundamental NAMs technologies to be used with or in addition to with -- assuming that ever works, is way off. So this will be very slowly. I mean, the -- I don't know, so the FDA has given the drug companies permission to utilize more of these technologies, but they will take the responsibility upon themselves to ensure patient safety.

And so regardless of what the regulatory agencies say either the science works or it doesn't. And that's why we think that hybrid approaches as we go forward will be beneficial. You get the benefit of some NAMs to answer certain questions. And when you're looking at a whole body systemic implications, you have a whole animal system combined with that.

So we're pretty confident that that's the way it's going to move. The extent to which technology develops in the future, that could be some sort of substitute having anything is possible, to take considerably long time and validation -- acceptance and validation by the regulatory agencies will be an important underpinning of all of this. And as we said earlier, we'll have a substantial role in leading that and helping our clients get to that point where they're either comfortable with NAMs as additional technologies or not.

Got it. That's helpful. And then just a quick follow-up on the strategic review here. How are you thinking about the time line?

I know you mentioned sort of a relatively quick turnaround. But should we expect an update by the time of the next earnings call, for example, or perhaps even sooner? And then one for Flavia. I mean you've done a pretty good job with the cost cuts here.

I think 5% -- over 5% of your cost structure has been eliminated. So in the context of the strategic review, are further cost cuts kind of like a lower priority item in your view, given how much work you've already done there? And obviously, you don't want to impair your ability to lean into an eventual sort of robust market recovery here?

I'll take the first part. So the strategic review, we haven't started yet. We just signed this deal with Elliott. That committee is going to meet often.

I don't know exactly what the cadence is yet. And we're going to go really deep in all of our businesses. As I said earlier, in all the markets we're in, what's the competitive dynamic, how is the technology is developing, are we getting the returns on our acquisitions that we wanted, what's the margin profile look like and how do we continue to enhance and improve our portfolio. So that's going to take some time.

So I don't know exactly when we'll have the punchline. We're going to move through it as swiftly as possible without rushing. I think it's extremely unlikely we'll have any punchlines by the next earnings call.

Yes. And I think just in the cost savings to your point, Tejas, we are pleased with the actions we have taken so far. They were necessary, obviously, given the demand environment. But as I talked earlier in previous earnings calls, some of the savings that we have identified are durable.

They're not going to -- we're not going to have to add back staffing for about $75 million of the $225 million. And so I think we'll continue to take a look at opportunities to always be efficient. But to your point, I think we've done a lot on this space already. And so we'll update you all on the strategic review, as Jim said, once that's completed.

Our next question comes from Matt Sykes with Goldman Sachs.

[ Hugh Will ] on for Matt here. A lot has been asked, so I'll keep it to one. But within DSA, was the demand environment different between safety assessment and discovery work? It sounds like discovery or earlier stage work was a little weaker, but just want to unpack that?

Discovery was weaker. And we're doing everything we can. We have a combined sales force selling across Discovery all the way through safety. So we have a much more integrated approach and we're optimistic that we're going to make more progress with our discovery clients.

Having said that, we don't think that the large drug companies and certainly the smaller ones haven't swung back to significant amounts of investments in discovery. I think they're still trying to get INDs filed and get this post-IND work into the clinic, and obviously, ultimately into the marketplace so they can fix the impending or protect themselves against the impending patent curve. So at some point, that pendulum will swing back because if they don't invest aggressively in Discovery, they're going to have really lousy portfolios going forward. But yes, we definitely had a weak quarter in Discovery.

And hopefully, the enhanced sales focus will improve that. We'll let you know.

Our next question comes from Luke Sergott with Barclays. Our next question comes from Josh Waldman with Cleveland Research.

This is Rob Cottrell. I wanted to come back to biotech, where you mentioned sales to small and midsized biotechs grew for the second consecutive quarter despite funding challenges. Was that the case across all 3 segments? And then any differences to call out in terms of midsized biotech versus small biotech?

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

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

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

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