Charles River Q3 2026 Earnings Call Transcript

Charles River (NYSE:CRL) reported third-quarter financial results on Wednesday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Charles River Laboratories International, Inc. reported solid Q3 2026 financial performance, with revenue and non-GAAP EPS exceeding prior guidance. Revenue increased by 4.7% year-over-year, driven by strong growth in the DSA and manufacturing segments.

The company is executing its ‘Pathway to Purpose’ strategy, focusing on modernization and operational excellence. Key initiatives include automation in manufacturing and new digital solutions to enhance client connectivity.

Charles River raised its full-year 2026 revenue guidance, expecting organic growth of at least 1.5%, and increased its non-GAAP EPS guidance. The company anticipates continued mid-single-digit growth in key segments.

Operational highlights include the implementation of an automated manufacturing suite and the launch of Apollo Orchestra to enhance lab workflows. The company also partnered with the FDA for preclinical screening tools and expanded relationships with top pharmaceutical clients.

Management expressed optimism about the improving biopharmaceutical demand environment and the potential benefits of AI in drug development. They noted strong DSA bookings and proposal activity as positive indicators for future growth.

Full Transcript

OPERATOR (Moderator)

Ladies and gentlemen, thank you for standing by. Welcome to the Charles River third quarter 2026 earnings conference call. This conference call is being recorded at this time. All participants are in a listen-only mode. After the speaker’s presentation, there will be a question and answer session. To ask a question during this period, you will need to press star 1 on your telephone keypad. If you would like to remove yourself from the queue, please press star 2.

Lastly, if you should need any operator assistance today, please press zero. I would now like to turn the conference over to our host, Mr. Todd Spencer, Vice President, Investor Relations. Please go ahead, sir.

Todd Spencer (Vice President, Investor Relations)

Good morning and welcome to Charles River’s third quarter 2026 earnings conference call and webcast. This morning I am pleased to be joined by Birgit Girshick, our Chief Executive Officer, and by Glenn Coleman, our Executive Vice President and Chief Financial Officer. They will comment on our results for the third quarter of 2026 as well as our financial guidance. 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 webcast replay of this call will be available beginning approximately two hours after the call today and can also be accessed on the 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 federal securities law, including the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated during this call. We will primarily discuss non-GAAP financial measures which we believe help investors gain a meaningful understanding of our core operating results and guidance.

The non-GAAP financial measures are not meant to be considered superior to or a substitute for results prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and the reconciliations on the Investor Relations section of our website. I will now turn the call over to Birgit Girshick.

Birgit Girshick (Chief Executive Officer)

Thank you, Todd, and good morning. We are pleased today to report another solid quarter with revenue and non-GAAP earnings per share that exceeded our prior outlook. Continued momentum in the improving biopharmaceutical demand environment and additional progress towards the execution of our Pathway to Purpose strategic vision. It was wonderful to see many of you at our Investor Day just over one month ago and I hope that you found it to be an informative discussion about our strategic initiatives designed to enhance our operational excellence and strengthen our scientific leadership, as well as our future growth drivers and long-term financial targets. As I mentioned, our focus is to simplify the company and move faster, invest where we can win, and continue to lead as a scientific partner of choice for the critical work that our clients do.

By executing on these goals, we believe it will translate into higher growth and operating margins and drive long-term shareholder value creation. We have made meaningful progress in recent months on initiatives to support our Pathway to Purpose strategy, which includes working to modernize our company and the industry, strengthening our world-class scientific portfolio, and offering a customized client-centric approach to drive growth. I will now provide you with highlights that demonstrate some of this progress as well as our third quarter performance. We were encouraged by the acceleration of our revenue growth rate in the third quarter as we had anticipated, including solid mid-single-digit organic growth in the DSA segment and high-single-digit organic growth in the manufacturing segment.

The solid DSA performance was supported by a net book-to-bill of 1.09 times in the third quarter, which marks the fourth consecutive quarter that the net book-to-bill has been above 1 time, averaging approximately 1.1 times over this period. Both the third quarter and trailing twelve-month DSA booking performance were consistent with the levels needed to support our long-term financial targets of 5% to 7% growth in the DSA segment. With the CDMO business having been divested for a full quarter, we were also pleased to clearly see the underlying growth and margin trends emerge for the manufacturing segment and believe the outlook remains favorable for our comprehensive manufacturing quality control testing solutions. We expect these collective trends to support the improvement to mid-single-digit organic growth for the company in the second half of this year, as well as the projected margin improvement.

To enhance our ability to take advantage of improving demand trends, we are also working on our modernization efforts to drive greater efficiency, including through our Create the Future Transformation program. As an example, in July we implemented a fully automated manufacturing suite for our Endosafe endotoxin cartridge technology to increase cartridge production capacity, strengthen manufacturing controls, and enhance digital traceability. This upgrade improves quality and labor productivity and also increases cartridge production capacity by 14%.

Also in our manufacturing segment, we partnered with Autolimus to launch Apollo Orchestra to digitize laboratory workflows and enhance client connectivity. This is a new capability for our Apollo platform which will transform laboratory execution systems, increase efficiency, and provide greater transparency and collaboration for clients. These are two examples of progress in our Create the Future Transformation program, which is expected to generate over $300 million in cumulative savings over the next four years and will be a key component to drive meaningful operating margin improvement in 2027 and beyond.

We have also taken steps to continue to strengthen our scientific capabilities. We announced a collaboration with the FDA to validate preclinical screening tools to quantify and rank the abuse potential of new drugs. This collaboration is aimed at improving public health by helping to ensure the safety of drugs. As part of our efforts to further advance our Alternative Methods Advancement Project Initiative, or AMAP, we also introduced a new rapid cell banking program designed to significantly accelerate product release timelines in the biologics testing business.

By combining rapid cell bank and release packages with advanced characterization using in vitro next-generation sequencing capabilities, we will be able to reduce cell bank production timelines by 40% versus the industry standard of 20 weeks, enabling clients who develop advanced therapies to reach key milestones and bring their innovative treatments to patients faster. In addition, we continue to pioneer in the space of virtual control groups, or VCGs, to selectively reduce animal use where scientifically appropriate.

Last week we announced that our VCG database and methodology will now be used in a GLP compliance safety assessment study for Ipsen, a biopharmaceutical client. This moves the use of VCGs from concept to regulatory submission. The execution of these kind of initiatives is already benefiting us with clients because of our client-centric approach and the value that we provide to our clients through the global breadth and scientific depth that we are able to offer.

We recently extended our relationship with a top-10 biopharmaceutical company to serve as a primary strategic partner for safety assessment services. The incremental work will transition to us over the next 12 to 18 months and meaningfully expand our relationship with this client. With regard to overall demand trends, we are pleased that the improving biopharmaceutical demand environment has remained consistent in recent months and continues to show positive momentum. We are monitoring developments related to inflation, oil prices, interest rates, and the general macroeconomic environment, as well as biotech funding trends, for any signs of disruption, but to date we continue to expect the demand environment to trend favorably.

This view is further supported by our internal demand KPIs, which I will discuss in more detail shortly. Our revenue from both global biopharmaceutical and small and mid-sized biotechnology clients increased on an organic basis in the third quarter. There are several factors contributing to these positive trends. First, many of our large biopharmaceutical clients have progressed through their restructuring activities and are reinvesting in their R&D pipelines, including their preclinical or IND-enabling programs, which is a positive indicator for future demand.

In addition, as has been well chronicled, the biotech funding environment has improved meaningfully since the middle of last year with trailing 12-month funding remaining just below $100 billion. Despite a modest slowdown in the third quarter, we are not seeing any signs of slowdown in our client interest, supported by another strong increase in DSA proposal activity in the third quarter. This is an indicator that supports our belief that favorable demand trends will continue.

And finally, the DSA bookings improvement over the past four quarters, during which time our net book-to-bill has averaged approximately 1.1 times, has begun to work through the backlog and we’re beginning to see the benefits as demonstrated by the improvement in the third quarter revenue growth to the mid-single digits organically for the DSA segment and total company. I will now provide some highlights from our financial performance before Glenn provides additional detail. First, we are pleased that our third quarter results exceeded our prior outlook for revenue and non-GAAP earnings per share. Third quarter revenue increased 4.7% to the highest level since the second quarter of 2023, with a solid performance in both the DSA and manufacturing segments.

The operating margin increased 330 basis points year over year and 250 basis points sequentially to 23% due to operating leverage from higher study volume and lower nonhuman primate sourcing costs in the DSA segment and the full-quarter impact of the divestitures, particularly in the manufacturing segment. Non-GAAP earnings per share of $3.90 increased 27% year over year and also exceeded our prior outlook due to the strong top-line performance and a lower tax rate.

Based on our strong third quarter financial performance, we are raising our full-year revenue guidance by 100 basis points to organic growth above 1.5% and non-GAAP earnings per share by $0.15 at midpoint to $11.35 to $11.55. As we discussed at our Investor Day, we are pleased to see earnings power return as our growth rate accelerates and we generate meaningful operating margin expansion. The organic revenue growth rate in each of our business segments also improved from second quarter levels. DSA revenue growth improved to 5.9% organically in the third quarter, primarily driven by robust demand for safety assessment studies utilizing nonhuman primates, as well as growth for bioanalysis services. As we discussed at our Investor Day, we believe that we have competitive advantages in the areas of nonhuman primate supply and preclinical bioanalysis services.

They are expected to be important growth drivers and differentiators for Charles River in the future, particularly as demand for biologics and other complex therapies continues to intensify. Regarding the DSA pricing environment, we are beginning to modestly reduce the level of discounting in recent proposals. Our goal over time will be to cover annual cost inflation through price increases and receive the value of services that we provide to our clients.

While we are early in this process and are not yet seeing it benefit the revenue, we are winning proposals and maintained our capture rate during the third quarter. Assuming the positive trends hold, we do not expect to see any benefit from pricing until at least the second half of next year due to the normal lag as newly booked studies work through the backlog. As I’ve already mentioned, from a demand perspective, we were pleased to see continued strength in the DSA demand KPIs in the third quarter. Net bookings increased 32% year over year to $652 million as we anniversaried the softer bookings that occurred through the third quarter of last year. This resulted in a net book-to-bill of 1.09 times as well as both year-over-year and sequential increases in the DSA backlog to 2,000,000, 1903. This continues to firmly support our long-term financial targets, including 5% to 7% DSA organic revenue growth.

As I mentioned, proposals showed a strong increase again, marking the fifth consecutive quarter of year-over-year improvement. These trends collectively support our expectations for continued mid-single-digit DSA organic growth in the fourth quarter of this year. Both global biopharmaceutical and small and mid-sized biotechnology clients continue to be key contributors to the demand improvement. Manufacturing revenue rebounded to 7.4% organic growth with similar growth rates in both the Microbial Solutions and Biologics Testing Solutions businesses. We were pleased to see the growth rate return to levels that are consistent with our long-term targets for this segment. Our manufacturing quality control testing portfolio leverages many of the strengths of our DSA offering, including enabling clients to drive greater speed and efficiency, and also creates additional growth opportunity by deepening our client relationships across the drug development life cycle.

Now that we have divested the CDMO business and anniversary decline-specific issue that has been a headwind for the biologics testing business since mid-2025, we are more clearly seeing the revenue growth and margin potential for the manufacturing segment. RMS revenue declined 0.6% organically. The trends have remained consistent all year, with strong growth in China offset by softer demand in North America. Revenue from academic and government accounts was relatively stable globally for the entire RMS segment in the third quarter, and higher revenue in the Insourcing Solutions business related to government contract awards was offset by lower small model volumes in North America, reflecting continued pressure from uncertainty in government funding.

This is one of the reasons that the RMS growth rate has not yet begun to re-accelerate as it has in the DSA and manufacturing segments. AI has gotten a lot of attention in recent weeks. So, in closing I want to reaffirm our views on the potential benefits of AI. First, as I noted at our Investor Day, we believe AI will be a tailwind to our business in the coming years and increase the number of programs that progress through the regulated drug development process, including safety assessment. However, gauging the potential impact of AI on the R&D process will take time because the measure of success will be when more drugs discovered using AI progress through the IND-enabling process and into the clinic.

But as I said, we are well positioned to take part in this process, as demonstrated by our recent collaboration with Eli Lilly’s Toon Lab Initiative and the scientific breadth and depth of our portfolio. Beyond the potential benefits of AI, we are encouraged by the continued strength of the underlying biopharmaceutical demand environment. While there are still pockets that have not yet begun to improve, from DSA pricing and startup biotech activity to academic and government client demand, we are pleased with the progress that we have made and the growth prospects ahead.

We also see significant opportunities to further strengthen Charles River’s competitive position with our financial strengths, focused strategy, and deep expertise in regulated testing. Across the drug development continuum, we are well positioned to meet growing client demand for scientific innovation, speed, and efficiency. Through Pathway to Purpose, we are building a more agile, client-centric organization that will deepen client relationships, expand engagement across our portfolio, and increase our share of R&D spend as demand trends continue to improve.

Now I will turn the call over to Glenn Coleman to provide more details on our third quarter financial performance as well as to update our 2026 guidance.

Glenn Coleman (Chief Financial Officer)

Thank you, Birgit, and good morning. As a reminder, my comments on financial performance will largely be related to non-GAAP results which exclude amortization and other acquisition- and divestiture-related adjustments related primarily to structuring and efficiency initiatives 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 were pleased with our solid third-quarter financial results, as both revenue and non-GAAP earnings per share exceeded our prior outlook. Organic revenue increased 4.7% year over year, marking our strongest growth in three years. This exceeded our prior outlook of 1% to 3% organic growth, with strength across our portfolio, particularly in the DSA segment. The non-GAAP operating margin improved 250 basis points sequentially to 23%, driven by the DSA and Manufacturing segments as well as lower corporate costs.

Non-GAAP earnings per share of $3.09 increased 27.2% year over year, which was above our prior outlook of $2.90 to $3.00 as a result of the stronger-than-expected operating income driven by higher revenue as well as a lower tax rate. Moving to segment details, DSA revenue was $596 million in the third quarter, an increase of 5.9% on an organic basis driven by higher volume for regulated safety assessment services, including the continued strong demand for nonhuman primate-related studies and bioanalysis services. This is the second consecutive quarter of revenue growth in the DSA segment as we continue to see the benefits of the improved biopharmaceutical demand trends which began at the end of last year.

As Birgit mentioned, we continue to see strong demand, including the third-quarter net book-to-bill of 1.09 times and strong proposal growth year over year. The DSA operating margin increased by 140 basis points to 26.8%, primarily due to improved operating leverage as a result of the higher study volume and the benefit of lower sourcing costs for Cambodia nonhuman primates. Looking ahead, we expect the DSA operating margin to continue to improve sequentially in the fourth quarter as we expect to realize further benefits from Cambodia NHP sourcing and also lower fringe benefit costs, which are typically more favorable later in the year.

Shifting to the Manufacturing segment, third-quarter revenue of $179 million increased 7.4% on an organic basis. The strong performance was driven by both the Microbial Solutions and Biologics Testing businesses. Microbial Solutions delivered organic revenue growth similar to the segment average, reflecting continued strong demand across our three major geographic regions for endotoxin testing reagents, including our PTS rapid testing cartridges.

In addition, we were pleased by the placement of nine automated Endosafe Nexus instruments in the third quarter, which we expect will drive meaningful incremental cartridge use over time. Our Celsis bioburden testing platform also reported solid revenue growth from both reagents and instrument placements, which supports pharmaceutical clients’ broader microbial testing needs. The placement of the new systems demonstrates the value of our comprehensive rapid testing solutions in helping clients improve the speed and efficiency of manufacturing, quality control, and product release testing.

The Biologics Testing business also grew at a high-single-digit organic rate, primarily driven by strong demand for in vitro biosafety and analytical testing. We also anniversaried a client-specific challenge that had been a headwind since the middle of last year. The Manufacturing operating margin improved to 38.6%, representing improvement of 80 basis points sequentially and nearly 1,200 basis points year over year, driven primarily by the full-quarter benefit of the CDMO divestiture as well as operating leverage from the strong top-line performance.

We continue to expect Manufacturing will be an important contributor to overall operating margin improvement, with continued progress expected in the fourth quarter approaching 40%. Wrapping up the segment discussion, RMS reported revenue of $208 million in the quarter, representing an organic decline of 0.6% year over year. The decline was largely driven by lower revenue for small research models in North America as well as lower revenue for nonhuman primates sold to third parties due primarily to the timing of shipments. We also plan to use more nonhuman primates on internal DSA studies going forward. The decline was largely offset by strong demand for small models in China, which grew at a double-digit rate, as there continues to be significant investment in R&D in China.

The RMS segment also benefited from higher revenue for Research Model Services, driven by the Insourcing Solutions business, which has benefited this year from new government contract awards. CRADL operations have been stable but have not returned to growth, as the early-stage biotech environment, including new biotech company starts, has yet to meaningfully improve. RMS operating margin declined by 60 basis points year over year to 24.4%, due largely to unfavorable revenue mix both geographically, as we continue to experience higher growth in China than in North America, and also the lower nonhuman primate revenue.

We expect the RMS margin to be modestly lower sequentially in the fourth quarter, due primarily to normal seasonality in the business. Moving on to other financial metrics for the third quarter, unallocated corporate costs totaled $54 million, or 5.5% of revenue, compared to 5.9% in the prior-year period. As we anticipated, the decrease was primarily driven by lower fringe-related costs, including stock compensation and deferred compensation expense. We continue to expect unallocated corporate costs of approximately 6% of revenue for the full year. Net interest expense was $26 million in the third quarter, an increase of $2.5 million year over year.

At the end of the third quarter, gross and net leverage improved sequentially to 2.3 times, due primarily to lower debt levels and improved earnings. This improvement reflected our continued focus on disciplined capital allocation, including the balanced use of cash to fund strategic acquisitions earlier this year and our ability to quickly repay debt. For the full year, our net interest expense outlook is expected to be at the upper end of our previous guidance range of $103 million to $108 million on a non-GAAP basis, due in part to higher interest rates.

The third quarter non-GAAP tax rate was 22.8%, a decrease of 550 basis points year over year. The higher tax rate in the prior-year period resulted from the enactment of the One Big Beautiful Bill and the enactment of certain global minimum tax provisions. For the full year, we expect a non-GAAP tax rate of approximately 23%, which is at the lower end of our prior guidance range, as the impact of the tax legislation changes in the foreign jurisdiction that I discussed during the second-quarter earnings call were more favorable than anticipated.

Free cash flow was $207 million in the third quarter, an increase of $29 million compared to the prior-year period. This increase was largely driven by the timing of working capital. CapEx increased to $47 million, or approximately 4.8% of revenue, in the third quarter from $36 million last year, as we continue to invest in growth and margin expansion initiatives. For 2026, we continue to expect CapEx will be approximately $200 million, unchanged from our prior outlook and in line with our long-term targeted level of 5% to 6% of revenue.

Our free cash flow outlook also remains unchanged at $400 million to $420 million. Turning to full-year 2026 P&L guidance, we are increasing both the reported and organic revenue outlook due to better-than-expected top-line performance across all three segments in the third quarter, particularly the DSA segment. We now expect a reported revenue decline of 1.5% to 2%, with year-over-year decline driven by the impact of completed divestitures. We’re also raising our organic revenue growth guidance for the year to be at least 1.5% growth, which represents a 100-basis-point improvement compared to our prior guidance.

We are narrowing and modestly increasing our organic revenue growth outlook for each segment and now expect DSA to be above 2% growth, Manufacturing at a mid-single-digit growth rate, and RMS at a low-single-digit organic decline. Moving to profitability, we continue to expect operating margin expansion of approximately 120 to 150 basis points in 2026, with the Manufacturing and DSA segments driving the year-over-year increase. We are increasing our non-GAAP earnings per share guidance by $0.15 at the midpoint to a range of $11.35 to $11.55, which represents 10% to 12% year-over-year growth.

The increase reflects the top-line outperformance in the third quarter dropping through to earnings as well as a lower-than-expected tax rate. With one quarter remaining, our fourth-quarter outlook is effectively embedded in our full-year guidance. Looking at the revenue trends, we expect the DSA and Manufacturing segments’ organic growth will remain at mid-single-digit and high-single-digit rates, respectively, in the fourth quarter. While we have forecast a modest reduction in the RMS growth rate, we expect continued sequential operating margin improvement of approximately 150 basis points, due largely to the benefit of lower sourcing costs for Cambodia nonhuman primates in the DSA segment, favorable fringe-related costs, and higher sales volume related to normal year-end order patterns in Microbial Solutions. This is expected to result in non-GAAP earnings per share growth of approximately 30% to 40% year over year.

Before I conclude, I’d like to address how we are positioning our financial performance for next year. We expect to provide our 2027 financial guidance with our fourth-quarter earnings in February. Our view towards 2027 is the same as I discussed at our Investor Day in September. At this time, we expect a gradual improvement in 2027 from the organic growth rate in 2026 and, assuming the favorable market trends continue, revenue growth increasing to the targeted 5% to 7% range starting in 2028.

In 2027, we expect operating margin improvement will be higher than the 75-basis-point average through 2030 that we discussed at the Investor Day, largely due to a full-year benefit of acquisitions and divestitures completed in 2026 as well as top-line leverage and our Create the Future cost-savings initiatives. To conclude, the third-quarter financial results demonstrate the strength of our streamlined portfolio and our continued focus on operational execution. We are encouraged by the improving end-market demand trends and our execution against key strategic initiatives, both of which we expect will support gradual progress towards our long-term financial targets. Our Pathway to Purpose priorities will modernize how we work, strengthen our scientific leadership and portfolio, and enhance our client-centric approach as we continue to position Charles River to deliver profitable growth and long-term shareholder value.

Thank you.

Todd Spencer (Vice President, Investor Relations)

Thanks, Glenn. That concludes our comments, and we will now take your questions.

OPERATOR (Moderator)

Thank you very much, Mr. Spencer. Ladies and gentlemen, at this time, if you do have any questions, please press star one. If you would like to remove yourself from the queue, you can do so by pressing star two. Once again, star one for questions. And we ask that you please limit yourself to one question and one follow-up. We’ll go first this morning to Elizabeth Anderson with Evercore ISI.

Elizabeth Anderson (Analyst at Evercore ISI)

Hi guys, good morning. Thanks so much for the question. I appreciate the comments on the demand environment. Obviously you have a lot of different business lines and lots of different things are happening. If you talked about for 2027 that gradual improvement towards the 5% to 7% in 2028, can you just talk to us a little bit more, maybe sort of operationally, like what improves faster, what is improving maybe towards the later part of that? Even if it’s qualitative commentary, I think that would just help us to understand the pace of improvement and what you’re seeing in the market from there.

Thank you.

Birgit Girshick (Chief Executive Officer)

Yeah, certainly. Thanks, Elizabeth. Happy to. So yes, what we’re looking at right now is what we’re actually seeing. We’re looking at our proposals overall. They have been increasing. Net book-to-bill continues to be strong for the trailing twelve months, 1.1 as an average, so definitely helping or supporting the long-range target that we have. And what we are also seeing is a return to revenue growth. For the second quarter, Q2 was kind of moderate, but the third quarter revenue growth is right where we expected it, a little bit better actually.

What we are looking for and what we are currently seeing in all our forward-looking metrics, including proposals, gross bookings, net bookings, even capture rates, is a gradual return to growth, building on the pretty good revenue growth rate that we have been seeing in Q3 going into next year. Most of that, or just about all of that right now, is volume-driven, and what we have not yet seen really is a return to pricing power, particularly not in the DSA segment.

As we said in our prepared remarks, we are gradually reducing the discounting, we are maintaining proposal growth, we are maintaining our capture rates, so all looking really good. But even from a timing perspective, if this holds and accelerates, we won’t see much of an impact before the second half of next year. Otherwise, we are seeing good growth rates now back in our Manufacturing segment, right where we expected to see for our long-range financial targets. DSA is coming along with the exception, as I said, of pricing. And then for Research Models and Services, we still have some headwinds that we need to work through. A lot of that comes from academic and government, offset by strong growth in China, and we expect that to take a little while before it works itself out.

So really, everything we’re seeing is positively improving, setting us up for a gradual improvement working through itself by the second half of next year, and then with a little bit more pricing power, we think we’re right there where we want to be, or what we said at the investor day, getting to our long-range financial target. Did that answer your question, Elizabeth?

Elizabeth Anderson (Analyst at Evercore ISI)

Yeah, that was super helpful. Thank you very much. And I know probably you just sort of updated us on the call a couple weeks ago regarding AI. But as we start to see those molecules, we’ve seen reports of molecules in discovery being used by AI, what kind of trajectory in general does that take to sort of get molecules from that discovery phase into safety and sort of start to see that? Is that kind of ’28, is that longer? And obviously I know the answer depends, but just sort of directionally speaking, how does that work?

I’m sorry if that’s a bit of an unfair question.

Birgit Girshick (Chief Executive Officer)

No, no, no, not at all. So, I mean, the work with AI didn’t start this year. It started literally a decade ago. What we are seeing right now is obviously an acceleration. We do work with quite a few of the AI discovery companies, and they have programs in the preclinical phase, some even in the clinical phase. But what we are expecting to see is just an improving rate, or more of those companies, more programs coming into the validation space or the validation process that we are doing for those companies.

So we are seeing some now, and we’ll see an increasing amount of those companies. Frankly, I would say in two years it’s going to be hard to tell who is AI-native and who uses AI and who doesn’t use AI. I think just about everybody will turn into a nearly AI-native company. The positive thing about all of that: it’s bringing a lot of interest into the space, into the healthcare space. Biotech companies are seeing more funding, partially or maybe to a good amount because of AI. And so eventually this will all kind of mix itself into just an accelerated amount of IND-enabling programs, strengthening our pipeline, ending up in our backlog.

So all positive.

Elizabeth Anderson (Analyst at Evercore ISI)

Very helpful. Thank you so much.

Birgit Girshick (Chief Executive Officer)

Thanks, Elizabeth.

OPERATOR (Moderator)

Thank you. We’ll go next now to Ryan Halstead with RBC.

Ryan Halstead (Analyst at RBC Capital Markets)

Morning. Thanks for taking the question. Maybe just sticking with AI—you know, a lot of investors focus on the topic, so I appreciate asking. The question is around your bookings and the strong book-to-bill. Is there a way to gauge just how much of your bookings and book-to-bill is the improving biotech environment and R&D spend, and how much is really coming from AI already? That’s kind of my first question.

Birgit Girshick (Chief Executive Officer)

Yeah, Ryan, it’s a really, really good question we literally just talked about. It’s really hard, because as I said, there are typical AI companies that all of us would say are AI-native, and then there are most discovery companies, I would say, using AI now in some form or fashion. So it would be extremely manual and not an accurate science to really try to say what comes from AI companies and what doesn’t. Yesterday there was actually a report that was quite helpful and I thought well done, that kind of split out the AI discovery funding from the normal biotech funding, and that’s probably the best number we would give you, which was for the last quarter over $900 million. But in our order book it’s really difficult, because everybody’s now using AI, and it doesn’t really make a lot of sense to split out AI versus non-AI. What I’m looking for is: AI is driving interest in the sector, it’s driving interest in investments, and that will benefit all of us.

Ryan Halstead (Analyst at RBC Capital Markets)

Very helpful, I appreciate that. And then maybe my follow-up, just switching gears to NAMs. You talked about the virtual control groups moving from concept to practice. Any more thoughts on how meaningful you expect incorporating virtual control groups to be in your work across all of your customers?

Birgit Girshick (Chief Executive Officer)

Yeah, happy to. So NAMs is the right ethical and scientific direction. Obviously we are very committed to reducing the number of animals in studies. Therefore, virtual control group is an incredibly important and rewarding program that we have. To see it now coming out of basically validation and proof of concept into actually using it on a real study and providing that data to the FDA is great to see. So it’s a big, big milestone from a scientific perspective.

We are looking to provide our clients with better answers, better insights, better data. Virtual control groups can provide that in certain instances. Another important point: from a revenue perspective, we are looking for getting paid for our investment. I wouldn’t look at it as a huge revenue upside. I would say it’s probably right alongside being paid for regular control groups, so it does kind of even out. But scientifically, and from a direction of reducing the number of animals, it’s a great milestone.

Ryan Halstead (Analyst at RBC Capital Markets)

Very helpful. Thank you.

OPERATOR (Moderator)

Thank you. We go next now to Luke Surgot with Barclays.

Luke Surgot (Analyst at Barclays)

Hey, great. Just wanted to talk a little bit and continue on the AI trend and demand that you guys are seeing. I understand that everybody’s going to be using it, but can you give us a sense of the difference in dollar per program or dollar per molecule—any changes from amount of services being used or anything like that—from one of these native AI biotech customers versus what you saw legacy? Because there’s an argument that it’s going to reduce overall volumes longer term.

I think everybody understands that increased efficiency, et cetera, you’ll see overall volumes in the long term, but there’s a small bear contingent talking about near-term disruption to overall lower dollar value.

Birgit Girshick (Chief Executive Officer)

Yeah, happy to. So Luke, the way we are seeing that: the AI-discovered molecules—that is really, really early stage, so target identification, designing better molecules—that may disrupt a little bit the chemistry space, and that’s an area that we divested earlier this year. So we don’t expect any impact on our revenues. And then all of those molecules, they are now much easier to develop. The molecules are easier to spin out. That’s why everybody says okay, that’s cheaper, that’s more efficient, more productive—that will translate into more programs.

All of those programs still need to be validated and safety-tested, and that’s the area that we’re strong in, we’re focusing on. That’s the work we do. So from a dollar amount per program, there is no difference for us. It doesn’t matter if it’s AI-designed, doesn’t matter if it is from an AI-native company or non-AI-native company, they come in with the same regulatory process requirement that any other program would have. In terms of more programs or fewer programs, qualitatively what we’re seeing is that often companies with AI platforms that they want to validate come in with more programs than a biotech company that is a non-AI company. The reason is a couple different things. Number one, they have an AI platform that they now need to validate, and the only way to validate it is with shots on goal—so more programs. If you have only one program and it fails, your AI platform fails.

If you have 20 programs and 15 of those succeed, you have a big strong selling point. So they just need to have more volume going through that validation space to, one, teach the platform, but then also to validate the platform. Biotech companies that are non-AI-native generally come in with one program, maybe a backup program, but a lot fewer programs. So that’s more qualitatively, because as I said, the boundaries are changing quite a bit because everybody starts using AI.

The other thing that we’re seeing—and I think some of the data out there is confirming—is that if you have AI in your name or in your description of the company, funding seems to be a little bit easier to get. So AI-native companies have a lot of cash, a lot of funds, and with that they can actually run a lot more programs without doubling their potential for success of that AI platform. So again, it’s more qualitatively than quantitatively, but we do see on a smaller scale those effects.

Luke Surgot (Analyst at Barclays)

Great, that’s helpful. And then, changing gears, I want to talk a little bit about the NHP supply and demand and how that’s shaking out. We’re getting channel checks here that supply is getting super tight again, people locking up multi-years out from when projects are going to start. So talk about what you’re seeing there and just update us on the exposure across RMS and DSA as we think about probably back half ’27 into ’28 when the pricing dynamics start to play out.

Birgit Girshick (Chief Executive Officer)

Yeah, certainly. So just to level set everybody again. So we use non human primate in our safety assessment studies for our clients and that is the primary reason we have backwards integrated into our supply chain. We now own farms and we’re happy to say that about roughly 80% of our estimated usage is covered by our own supply from our own farms. And that gives us that’s a big differentiator and is a big competitive advantage in our opinion. Now you’re asking about tighter supply.

There is definitely a lot of discussion in China about very tight supply of non human primates in China. We have a farm in China and because we can’t export the animals for our own safety assessment studies, we are actually selling them through our research models and services business in China. That’s a relatively small amount, relatively small revenue base, but we are hearing a lot and seeing a lot that there is definitely a need for more non human primates in China and that there is a lot of interest in that space.

As I said, not necessarily very material for us, but we’re watching that market to see where the need goes and then certainly also where pricing goes. This year pricing improved in China moderately to levels that we have seen before in recent years and we’re going to see what happens in 2027. Otherwise we continue to really focus on operational improvement, better control of our supply chain, making sure logistics is in place and just providing our clients with that differentiator of having non human primate supply for their studies at the best quality and the best health status possible.

And again, as I said, we see as a differentiator, I just want to point out that when we basically sell a safety assessment study, we’re selling the whole study so the animal is included, so we don’t necessarily split out the animal itself. What we have seen this year is an increased need for non human primate studies in the marketplace. And it makes sense because of a lot of complex modalities, a lot of biologics being priority in the pipelines of many of our clients and we’ll have to just see where that continues.

We have currently enough supply to meet our long range financial targets. And the rest of it, we’ll just have to see where the marketplace goes, where the science goes and where our clients need go. Did that answer the question?

Luke Surgot (Analyst at Barclays)

Yeah, that’s helpful, thank you.

Birgit Girshick (Chief Executive Officer)

Thanks Luke.

OPERATOR (Moderator)

We’ll go next now to Justin Bowers with Deutsche Bank.

Justin Bowers (Analyst at Deutsche Bank)

Hi, good morning, Birgit. Just piggybacking on that last question. What are you seeing in terms of therapeutic areas? One is just around vaccines and infectious disease. Are you seeing increased interest in investment there? And then part two would be your comment around the partnership with Top 10 Pharma just at a high level. Are you starting to see pharma invest more in preclinical and then with acquired biotechs, are they starting to expand the number of assets or programs from those acquisitions?

Birgit Girshick (Chief Executive Officer)

Yeah, so maybe I’ll start with the. Well, let me start with the therapeutic area. So what we are definitely seeing is a high interest in a high amount of programs in the biologics complex modality space. We’re seeing continued interest in vaccines, but I wouldn’t say an accelerated interest. So it is more about mRNA, maybe ADCs, things like that. That is a complex work and actually supports our competitive differentiation as a specialty provider.

Less so with the vaccine space, but that hopefully will change too and we might see an uptick there in the outer years. As far as pharma. So we announced that we have expanded a relationship with one of the top 10 biopharmaceutical companies. That’s a great outcome and a great milestone. We are now really the preferred partner for just about all of the big clients of ours. Just showcasing the breadth and depth of our portfolio, our client centric approach with our clients and so we are really, really happy with that. Global biopharmaceutical clients have really for the last, I would say 18 months, increased the amount of work coming out of their restructuring activities.

Bookings are strong, proposals are strong, we see quite a bit of growth in that space. So all the indicators, including the revenue that we are seeing are quite healthy from global biopharmaceutical companies who are definitely refocusing on internal development and getting more drug programs into IND enabling studies and into the clinic. So just great to see that. And then from a biotech perspective, our indicators are all healthy too, seeing really great bookings from them. The proposal rates are good, capture rates are good, and also seeing a return to revenue growth. Funding overall is good. There are certainly some soft spots that we still would like to fill in such as early company formation, but I think that will come over time as well. So overall we believe that the demand environment is healthy. It’s supporting our outlook for this year and our long range financial target that we have provided.

And we’re not seeing any disruption either macroeconomically or in our domain KPIs at this point.

Justin Bowers (Analyst at Deutsche Bank)

Thank you for the detail. I squeezed in two so I’ll jump back in queue.

OPERATOR (Moderator)

Thank you. We’ll go next now to Dave Winley of Jefferies.

Dave Winley (Analyst at Jefferies)

Great, great. Good morning. Thanks for taking my questions. I’m going to move off the primary topic here and ask a question Birgit, about bioanalytical. You have highlighted that an expansion there in your comments today. You talked about preclinical bioanalytical. Some of the areas where I think you’re expanding are to try to capture or retain business as it moves into clinical. So I’d just ask you to broaden the commentary or perspective about the progress you’re seeing in bioanalytical across both preclinical and clinical.

Birgit Girshick (Chief Executive Officer)

Yeah, great catch. Yeah Dave, definitely. So what we said in our prepared remarks was that we have a particular strong differentiation right now in the preclinical space. You’re right that our interest extends also into the clinical bioanalytical space. And the reason for that is it’s the same platforms, it’s the same assays, it’s the same clienteles and particularly with increasing complexity of assays and drug programs. We can provide our clients with kind of that consistency across both the preclinical and into the clinical.

We have the science, we have the partnerships and I think we can take some time out of their development timeline by just not having to change partners midstream when you go from the preclinical into the clinical process. So definitely interested in both areas. Right now our clinical part of our revenues in bioanalysis is the minority, but we’re looking to grow that over time. So we currently have five organic expansions ongoing in our organization where we’re building out existing footprint to increase capacity for bioanalytical both for preclinical and clinical.

And we also said at the investor day that we would certainly be interested in potential M&A when and if we find the right target.

Dave Winley (Analyst at Jefferies)

Great. My follow up is a little bit of a technical one, but comes back to the NHP discussion. I think you’re describing that you’re expecting progressive benefit from the lower cost NHPs, having internalized your supply chain a little bit in 3Q, a little more in 4Q. I guess I was expecting to see that show up in gross margin and I do see a little, but maybe not as much as I had expected. And when we look at how the numbers are falling out from the filing, it looks like DSA SGA is really low in the quarter.

And so I wondered if perhaps the geography of where that benefit being acquisition driven is landing. Is there something going on there? And relatedly, when you say discount, you’re narrowing discounts on bids. That is some amount of price improvement, is it not? Just want to clarify on NHPs. Thanks.

Birgit Girshick (Chief Executive Officer)

Yeah, let me take the pricing question and then I’ll let Glenn go into the margin question. So yes, technically if you narrow the discounts, you’re getting some pricing power back. And we just wanted to point out that we are in the process of doing that. We are moving from strategically using discounts to win work to kind of testing the market to see that we can continue to win work with getting paid for inflation and for the work we do. But we also wanted to caution that because of this being in a proposal stage, we’ll need some time to work it through our backlog into revenues in the coming years.

So that’s why I said don’t expect anything major till the second half of 2027 before we really see some pricing power here.

Dave Winley (Analyst at Jefferies)

Got it. Understand that on the

Glenn Coleman (Chief Financial Officer)

Margin question, I would just say we would expect to see a benefit on gross margin, especially in Q4 with the lower sourcing costs coming from KF Cambodia. So that is a big part of the overall operating margin improvement from Q3 to Q4 along with lower fringe costs. And we did see lower fringe costs also in Q3 to help to drive some of the SG&A down. If you’re looking at our 10Q filings, you’ll see a pretty significant drop in SG&A that’s associated with a non-GAAP item with a tax release and reserve reversal that we did, which obviously we don’t include as part of our non-GAAP numbers.

But you’ll see a big adjustment there for that. So you’re probably looking at that.

Dave Winley (Analyst at Jefferies)

Yeah, thanks. Thank you. Appreciate the clarification.

Birgit Girshick (Chief Executive Officer)

Awesome. Thanks, Dave.

OPERATOR (Moderator)

Thank you. We’ll go next now to Casey Woodring with JP Morgan.

Casey Woodring (Analyst at J.P. Morgan)

Great. Thanks for squeezing me in. I guess my first one is just on capacity expansion. Just given the anticipated increased demand from AI, I’m wondering how you’re thinking about expanding capacity and what your utilization is currently.

Birgit Girshick (Chief Executive Officer)

Yeah, Cassie. So currently we have a good amount of capacity available for, for our in vivo work. The reason for that obviously is the volume declines that we’ve seen in the past years. And when we went into those volume declines, we did have adequate space for a little bit of growth. So we are comfortable with that for at least a couple of years. Hard to say. Obviously it depends on the growth rate and the mix and geography. And if that changes, or when that changes, I should say it will change, obviously then we have some space at our sites that we can expand in.

So we are well set. We have some empty expansion space that we can convert relatively quickly and we watch this literally month to month to month to make sure that we are on top of it, that we don’t miss that window. But that speaks to the way we have expanded over the last few years in increments, small steps. A few more rooms here, a few more rooms there. It is the best way for us and the best discipline for us to expand. From our bioanalytical capacity, we are, as I said, currently expanding because we have seen growth over the last few years in that space when in vivo work actually declined. And we see this as a higher growth area going forward. So those five expansions that are currently underway will give us that necessary capacity that we are looking for. So this is an always, always we are very disciplined about the capacity expansion, trying to always have enough space but not to be too far ahead.

Casey Woodring (Analyst at J.P. Morgan)

Got it. That’s helpful. And maybe just two quick ones as follow ups. The first is just would you expect seasonal trends from 3Q to 4Q in bookings to hold this year in terms of that normal step up in bookings you see in 4Q? And then just as backlog goes up, how should we expect burn rate to trend kind of into 27. Should we expect that to tick down? Thank you.

Birgit Girshick (Chief Executive Officer)

Yeah. So from a seasonal trend, we do often see higher bookings in Q4, particularly compared to the Q3 bookings, which is the summer quarter, which often has a little bit of seasonality in there. But it depends a little bit on the business that we have too and where some of our global biopharmaceutical clients are in terms of finishing up their budgets and are ready to prioritize the programs that are coming in. So overall, yeah, we might see that.

And as I said, our book-to-bill is nonlinear. We see quarter-over-quarter changes and then it also depends obviously on the revenue base that we are seeing. But overall we should be seeing strong demand going forward. We do see—maybe to point out—healthy proposal levels. We are the fifth consecutive quarter with increasing proposal levels now and that is certainly a good metric for us, particularly with capture rates staying strong for us, and that should translate into good bookings.

OPERATOR (Moderator)

Thank you. We’ll go next now to Jared Haas with William Blair.

Jared Haas (Analyst at William Blair)

Hi, good morning. Thanks for squeezing me in here. Maybe I’ll go back to—I appreciate some of the color you shared on examples of your modernization efforts and the work that you’re doing around automation as part of the long-term strategic goals. I guess I was just curious if there’s any incremental callouts in terms of opportunities or specific workflows that you point to that you think can move the needle either financially or operationally over the next handful of quarters.

Birgit Girshick (Chief Executive Officer)

Yeah, actually we pointed out a couple maybe from the prepared remarks that we felt are interesting examples. One is the automation of our production line for LAL reagents that increases 14% capacity for our production of those reagents and also allows us to drive production with basically fewer resources. So it will have a positive impact on our material costs. Another one is the Apollo Orchestrate. So Apollo is the platform that we use in all our businesses to communicate with our clients. And when I say communicate, that’s where they see their samples that are submitted, they see their test results, they see where their study is currently. And what we’re going to do with Apollo Orchestrate in our biologics business is actually digitizing the whole workflow from sample submission through the lab, scheduling, execution of the samples, test results back to the client.

That is another great example of how we’re using modernization to create more efficiencies. We talked about the cost savings of 300 million in the investor day over the next few years, but also to improve our client centricity, make it easier for the clients to communicate with us and to see their test results, but then also make it easier for our employees to execute on the work. So those are two great examples. And we have 500 initiatives ongoing.

Some are pretty complex and pretty impactful and all of them will have some level of improvement. So I really look forward to the execution of those initiatives.

Jared Haas (Analyst at William Blair)

Okay, got it. That’s really helpful. And then I also just wanted a clarification. When you talk about pricing and sort of longer term you think about pricing, the lever there is sort of being the goal to cover the cost of inflation. Is that effectively a mechanical relationship where you could sort of benchmark price to a specific measure of inflation, or does it require a little bit