CHARLES RIVER LABORATORIES INTERNATIONAL, INC. Q2 2026 earnings call

Good morning, and welcome to Charles River Laboratories second 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 second 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 be accessed on our Investor Relations website. The replay will be available through next quarter's conference call. I'd like to remind you of our safe harbor.

All remarks that we make about future expectations, plans, and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated. During 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 of operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and the reconciliation on the Investor Relations section of our website. I will now turn the call over to Birgit Girshick.

Thank you, Todd, and good morning. Today, I would like to discuss the progress that we made during the second quarter, both financially and on our refreshed strategic framework, Pathway of Purpose. I'm pleased to report that we delivered on our second quarter financial targets, exceeding our prior outlook for the quarter, and that we are raising our financial guidance for the year. We continue to remain focused on execution, on achieving our financial targets and driving increased shareholder value, as well as executing on our Pathway of 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. Execution of our Pathway of Purpose strategic initiatives and our financial goals will be the key to our future success.

Let me now provide you with the recent highlights that demonstrates our progress on our Pathway of Purpose initiatives, as well as our second quarter performance. First, we were encouraged that the biopharmaceutical demand environment continued to strengthen in the second quarter, particularly in the DSA segment. The DSA net book-to-bill rose to nearly 1.2x in the second quarter, making this the third consecutive quarter that the DSA net book-to-bill has been above one time and also the highest level achieved in nearly four years. Our constructive view was also supported by a return to organic revenue growth of 0.1% for the total company, which marks the first time that revenue has improved organically since the third quarter of 2023. We firmly believe these trends positioned us well to drive higher organic growth during the second half of the year.

As part of our efforts to further deepen client relationships, in June, we announced a unique collaboration with Eli Lilly's TuneLab drug discovery platform. In support of Lilly's goal to advance R&D modernization efforts, we will provide our non-clinical or reg lab testing expertise to help build and optimize Eli Lilly's AI and machine learning drug discovery model. We believe this type of collaboration demonstrates that the future state of drug discovery and development will require traditional in vivo and in vitro solutions, even when integrated with AI or other in silico approaches, to help enhance the speed and scientific data needed to support our clients' R&D programs. Charles River is a scientific partner that is uniquely positioned to be able to integrate traditional in vivo, in vitro, and new innovative capabilities into one comprehensive solution for the biopharmaceutical industry.

We are also utilizing new technologies, including AI, to modernize and strengthen our own scientific portfolio, including an enhanced digital pathology solution that delivers AI-enabled end-to-end workflows designed to improve study turnaround times and increase pathology's efficiency. With over 140 trained pathologists on staff, pathology always has been one of Charles River's greatest strengths, and this enhanced digital solution will drive both internal operating efficiency and greater speed for our clients' programs. Our goal for clients that utilize our fully integrated digital pathology solution will be to cut at least one week from standard pathology timelines. As I discussed in detail last quarter, we completed the divestitures of certain European discovery services sites in May 2026, as well as the CDMO and cell solutions businesses.

The partial quarter benefit from the divestitures was one of the drivers of the 420 basis points of sequential operating margin improvement in the second quarter to 20.5%, and helps us refine the portfolio to create a more streamlined offering focused on our core competencies in regulated testing solutions. We are also continuing to invest organically in our scientific capabilities to support our future growth and accommodate more of the testing requirements for our clients' therapeutic programs, including in the area of lab sciences and specifically bioanalysis. Demand for lab science services has been growing nicely over the past five years, driven by large molecule bioanalysis, biomarkers, and additional testing requirements in both regulated and non-regulated programs, including in the clinical development phase. To support this growth, we recently embarked on an expansion to add bioanalytical laboratory capacity at Heriot-Watt University's Research Park in Scotland.

This expansion, which is one of five ongoing lab sciences expansions globally at Charles River, will also offer an opportunity to partner with Heriot-Watt University on the talent pipeline to further support our future growth in bioanalysis and in the region. My final highlight demonstrates how our broader strategy is working to support our client-centric approach. We recently announced a collaboration with Arovella Therapeutics to provide next-generation sequencing or NGS services to accelerate progress toward their alternative cancer treatment approaches using cell and gene therapy. This collaboration shows that by strengthening our scientific capabilities with an innovative in vitro NGS testing solution through our recent acquisition of PathoQuest, we are able to deepen client relationships and expand the possible opportunities for collaboration. In today's dynamic marketplace, there are abundant opportunities to further differentiate Charles River from the competition.

We stand alone with our strong financial profile, refreshed strategic vision, and scientific expertise focused on our core regulated testing capabilities that span early-stage development through the clinic and beyond. Clients are expecting their scientific partners to help them drive greater innovation, speed, and efficiency. We are making great progress under our Pathway of Purpose strategic framework to become an even more modern, client-centric organization that will operate more simply with more agility and enhanced digital connectivity. The biopharma demand environment improves, this will enable us to become an even more essential partner to our clients, work with them across our differentiated portfolio, and gain a greater share of their R&D spend. Let me provide a brief update on the end market trends. I mentioned, we believe the biopharma demand is continuing to sustainably improve.

Small and mid-sized biotech clients are leading the trend as a result of the invigorated funding environment demonstrated by a trailing 12-month funding of nearly $100 billion, which is just shy of peak levels achieved during the pandemic. We continue to monitor for changes in the funding environment, whether it be from interest rates and inflation pressures or other macroeconomic factors, funding activity has been resilient and broad-based to date, including a notable increase in IPO activity as well as solid VC and follow-on funding. Revenue from small and mid-sized biotechs was essentially flat organically in the second quarter, which is an improvement from declines in recent quarters. A reminder, there is a natural lag of several quarters between studies are booked into backlog and work their way through to revenue.

We are just beginning to see the benefit from improved DSA booking activity from late last year. Therefore, the strengthening booking activity that we have experienced through the middle of this year gives us greater confidence that we will generate incremental organic revenue growth starting in the third quarter on both a consolidated basis and in the DSA segment. Global biopharmaceutical clients were also a significant contributor to the improving DSA demand KPIs in the second quarter. As I mentioned last quarter, most of our global biopharma clients have progressed through restructuring and pipeline reprioritization activities over the last several years. Demand trends have been improving gradually over the last 18 months with continued evidence this year. Revenue from global biopharmaceutical clients continued to increase organically in the second quarter. I will now provide some highlights from our financial performance before Glenn provides additional detail.

First, we are pleased that our second quarter results exceeded our prior outlook for revenue on non-GAAP earnings per share. Second quarter revenue increased 0.1% on an organic basis compared to our prior outlook of a low single-digit decline. In addition to the solid top-line performance, the operating margin increased 420 basis points sequentially to 20.5% due to two primary factors. First, less pressure from several discrete margin headwinds that impacted the first quarter as we had anticipated. Second, a partial quarter benefit from the divestitures that enabled the manufacturing segment's operating margin to jump to 37.8% in the second quarter.

For the remainder of the year, we continue to have a clear line of sight into the drivers behind at least 500 basis points of margin improvement expected in the second half of the year, with the largest drivers being the actions that we have already taken to strengthen and refine our portfolio. Non-GAAP earnings per share of $3.02 increased 47% sequentially, which was well above our prior outlook of at least 30% sequential growth. Glenn will provide more details on the operating margin and earnings drivers in a moment, as well as our increased financial guidance. RMS revenue declined 1.4% organically. This represents an improvement from the first quarter level, due principally to the timing of NHP shipments, which were more normalized in the second quarter and did not have a meaningful impact on the year-over-year growth rate.

The primary drivers of the year-over-year revenue decline were lower revenue for small models in North America, as well as for research model services, including genetically engineered models and services or GEMs. These declines were largely offset by continued robust demand for research models in China from mid-tier biotech and CRO clients. For the year, we continue to expect a low to mid-single digit organic revenue decline in the RMS segment, with much of this decline driven by lower volumes for research models in North America. This is largely because spending from academic and government clients has been constrained by flat NIH budgets and slower grants processing. DSA revenue returned to growth, increasing 0.2% organically in the second quarter.

As noted, it takes several quarters for projects booked to work through the backlog and into the revenue stream. We are just beginning to see the benefits of the improved biopharmaceutical demand trends from the end of last year. The second quarter improvement was broadly driven across multiple study types and modalities, including a more discernible uptick in IND-enabling studies as clients shift their research focus earlier to replenish their pipelines and continued strength for NHP-related studies reflecting our clients' focus on complex biologics. Regulatory required safety assessment studies utilizing NHPs have become a competitive advantage for Charles River because of our more reliable supply of these critical research models after strengthening our portfolio through the acquisitions of suppliers in Cambodia and Mauritius in recent years.

We expect the DSA growth rate to accelerate in the second half of the year, supported by encouraging trends in the DSA demand environment to date. Net bookings increased significantly year-over-year and by 12.6% sequentially to $701 million in the second quarter, resulting in an increase in the DSA backlog to $1.97 billion and a net book-to-bill of 1.19x. The second quarter improvement was broad-based across both global biopharmaceutical and small and mid-sized biotechnology client segments. As noted, these were the highest levels for the net book-to-bill and net bookings in nearly four years since the third quarter of 2022 and the third consecutive quarter that the net book-to-bill was above one times. These trends, combined with another strong increase in proposal activity during the second quarter, leave us cautiously optimistic that the positive momentum will continue.

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, costs related primarily to restructuring 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 are pleased with our financial performance for the second quarter, with both revenue and non-GAAP earnings per share exceeding our prior outlook. On an organic basis, revenue was essentially flat year-over-year compared to our prior forecast of a low single-digit decline, driven by better than expected performance in our DSA and manufacturing segments. The non-GAAP operating margin of 20.5% was in line with our forecast but improved by 420 basis points on a sequential basis over the first quarter.

Non-GAAP earnings per share of $3.02 also exceeded our expectations, with over half of the outperformance driven by better than expected top-line results and the remainder by a favorable contribution from non-operating items, which I'll discuss in more detail shortly. In the second quarter, we also repurchased $100 million in shares at approximately $174 per share under the $1 billion stock repurchase authorization approved last October. This brings our total year-to-date share repurchases to $300 million and reflects the continuation of our thoughtful and diligent approach to capital deployment to enhance shareholder value as we balance organic investments in the business, pursue strategic acquisitions, and repay debt. Our updated guidance assumes an average diluted share count of approximately 48.5 million shares for the full year 2026.

Moving to details on our segment performance, DSA revenue was $607 million in the second quarter, a decrease of 1.9% on a reported basis compared to the second quarter of 2025, due primarily to the impact of the divestiture of certain European discovery sites. On an organic basis, revenue increased 0.2% and was also the first time we reported organic growth in DSA since the third quarter of 2023. Year-over-year, operating margin decreased by 180 basis points to 25.6%, however, increased by 460 basis points on a sequential basis from the first quarter. The year-over-year decline was primarily due to higher study-related direct costs. However, we expect this year-over-year margin headwind to turn favorable in the coming quarters as we benefit from lower NHP sourcing costs as a result of the acquisition of our Cambodian NHP supplier.

The lower sourcing costs for Cambodian NHPs will begin to benefit the DSA operating margin in the third quarter, but will have a more significant margin contribution in the fourth quarter as we increase our use of these models on studies. As a result, we expect the operating margin in DSA to be the highest in the fourth quarter. Shifting to the RMS segment, revenue was $209 million in the quarter, representing an organic decline of 1.4% year-over-year. Small model revenue experienced lower volume for research models in North America and for research model services, partially offset by continued strong demand in China. Operating margin declined by 80 basis points to 24.5% in the second quarter, due largely to the impact of lower sales volume and an unfavorable geographic revenue mix.

Wrapping up the segment performance, the manufacturing segment reported second quarter revenue of $188 million, an increase of 1.3% on an organic basis. The CDMO business reduced the segment organic revenue growth rate by nearly 400 basis points in the quarter, with the segment growing at a mid-single-digit organic growth rate excluding CDMO. The strong performance in our manufacturing segment was largely driven by high single-digit organic growth in our Microbial Solutions business as we saw increases in demand across our three major geographic regions for endotoxin testing reagents, including our PTS rapid testing cartridges, as well as adding new clients to our strong, broad-based quality control testing platform. Operating margin improved by 500 basis points year-over-year to 37.8%, driven primarily by the benefit of the CDMO divestiture.

We expect the manufacturing segment to remain a meaningful contributor to margin expansion during the second half of the year, with the operating margin approaching 40% with the full benefit being recognized from the CDMO divestiture. Moving on to other financial metrics, unallocated corporate costs were higher than expected in the second quarter, totaling $72 million or 7.2% of revenue, compared to 5.9% in the prior year period. The increase was primarily driven by increased costs related to our deferred compensation plan of $6 million or $0.10 per share due to the market performance of the plan assets during the quarter. To fund the deferred compensation plan, we separately invest in certain funds which experienced gains of $19 million, or $0.29 per share in the second quarter. These gains are included in other income.

The net benefit associated with our deferred compensation plan was $0.19 per share in the second quarter, which we do not expect to recur. Based upon our second quarter results and updated forecast, which also encompasses higher performance-based compensation, we now expect unallocated corporate costs of approximately 6.0% of revenue for the full year, compared to our prior outlook of approximately 5.5%. Net interest expense was $28 million in the second quarter, a decline of $1.2 million year-over-year. For the full year, our net interest expense outlook remains unchanged at $103 million-$108 million on a non-GAAP basis. At the end of the second quarter, our net leverage improved slightly to 2.5x from the first quarter. The non-GAAP tax rate in the second quarter was 23.8%, an increase of 110 basis points year-over-year, due primarily to the impact of discrete items.

For the full year, we now anticipate our non-GAAP tax rate will be in the range of 23%-24%, an increase of approximately 100 basis points from our prior outlook, primarily as a result of the unfavorable second quarter rate and a higher tax rate due to proposed tax legislation changes in a foreign tax jurisdiction. The higher tax rate outlook for the year is expected to be a $0.20 headwind to earnings per share, with about half of the impact in the third quarter. Free cash flow was $149 million in the second quarter, a decrease of $21 million compared to the prior year period. This decline was primarily driven by the timing of working capital. CapEx declined to $31 million, or approximately 3.1% of revenue in the second quarter from $35 million last year.

For the full year, we're raising our free cash flow projections to be in the range of $400 million-$420 million, compared to our prior outlook of $375 million-$400 million, largely driven by higher earnings. Turning to full year 2026 P&L guidance, we are increasing both the reported and organic revenue outlooks due primarily to the DSA manufacturing outperformance in the second quarter and our expectations for further improvements during the remainder of the year. We now expect reported revenue to decline in the range of 2.5%-3.5%, driven by the impact of completed divestitures. We're also raising our organic revenue growth in the range of flat to a 1% increase, which represents a 150 basis point improvement to our prior guidance.

By segment, on an organic basis, we're increasing our DSA revenue outlook to low single digit growth for the year. We're also adjusting our manufacturing revenue outlook higher to a low to mid single digit growth rate. Our RMS outlook remains unchanged. Moving to profitability, we continue to expect operating margin expansion of approximately 120-150 basis points in 2026, with the manufacturing and DSA segments driving the year-over-year increase. We have a clear line of sight into the second half improvement of at least 500 basis points compared to the first half of the year. As shown on slide 14, approximately 50% of the second half improvement will be attributable to the portfolio actions already completed, including the full benefit of the divestitures, as well as the lower NHP sourcing costs from the K.F. acquisition, which will largely benefit the fourth quarter.

Lower corporate costs are estimated to drive approximately 150 basis points of the improvement, with the balance derived from other operational contributors, including efficiency savings. Lower corporate costs in the second half will reflect favorable stock compensation expense related to the CEO transition and fringe costs, which are typically lower in the second half of the year. We are also increasing our non-GAAP earnings per share guidance to a range of $11.15-$11.45, which represents 8%-11% year-over-year growth and an increase of $0.25 at the midpoint of our prior outlook. The increase reflects the expected operational outperformance for the year, driven primarily by improving trends in the DSA segment and a better than expected performance in the manufacturing segment.

Separately, we expect the $0.19 net benefit associated with the deferred compensation plan will not have a meaningful impact on non-GAAP earnings per share in 2026, as it is expected to be entirely offset by the higher tax rate outlook for the year, which is an approximate $0.20 headwind. For the third quarter, revenue is expected to decline approximately 4%-6% on a reported basis, primarily driven by the impact of the completed divestitures. We expect organic revenue growth of approximately 1%-3% year-over-year, reflecting improving demand trends in the DSA segment and an expected rebound in biologics testing growth rate, which will drive higher manufacturing revenue growth. In addition, operating margin is projected to improve approximately 200 basis points sequentially versus the second quarter, due largely to lower corporate costs and a full quarter benefit from the divestitures.

For the third quarter, we expect non-GAAP earnings per share in the range of $2.90-$3, representing an approximate 20% year-over-year increase. As previously mentioned, the higher tax rate outlook creates a $0.10 headwind to third quarter earnings per share, which has been included in the guidance. In conclusion, I'm encouraged by the recent improvement in the underlying business trends and our first half performance, including the execution of our strategic priorities, which demonstrate our commitment to our Pathway of Purpose strategy and enhancing long-term shareholder value. Over the past several months, I've had the opportunity to meet with employees across our global organization, as well as shareholders and other stakeholders. These interactions have further strengthened my confidence in our capabilities, our people, and the momentum we are building across the organization.

I look forward to continuing to work with the team to execute our strategy and to sharing more information about our long-term priorities and financial targets at our upcoming Investor Day on September 24th. Thank you.

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

Great. Thanks a lot for the question, guys. Wanted to start actually on AI. We've been fielding quite a lot of questions on the space in relation to preclinical work, and you called out some of the partnerships here. Maybe just talk us through your expectations for the preclinical pipeline evolving from that smarter drug discovery and whether that seems like a plausible thesis to you based on the discussions you've had with customers. I think we're just trying to work out when that impact starts creeping into numbers via more IND enabling studies, would love your views there.

Thanks, Kallum, absolutely happy to. Obviously AI is a hot topic everywhere, and we talk to a lot of clients about it, what their expectations is, where they're investing into. From our perspective, a lot of the articles or the pieces that were published support our thesis on it. Once AI provides more productivity into the molecule design, target identification, makes more molecules maybe available to move into the validation stage and regulated safety assessment stage and makes the molecule design more efficient, we expect more programs to work itself through the safety assessment stage, the validation stage, the area that is core to us. We expect that it will actually be a tailwind for us and drive demand. Timing is a little bit more difficult to estimate.

Obviously, companies have worked on AI for a long time, on the other hand, technology is accelerating. Really we'll have to see when those efficiencies are being delivered, when the cost savings for our clientele can materialize. What we are already seeing actually is that a lot of companies that are more AI native or drug discovery companies that use AI platforms, they're generally running more programs than a typical biotech that generally comes in with one or two programs. The numbers are still very small, that will accelerate materially over the next, I would say, year or two. We should see some positive impact over the next few years, it will take some time to really ramp that up.

When it's going to be material is a little bit harder to estimate, I think you will see some ramp up over the next couple of years, more programs, more validation, more data needed to validate the platforms. All of that should be a tailwind for the work we do. In addition to that, we as a company are investing in AI tools, enabling platforms that give us more insights, also allow us to put efficiencies in place. Those are all really focused on the work we do so that validation, safety assessment stage that is core to us, that will allow us to differentiate ourselves, to help our clients to move faster. Time is money as usual, also provide us for our work with some efficiencies. We are really excited about AI.

I think it will be an enabler, a differentiator, obviously technology has to advance and continue to advance and then prove itself. Great question, Kallum.

Yeah. It's great color. Thank you. Just secondly, when we think about the portfolio refinement we've seen over the past year or so, clearly benefits starting to come through from that. Is it fair to assume you're now comfortable with the current shape of the business? Maybe just talk through appetite for maybe more deals or divestitures more broadly to capital allocation. Thanks a lot, guys.

Yeah. I'm going to start on that and then I'll let Glenn chime in here a little bit more on the capital allocation. From a point of divestitures, we absolutely are seeing the benefits from that both financially in terms of our OI improvements, also from an ability to focus on the core portfolio. That was a big driver for us to really getting back to core, to what we do best, where we have the biggest relevance to our clients, where we provide the highest value. That will allow us as a leadership team, but also our sales organization and our operational organization to really focus on being the best partner for our clients possible. We continue to look at our portfolio like we always have done. If you think back, Charles River has, over the years, divested other businesses.

We have had a program of site consolidations, we also have a healthy appetite for M&A. We will continue to look at all of that. Nothing imminent on the divestitures. We are still continuing to execute on some site closures that we had announced last year. Certainly from an M&A perspective, we have a good roadmap. We have a clear target area we are interested in, as you know, it is always difficult to estimate when targets are available, are they coming in for the right price? More to be seen, definitely we will keep it broad-based and continue to look at refining our portfolio.

The only thing I would add is obviously our balance sheet is in very good shape. We can support our acquisition strategy going forward. If you look at where our leverage is, we ended around two and a half times, even after the most recent $100 million share repurchase that we did in the second quarter. We generated strong cash flows in the quarter. We actually raised our free cash flow guidance. We have plenty of capacity under our existing revolver at very attractive rates. I think we are very well-positioned from a balance sheet perspective to support our acquisition strategy. You can never predict when they are going to happen, we would love to be able to add a couple additional companies to our portfolio.

Thanks a lot.

Great. Thank you so much. On the call, you talked about how the demand in biotech was accelerating. Can you talk about your other customer segments, especially how large biopharma is doing?

Yeah, happy to, Ann. It's actually great to see that both our major client segments are strengthening and we're seeing more demand from both of them, and our forward-looking demand KPIs are strengthening in both segments. Looking at the global biopharma specifically, most all of our global biopharma clients, and we work with all of them, have moved through their portfolio prioritization, have moved through their restructurings over the last few years. Over the last 18 months, we've really seen them coming back to work, booking more work, more discussions, more proposals, and fewer cancellations. It's going all in the right direction. We have a lot of discussions with those clients, so we understand that their focus right now is on more molecules into the clinic, more molecules approved and being approved for commercial distribution to the patients.

It's all about more programs, more speed, more agility, and I think we are the differentiated partner for them to help them execute on that.

Great. Thank you. My follow-up question is just about China. I get asked a lot about this, and I think there's two competitive debates investors are focused on. One is just like the increasing capability of Chinese CROs, and the other is whether large pharma is bringing more preclinical work in-house in China. Maybe can you talk about, do you view these as real risks, and how do you think about it long term?

Yeah. We certainly watch China very closely, right? A emerging or maybe a little bit past emerging innovative market, really interesting from a perspective of serving this market directly. As you know, we have a strong research models and services business in China. We are a well-established, highly respected participant in that industry, and it certainly would serve well to expand on that business. We're looking at options at any given time at how we can accomplish that. From the other hand is the, as you said, the competition in China, adding more capabilities. This is a trend that has started probably a decade, maybe even longer, really focused initially on the very early-stage capabilities, chemistry and biology, and that market definitely has structurally changed and generally moved into lower-cost countries, including China, but also a bit in India.

We are now looking to see what their ability of bringing on more regulated work is. This is still the minority, generally focused on companies that are doing their phase I work in China, but we are watching that very closely and are very prepared to differentiate ourselves here in the West with our services, with our speed, with our supply chain, and being the best partner we can be here for our clients. Some of our global biopharma clients are moving maybe more into China with some R&D centers. They're due to establish with that some capabilities there, again, from what I can see, at the very early-stage, not so much in the regulated safety assessment market.

I think all our global biopharma clients have established the understanding that it's really hard to be in this area, particularly because of that regulated nature, keeping up the scale and a capability that would make sense for them. We believe that their investments are in the true R of the R&D stage, and that we continue to support them in more of the development stage.

Thank you.

Great. Thanks for taking my question. I'll forewarn you, this is a multi-parter, Birgit. I'm interested in demand environment. You talked in the prepared remarks about pretty balanced demand in DSA across study types.

Yeah.

I'm hearing that large molecule or large animal, NHP specifically, studies are in quite high demand to the point that maybe some of your competitors are running short on capacity in the near term. My questions are, what your view is of the demand landscape by study type, and then help us to understand maybe a little bit more clearly the availability of NHPs that you have from previous Noveprim and more recently, K.F., and how much excess capacity or animal supply can you dip into there, or do you have to wait for contracts to run out? Are they already claimed, et cetera, to be able to service what I think is NHP growing demand? Thanks.

Certainly, David. Great questions. I wouldn't expect anything less than a multi question from you.

I got another one for you.

Looking at demand, yes, we talked about broad-based. We were referring quite a bit to pre-IND versus post-IND studies, which really has balanced out quite a bit, which is great, because we need both. We need the pre-IND because that will eventually translate into post-IND. We also referred to healthy demand in the more complex areas, and in NHP studies specifically. We believe that this is both very positive. It shows that clients are reinvesting in the early-stage pre-IND work, but it also shows that clients are very focused on more complex modalities, which provides us with a nice uptick in revenue opportunity, both not only in the in vivo study, but also from a bioanalysis study, because there's more revenue associated with a more complex modality than in small molecules.

Specific to your question on non-human primate supply, you obviously know and you refer to it, that we have acquired Mauritius farm a few years ago, and then the Cambodian farm last year. By having ownership of it, there's a couple things that we can do that we would otherwise not be able to do. Number one is control the quality, the logistics, the timing of shipments, and that is helping us a lot. Also to control the capacity itself. We can obviously breed more, that will take a little bit of time, but we can also either accelerate some shipments or hold back some shipments. It is really about managing the capacity to the peak levels. We still have third-party contracts that we were executing on.

They are ramping down, and we will work through that with our customer over the next few years and move more and more of those animals into client studies in our DSA segment. Overall, we are quite happy that we are integrated into the supply chain, as you can imagine. We are in a very healthy state of having animals available. We'll have to see where demand goes. We are really differentiated now because of that non-human primate supply, and we see that as a possibility, obviously, to gain market share. Overall, I think we're in the best state possible at this stage, and we will leverage that.

Great. If I could just squeeze in a follow-up quickly on the same topic. I think as I'm looking at both consensus and our numbers relative to the guidance that you're giving for third quarter, I think the primary difference is kind of a cadence of perhaps your access or the benefit of the NHP cost drop to your margin. Sounds like it's landing mostly in the fourth quarter rather than the third quarter. Maybe, I don't know if this is a Glenn question, but maybe you could talk a little bit about the cadence. Are there animals that are going to be on quarantine in the third quarter that are depressing that impact a little bit? Just kind of the third quarter, fourth quarter cadence as to how that K.F. benefit materializes. Thank you.

Yeah, no. Relative to the margins and what we see right now, we're expecting a minimal impact in Q3. There'll be some impact, but very small. The large impact will be in Q4. We do expect to see a very meaningful move in margins in DSA in the fourth quarter as a result of the NHPs and them being placed on studies and those direct costs going lower in Q4. That's where we're going to see the biggest impact.

Yeah. David, you got it. Absolutely, you're right. Just thinking through, you understand the timing of importation, quarantine, getting them on study, and then generating revenue. It just takes some time to import them, quarantine them, acclimate them, and then get them on study and generate revenue. It's just a matter of timing.

Yep. Thanks again.

Yeah. Thanks for taking the questions. Hey, just wanted to follow up maybe a little bit more on David Windley's cadence question here. I think, Glenn, you said that 4Q DSA revenue will be the highest, and I guess the question then is that the right kind of run rate we should think about as we look forward into 2027? Clearly when we've seen the strong demand uptick and we're seeing this continuous improvement in the book-to-bill, is maybe then the 4Q the right jump-off point, or is there anything that maybe because it's maybe delayed from 3Q to 4Q, that might be sort of a one-timish kind of benefit partially so that we shouldn't use that as the jump-off point?

Yeah, Charles, let me give you a little color. Your comment on revenue, my comment was really around margin being the highest for DSA in the fourth quarter, to be clear, and that's driven by these lower costs for the NHPs. As we look at the sequencing of margins, I mentioned in my prepared remarks about a 200 basis point sequential improvement from Q2 to Q3. That's largely driven by lower corporate costs and some benefit from divestitures. Then we'd expect probably about another 300 basis point improvement to Q4 to get to our full-year guidance numbers, and most of that will come from the acquisition of K.F. Cambodia and the benefit we'll see in the DSA segment. Just so you know how we're sequencing out the Q3 and Q4 margins and, obviously, the comments that I made earlier around the margins, not the revenue.

Okay. That's helpful. Sorry, I must have misheard. Then maybe just a quick follow-up on the tax rate change. You said partly it was due to a proposed tax legislation change. Do we know when that will actually be finalized? Is this an estimation of a proposed change, and is there a chance that maybe it doesn't go through? Thanks.

Thanks for the question. This is associated with Mauritius, and we are expecting to hear back literally any day now on what the changes are going to be. We've obviously been in close contact with the local authorities in understanding what this could be, and so we've modeled in our guidance the impact we are expecting. If for some reason the impact is less, it would obviously be upside to our guidance right now. Just to put a finer point on it, when we raised our EPS guidance for the year by $0.25 at the midpoint, that's all operational. We have about a $0.19 gain overall that we expect to flow through the year, but we're anticipating a $0.20 tax headwind to offset that. If for some reason this tax legislation change does not happen, there would be upside to our EPS numbers.

Right now, from what we know, we're pretty comfortable that it's going to happen, and we've factored it into our guidance.

Great. Appreciate it. Thanks.

Yep.

Great. Thanks for taking the question and congrats on great quarter. Birgit, maybe kind of going back to some of your prepared remarks on DSA strength, the book-to-bill commentary. You talked about demand trends both in biotech and pharma. Would love to hear you comment on what you view as your capacity to support this. As you talked about, there's a lag between when some of these things convert into when funding converts into bookings convert into revenue. You've kind of tweaked capacity in DSA in prior years. Just talk about where you feel like you are now in terms of ability to absorb as that funding starts to flow through, or if there's incremental investments you need to make. Where are you looking out 12, 18, 24 months on that front?

Yeah. Thanks for the question, Mike. Because of some volume declines over the last few years, we have sufficient capacity for a while. Obviously, it depends on the growth rate and the volume growth rate as such. At this stage, we don't see any issues, neither from an in vivo perspective, so animal rooms equipment, and then we will have to make some adjustments in people, but that isn't always. That is just part of doing business. From a lab perspective, we actually have expansions in progress. They're geared towards the future demand, and currently we're fine, but we will need to execute on those expansions over the next couple of years to be able to grow with the market or above. Overall, quite comfortable with what we have on capacity.

Utilization will improve a little bit, which is a good thing, but we don't see a bottleneck there.

Okay. Maybe a quick follow-up on pricing, both on NHPs and just more broadly, what you see in 2Q, what are your expectations for the second half? How is that kind of playing out with the uptick in demand? Thanks.

Yeah. Happy to address that too. Obviously what we're seeing in Q2 right now is mostly booked a few quarters ago. What's flowing through right now is proposals that were basically done last year. Overall, what I would say is pricing has not materially improved yet. Pricing is still stable. It is at the levels that we have seen for the last few years. Not more discounting, not less discounting. We are aggressive going after work, which shows in our capture rates. I'm actually quite happy seeing a little bit of an uptick in our capture rates, which indicates that our go-to-market approach is working or pricing strategies are working, and that our differentiation strategy is working. We are looking forward to the time where pricing becomes a little bit more available.

We do think that will happen with capacity filling up a bit more over the next few quarters. Then again, it will take some time to work through that in our backlog. Just as a reminder, if we get a proposal today, generally takes a quarter to go into bookings, another quarter or two to go into revenue generation. Any pricing uptick we might see in the upcoming quarters, would flow through then in 2027, not before. I think pricing will improve as capacity improves.

Okay. Thank you.

Hi, good morning. Just going back to an earlier question on China. I was going to take it in a different direction. On the clinical side, we're starting to see some of the in-licensing flow back in the U.S., and given the demand profile over there and what we think is some upward pressure on price over there, are you starting to see an uptick in work from biotechs that might have otherwise gone over there, stay here, or that's coming back here? Can you talk about the opportunity set there? On pricing, are you starting to see that approach parity, around the DSA side?