Charles River Laboratories International's (CRL) CEO Jim Foster on Q4 2017 Results - Earnings Call Transcript

About: Charles River Laboratories International, Inc. (CRL)
by: SA Transcripts

Charles River Laboratories International (NYSE:CRL) Q4 2017 Earnings Conference Call February 13, 2018 8:30 AM ET


Susan Hardy - IR

Jim Foster - Chairman and CEO

David Smith - EVP and CFO


Eric Coldwell - Baird

Dave Windley - Jefferies

Jack Meehan - Barclays

John Kreger - William Blair

Tim Evans - Wells Fargo Securities

Ricky Goldwasser - Morgan Stanley

Sandy Draper - SunTrust

Tejas Savant - JPMorgan

Erin Wright - Credit Suisse

George Hill - RBC


Ladies and gentlemen, thank you for standing by. Welcome to the Charles River Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to Susan Hardy, Corporate Vice President of Investor Relations. Please go ahead.

Susan Hardy

Thank you. Good morning and welcome to Charles River Laboratories' fourth quarter 2017 earnings and 2018 guidance conference call and webcast. This morning, Jim Foster, Chairman and Chief Executive Officer and David Smith, Executive Vice President and Chief Financial Officer, will comment on our results for the fourth quarter of 2017 and our guidance for 2018. Following the presentation, they will respond to questions. There is a slide presentation associated with today's remarks, which is posted on the Investor Relations section of our website at

A replay of this call will be available beginning at noon today and can be accessed by calling 800-475-6701. The international access number is 320-365-3844. The access code in either case is 443328. The replay will be available through February 27 and you may also access an archived version of the webcast on our Investor Relations website.

I'd like to remind you of our Safe Harbor. Any remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by any forward-looking statements as a result of various important factors, including but not limited to those discussed in our Annual Report on Form 10-K, which was filed on February 14, 2017, as well as other filings we make with the Securities and Exchange Commission.

During this call, we will be primarily discussing results from continuing operations and non-GAAP financial measures. We believe that these non-GAAP financial measures help investors to gain a meaningful understanding of our core operating results and future prospects, consistent with the manner in which management measures and forecasts the company's performance. The non-GAAP financial measures are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations to those GAAP measures on the Investor Relations section of our website through the financial information link.

Now, I’m pleased to turn the call over to Jim Foster.

Jim Foster

Good morning. I’m very pleased to speak with you today about the conclusion of another strong year for Charles River, our expectations for 2018 and beyond and some important developments that will contribute to our long-term growth. Let me begin with an overview of our industry and factors driving our performance. We are operating in a robust business environment that gives us excellent growth potential. Our total addressable market is in the range of $15 billion, growing at mid-single digit rate. At revenue approaching 2 billion, that gives us a long runway. Biotech funding remains strong, in fact, 2017 was the second strongest year ever, with funding rising 37% from 2016 levels. The FDA approved 46 drugs last year, more than twice the number of drugs as in 2016 and because of our unique early stage portfolio and extensive scientific expertise, we worked on 74% of the approved drugs. We have demonstrated the value we can provide to clients and fully intend to continue to enhance our value proposition, both through internal initiatives and strategic acquisitions.

With the strength of the market opportunities and our premier reputation with clients, Charles River is on a path to nearly double its size over the next five years. We are maintaining our long-term target for consolidated revenue growth at high single digits over the five year life of our strategic plan and low double digits, including acquisitions. Our long-term target for the consolidated non-GAAP operating margin remains greater than 20%, even including acquisitions because profitable revenue growth is key to our long term goals. Further to that point, we continue to target at least low double digit non-GAAP EPS growth, exceeding organic revenue growth by at least 200 basis points.

Before discussing our fourth quarter results, I'm pleased to share two important events that will enhance our ability to achieve our growth goals. First, you will hopefully have seen that we announced a definitive agreement to acquire MPI Research, a leading non-clinical CRO providing comprehensive testing services to biopharmaceutical and medical device companies worldwide. Acquiring MPI will strengthen Charles River’s ability to partner with clients across the drug discovery and development continuum. As you know from the press release, we've entered into a definitive agreement to acquire the company for approximately $800 million in cash, subject to certain adjustments. Adding MPI’s capabilities enhances Charles River’s position as a leading early stage CRO and drives profitable revenue growth and immediate non-GAAP earnings per share accretion.

Our commitment to growth, including through strategic acquisitions requires an organizational infrastructure that is both broad and deep with highly experienced leadership at the top. The appointments of Davide Molho and Birgit Girshick are important steps in building out that necessary structure. Effective immediately, Davide becomes President and Chief Operating Officer of Charles River, responsible for our RMS, DSA, biologics and avian businesses and continuing to report to me. Trained as a veterinarian, Davide has established a proven track record of outstanding performance, leading many of our businesses through important strategic initiatives during his nearly 20 years with the company. His extensive operations management experience in both the US and Europe uniquely qualifies Davide to oversee our global organization and provide leadership as it continues to grow. Davide has been a key contributor on our executive management team.

The appointment of Birgit Girshick to corporate Executive Vice President, Discovery and Safety Assessment, enables us to manage the discovery and safety assessment businesses as one cohesive unit, leveraging the synergies between the two related businesses in order to enhance the extensive services we provide to clients. During her more than 25 years with the company, Birgit has established an exceptional record of operational management, most recently, leading our global discovery business after successfully executing the WIL Research integration. Given her experience, there is no one more qualified to combine these two businesses into a seamless operating unit.

This enhanced organizational structure will enable us to continue to advance our strategic objectives and support our continuing growth. I have complete confidence in Davide and Birgit’s capabilities and believe that Charles River will benefit greatly as a result of their new roles. I look forward to continuing to work side by side with Davide, Birgit and the entire team as we drive Charles River’s growth and development over the coming years. As I said at the outset, we plan to nearly double in size over the course of our five year plan, generating significant earnings growth and delivering value to our stakeholders. Today's appointments give us the right leadership structure to support and advance that plan.

Now, let me give you the highlights of our fourth quarter and full year performance. We reported revenue of 478.5 million in the fourth quarter of ’17, an increase of 2.5% on a reported basis. Robust client demand in the manufacturing and DSA segments drove organic revenue growth of 5.6%. For 2017, revenue was 1.86 billion with a reported growth rate of 10.5% and an organic growth rate of 6.7%. From a client perspective, biotech clients were our fastest growing client segment in both the quarter and the year.

The operating margin was 19.7% in the fourth quarter, an increase of 50 basis points year-over-year. We continue to be very pleased with the margin improvement in the manufacturing segment, which drove the fourth quarter increase. Lower corporate costs also contributed to the margin improvement. The full year operating margin of 19.3% was slightly higher than ’16, primarily due to 170 basis point improvement in the manufacturing operating margin offset in part by a lower RMS operating margin.

Earnings per share were $1.40 in the fourth quarter, an increase of 15.7% from $1.21 in the fourth quarter of ’16, due primarily to venture capital investment gains as well as higher revenue and operating income. For the full year, earnings per share were $5.27, a 15.6% increase over the prior year. Earnings growth was driven by higher revenue and operating income as well as contributions from venture capital investments and the excess tax benefit from stock compensation. When adjusting both years for these items, the year-over-year growth rate was 7.2%.

Our strong performance in ’17 reflects robust client demand across our broad portfolio of essential early stage drug research and manufacturing support products and services as well as the disciplined investments in staffing and infrastructure that we are making to support our continuing growth. These investments have positioned us extremely well to address the continued strong demand, which is the basis for our outlook for 2018.

Not including the anticipated acquisition of MPI, we expect organic revenue growth of 5.7% to 6.7% and non-GAAP earnings per share in a range of $5.42 to $5.57. The EPS range includes $0.14 of gains on venture capital investments and $0.14 for the excess tax benefit associated with stock compensation.

Adjusting both years to exclude these items, the 2018 EPS range represents growth between 8% and 11% and when including MPI, the non-GAAP earnings per share range is expected to increase to $5.67 to $5.82, a growth rate of 13.5% to 16.5% on the same adjusted basis. In either case, the projected non-GAAP EPS growth rate in ’18 is in line with our goal of an EPS growth rate more than 200 basis points higher than the organic revenue growth rate.

I'd like to provide you with additional details on our fourth quarter segment performance and speak to our expectations for ’18 and longer term. I’ll begin with the RMS segment. RMS revenue in the fourth quarter was 120.4 million, a decrease of 1.4% on an organic basis. The RMS operating margin decreased by 130 basis points to 26% due primarily to lower sales volume. From a client perspective, Charles River’s DSA segment is and will continue to be the largest client of the research models business. Research models remain an essential regulatory required scientific tool for early stage research and a vital component of our portfolio.

Researchers view our broad portfolio of high quality, scientifically defined research models and our exceptional client service as the foundation from which they derive precise scientific data about their molecules. In both the fourth quarter and full year 2017, biotech clients increased their purchases of research models, but global biopharma clients continued to reduce theirs. This is likely the result of both increased use of CROs and biotech partnering and consolidation in the biopharma industry, but as the leading supplier of models to these clients, the impact largely offsets growth from biotech clients and China.

Growth opportunities in China are significant and our business has been growing at double digit rates each year since we acquired it in 2013. The revenue growth rate moderated to low double digits in the second half of 2017 because of capacity constraints. Our new production facility in the Shanghai area was completed in the fourth quarter and we began commercial shipments early this year. This new production capacity as well as plans to continue to expand in China are among the factors that give us confidence in our long term low single digit growth targets for RMS.

In addition to China, we believe that the benefit of modest price increases and growth in the service businesses will also support our long-term target for this segment. GEMS and insourcing solutions performed well in the fourth quarter and we expect that the revenue growth rate for RADS will improve in ’18 now that we have anniversaried the one-time single client project in 2016 that depressed the growth rate in ’17. We expect that these trends will continue declining demand from large biopharma, increasing demand from biotechs, strong growth in China, modest price increases and demand for services. Therefore, we are reaffirming our long-term target of low single digit revenue growth for RMS.

Because of the importance of our research models to drug research and to our discovery and safety assessment businesses, we must continue to provide the high quality research models for which Charles River is known and respected as efficiently as possible. Over the last five years, we have periodically taken actions to enhance the productivity and streamline capacity in the research models business. The goal of these actions, including the planned closure of our RMS site in Maryland before the end of the year and our continuing efficiency initiatives, is to sustain the robust RMS operating margin and our long-term target in the high-20% range.

DSA revenue in the fourth quarter was 253.2 million, a 6.8% increase on an organic basis, driven by both the discovery and safety assessment businesses. DSA growth was slightly below the third quarter level, due primarily to a less favorable steady mix in safety assessment, which can fluctuate from quarter-to-quarter based on clients' priorities. For the full year, DSA organic revenue growth was 7.5%. Safety assessment growth was in the high single digits for the year, offset slightly by slower growth for the discovery business. We expect the discovery business to generate higher revenue growth in ’18 and beyond and we continue to expand our services and demand for outsourced services trends higher.

We are continuing to enhance our position as the premier single source provider for a broad portfolio of discovery services. We have built exceptional capabilities in the area of oncology, which is the largest and fastest growing area of drug research. We strengthened these capabilities in January, with the acquisition of KWS BioTest, a leading discovery oncology CRO based in the UK.

KWS specializes in immune-oncology, an area of significant scientific breakthroughs in which researchers are harnessing the human immune system to fight diseases such as cancer. We believe that adding KWS's capabilities to our portfolio enables us to increase the support we can provide to clients, as they increase their focus on oncology drugs, a belief that was reinforced by our clients’ immediate and positive reaction to the acquisition.

Our early discovery business recently delivered its 78th development candidate to a client. Early discovery scientific reputation and innovative sales strategies are creating new opportunities for us to work with clients at the earliest stages of drug research. Three clients recently renewed existing agreements or selected us to provide integrated programs. These opportunities combined with increasing demand from small and mid-sized biotech clients position the business for improved revenue growth in ’18.

Our assessment business continue to attract new business on the basis of our strong portfolio, scientific expertise and flexible and customized working relationships. Our capacity remained well utilized in ’17 and we opened a modest number of study rooms to accommodate growth. Pricing also continued to increase in ’17 at a rate of approximately 2%. As we noted last year, we will not provide future updates on safety assessment pricing. The safety assessment revenue increase in the fourth quarter reflected continued client demand and price increases, partially offset by steady mix. Proposal volume and bookings were very strong in the fourth quarter, increasing both year-over-year and sequentially, which positions us for continued safety assessment growth in ’18. In our view, there will continue to be significant demand for outsourced services from both biotech and pharma companies and we intend to maintain and expand our position as their partner of choice.

As biotech companies proliferate and pharma companies increasingly rely on outsourced services to improve efficiency and access to expertise, they no longer maintain in-house. We need additional capacity to accommodate the demand. For that reason, the acquisition of MPI Research is particularly opportune. MPI will add ototoxicity and abuse liability capabilities, and expand our existing capabilities in general toxicology and special toxicology, including ophthalmology, juvenile toxicity, molecular biology, and surgery, as well as medical device testing.

In addition to its strong scientific capabilities, MPI provides a 1 million square foot single site with available capacity. Furthermore, biotech companies represent the largest portion of their diversified client base, which will expand our exposure to the most significant driver of demand for outsourced services. From a financial perspective, this acquisition delivers compelling benefits, which will generate value to shareholders and which we consider fundamental to any acquisition we do. MPI will be immediately accretive to non-GAAP EPS. It will meet or exceed our ROIC hurdle rate within three to four years and will enhance our opportunities for organic growth. Subject to regulatory approvals and customary closing conditions, we expect to close the acquisition early in the second quarter of ’18.

On that basis, we expect the acquisition will contribute 170 million to 190 million to our consolidated revenue and add approximately $0.25 to non-GAAP earnings per share in ’18. We expect greater benefits in ’19 with MPI’s revenue contribution representing approximately 260 million to 280 million of consolidated revenue and non-GAAP earnings per share accretion of approximately $0.60. A 13 million to 16 million cost synergies will be somewhat less than we achieved with WIL, primarily because MPI’s operating margin is already slightly above 20%.

As we did with the WIL acquisition, we have already initiated a comprehensive integration planning process. Andy Vic, Corporate Vice President, Safety Assessment Ohio who joined us with the WIL acquisition and has been instrumental in its successful integration, will manage the operational integration on a full time basis. He will work side by side with both Charles River and MPI personnel to ensure that the integration process proceeds smoothly.

The DSA operating margin was 22% in the fourth quarter, 180 basis points below the fourth quarter of ’16. The decline was a result of the safety assessment study mix and higher staffing cost to support current and future growth, particularly in the early discovery business. The operating factors accounted for 100 basis points of the decline, with an additional 80 basis points resulting from the negative impact from foreign exchange. For the year, the DSA operating margin was 22.3%, 40 basis points below the prior year. The slight decline is due primarily to lower than expected revenue and higher staffing costs.

Given our long-term outlook for high single digit revenue growth for the DSA segment, we expect that higher revenue will result in improved operating margins. In addition, our continuing efficiency initiatives are expected to drive margin gains. Therefore, we are increasing our long term DSA operating margin target to the mid-20% range, above the more than 20% we've previously targeted.

The manufacturing support segment concluded an exceptional year with a strong fourth quarter. Revenue for the quarter was 104.8 million, a growth rate of 11.8% on an organic basis, driven by the microbial solutions and biologics businesses. Organic revenue growth for the year was 12.9% due to robust market trends in both businesses, our continuing efforts to enhance our product and service offerings and our best-in-class client service. Because we believe that the market trends will continue and we will continue executing our successful go to market strategy, we are reaffirming our long term goal of organic revenue growth in the low double digits for the manufacturing segment.

Combining robust sales of the PTS family of products, core reagents and microbial identification services, the microbial solutions business continued to generate low double digit organic revenue growth in the fourth quarter and for the year. Our installed base of rapid detection systems continued to expand and as a result, we are driving higher cartridge sales. Furthermore, as the only provider who can offer a comprehensive solution for rapid quality control testing above sterile and non-sterile biopharmaceutical and consumer products, we are leveraging our client relationships to market our microbial solutions.

For clients who have historically used our testing products in only one area, we are introducing them to our comprehensive microbial testing solution and selling across a broader portion of the microbial portfolio. We are in a unique position to support our clients' rapid testing needs and win new business, which is why we believe that the microbial solutions business will be able to continue to deliver low double digit organic revenue growth for the foreseeable future.

The biologics business reported another exceptional performance in the fourth quarter as well as for the year, delivering robust double digit organic revenue growth for both periods. We believe that the number of biologic and biosimilars drugs in development has led to a rapid increase in demand for our services over the last several years, especially in view of the fact that many of the biologic drugs are being developed by biotech companies that do not have the internal infrastructure to support the manufacturer.

Because of the exceptional growth in 2017 and our belief in continued growth for the foreseeable future, we have plans to expand into a new facility near our existing Pennsylvania site, which is larger and provides significantly more capacity for growth in 2018 and beyond. The additional capacity as well as continued expansion of our biologics services portfolio will further enhance our ability to support our clients’ biologic and biosimilar development efforts from discovery through clinical phases and commercial manufacturing.

Strong revenue growth and our focus on continuous improvement have resulted in greater operating efficiency in manufacturing support segment. The fourth quarter operating margin was 37.6%, a 340 basis point improvement from the fourth quarter of ’16. And for the year, the operating margin was 35.5%, a 170 basis point improvement over the previous year. Based on our outlook for low double digit revenue growth and continued efficiency initiatives, we are increasing our long-term operating margin target for the manufacturing segment to the mid-30% range from more than 30% previously. The increased margin expectation for this segment is one of the reasons that we believe we will achieve our consolidated margin of more than 20%.

As I said earlier, we are operating in a robust business environment with excellent growth potential. We are realizing that that potential because of four factors that distinguish us from the competition; our unique early stage portfolio, which we continue to expand both through internal development and strategic acquisition; our scientific expertise, which is unmatched in the CRO industry and enables our clients to rely on us, instead of maintaining in-house capability; our focus on continuous improvement, which enables us to operate more efficiently and effectively even as we grow through acquisition; and our best-in-class client service through which we ensure that our products and services are precisely tailored to each client's individual needs.

Our long term targets are based on our ability to execute our business strategy in this robust environment. We believe that we can generate consolidated revenue growth in the high single digits and an operating margin above 20%, including acquisitions. The revenue target is based on low single digit growth for RMS, high single digit growth for DSA and low double digit growth for manufacturing. The operating margin target is based on maintaining a high 20% margin for RMS and mid-20% target for DSA and a mid-30% target for manufacturing.

The investments we have made have enhanced our position as a trusted scientific partner for pharmaceutical and biotechnology companies, academic institutions and government and non-government organizations worldwide. We have demonstrated the value we can provide to clients and believe that our long term targets demonstrate our goal to deliver value to shareholders.

In conclusion, I'd like to thank our employees for their exceptional work and commitment and our shareholders for their support. Now, I'd like David Smith to give you additional details on our financial performance and ’18 guidance.

David Smith

Thank you, Jim and good morning. Before I begin, may I remind you that I’ll be speaking primarily to non-GAAP results from continuing operations, which exclude amortization and other acquisition related charges, costs related primarily to our global efficiency initiatives, the divestiture of the CDMO business in 2017 and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, the CDMO divestiture, the impact of foreign currency translation and the 53rd week in 2016. I will focus my discussion on our 2018 financial guidance. This guidance does not include the impact of MPI Research since the acquisition has yet to close.

In 2018, we believe that we are well positioned to deliver earnings per share between $5.42 and $5.57. The 2018’s earnings growth rate appears compressed by the year-over-year comparison of venture capital investment gains and the excess tax benefit associated with stock compensation, which creates a combined headwind of $0.24 per share. Adjusting for these headwinds, the year-over-year earnings per share growth is expected to be approximately 8% to 11%, primarily driven by higher revenue and modest operating margin improvement.

This year, we have forecast venture capital investment gains of $0.14 per share compared to a gain of $0.29 per share in 2017. Because of these strong historical returns, we increased our estimate for VC gains to $0.14 a share from a level of $0.04 in prior years. We believe the higher estimate for 2018 more closely aligned with historical performance because in each of the last five years, we have outperformed our initial $0.04 outlook with gains ranging from $0.05 in 2015 to $0.29 last year.

Given the inherent difficulty of forecasting VC gains or potential losses, we will evaluate eliminating these gains from our guidance beginning in 2019. For the excess tax benefit, we are estimating a $0.14 per share contribution in ’18 compared to $0.23 per share in ’17. The $0.23 last year was nearly double our original estimate due to the stock price appreciation and subsequent option exercise activity. The VC gains and excess tax benefit created significant $0.24 headwind in 2018 and it is important to note that our earnings per share growth rate would be 8% to 11% on adjusting for this headwind.

2018, we expect organic revenue growth on a consolidated basis to be in a range of 5.7% to 6.7%. From a segment perspective, the underlying trends in each of our business segments are expected to be similar to those of last year. We expect RMS growth to improve from second half 2017 levels to a low single digit growth rate in 2018, but continue to be pressured by lower sales volume in mature markets. RMS is expected to benefit from continued growth in the services business and new production capacity to support robust demand for research models in China.

We expect the DSA segment will deliver organic growth in the same range as 2017. We expect safety assessment growth in the same range as the segment and improved growth in our discovery business. The manufacturing segment is expected to generate organic growth about 10%. The microbial solutions and biologics businesses are expected to continue to grow at low double digit rates in 2018, biologics growth is expected to moderate in the first half of the year until we bring additional capacity online to support the increasing demand.

In our guidance, we are estimating the impact of foreign exchange based on bank forecast of forward rates. The 1% benefit that we expect from foreign exchange in 2018 is less favorable than if we were using current rates, but given the volatility and weakening of the US dollar since the beginning of this year, we did not feel it was prudent to include a higher benefit from foreign exchange in our guidance because rates could fluctuate over the balance of the year. On slide 39, we have provided information on our 2017 revenue by currency and the foreign exchange rates that we are using in 2018.

In addition to revenue growth, we expect modest operating margin improvement will drive earnings growth this year. The manufacturing segment will be the primary contributor as it benefits from manufacturing efficiencies and volume leverages in our microbial solutions business. We will continue to add staff this year to support growth across many of our businesses. Although we will continue to invest in additional staff to keep pace with demand, we believe that we are well positioned to gradually improve the consolidated operating margin to reach our long-term goal of greater than 20%.

Efficiency savings are also expected to continue to be a driver of operating margin improvement. In 2017, we achieved incremental efficiency savings of over $65 million. In 2018, we expect to generate efficiency savings of $60 million to $65 million before the benefit of the expected MPI synergies. The benefits from our efficiency initiatives help offset annual cost increases.

Unallocated corporate expenses in ’18 are expected to be slightly below 7% of revenue compared to 7.1% of revenue in ’17. Our 2018 outlook demonstrates that the investments in our people, processes and systems over the last several years are beginning to generate the intended goal of greater efficiency and productivity.

Before factoring in the incremental interest expense associated with the intended MPI transaction, net interest expense is expected to be in the range of $29 million to $31 million in 2018 compared to $29 million recorded in 2017. This outlook assumes that higher interest rates in 2018 will be largely offset by debt repayment. We are in the process of evaluating our financing options for the MPI acquisition, including the planned expansion of our credit facility. We are also actively evaluating fixed rate debt financing alternatives.

Our MPI accretion outlook includes an estimate for incremental interest expense related to this refinancing activity. This year’s non-GAAP tax rate is expected to be in the range of 25% to 26%, excluding MPI, which compares favorably to the 27.2% rate last year, primarily because of the benefit of operational efficiency initiatives. This will be partially offset by the $0.09 headwind associated with the excess tax benefit from stock compensation. The excess tax benefit reduced the tax rate by 310 basis points in 2017, but only reduces the 2018 rate by 180 basis points.

As we disclosed last month, we expect that US tax reform will be effectively neutral to both GAAP and non-GAAP earnings per share in 2018. However, we expect additional opportunities to be identified as we continue to refine our understanding of this legislation. In the fourth quarter of last year, the one-time charges related to the transition or toll tax, the revaluation of deferred tax liabilities and the withdrawal of the indefinite reinvestment decision reduced GAAP earnings by $78.5 million or $1.66 per share, but this amount was excluded from non-GAAP results. US tax reform did not have an impact on our non-GAAP result in 2017.

Free cash flow in 2017 was $242 million, a decrease of approximately $20 million from $262 million in 2016. Free cash flow was below our November outlook of $265 million to $275 million because of two primary factors, the timing of capital projects and working capital, specifically DSOs. Capital expenditures of $82 million in ’17 were $27 million higher than in ’16 and $7 million above our prior outlook. In addition, DSOs ended the year at 60 days, which was higher than our expectation. However, we believe this was largely a timing issue and expect DSO will improve in 2018.

This year, we expect free cash flow to be in a range of $250 million to $260 million, excluding MPI. The toll tax is expected to reduce free cash flow by approximately $15 million. Excluding the toll tax, free cash flow would increase by 9.5% to 13.5% over the 2017 level. Capital expenditures are expected to be approximately $100 million in 2018 before factoring in MPI’s capital requirements. The increase from 2017 will be driven primarily by additional projects to support growth, including continuing to add capacity in RMS China, biologics and the safety assessment business and modest investments in our own information systems.

A summary of our 2018 financial guidance, excluding MPI can be found on slide 46. Including the [indiscernible] and assuming an early second quarter close, our guidance for 2018 would be reported revenue growth in a range of 16% to 18% and earnings per share in a range of $5.67 to $5.82. From a financial perspective, we believe this acquisition delivers compelling financial benefits, which will generate value for shareholders. It provides an attractive contribution to revenue growth and is immediately accretive to non-GAAP earnings. It will exceed or meet our return on invested capital hurdle rate within three to four years and it presents an opportunity to enhance MPI’s operating margin with synergies of $13 million to $16 million by the end of 2019.

Following the acquisition, our capital priorities will be focused on debt repayment. Our pro forma leverage ratio at closing is expected to be slightly below 3.5 times, which is similar to our post WIL debt level. At this time, we do not intend to repurchase any shares this year an absent any M&A activity, our goal will be to drive the leverage ratio below 3 times.

Moving ahead to our first quarter outlook, we expect year-over-year revenue growth will be in the high single digits on a reported basis. Organic growth is expected to be in the mid-single digit range, due primarily to slower growth in the manufacturing segment. The biologics growth rate will be lower due to capacity constraints until we open our new Pennsylvania facility later this year. The RMS segment also faces a difficult prior year comparison due to the strong first quarter in 2017.

First quarter earnings per share are expected to be moderately below last year's $1.29, due in part to meaningful headwinds from venture capital investment gains and the excess tax benefit from stock compensation, which totaled $0.05 and $0.15 respectively in the first quarter of ’17. This year, we are forecasting $0.03 to $0.04 of these gains and expect the excess tax benefit will be approximately $0.10, creating a year-over-year headwind of $0.06 to $0.07 in the first quarter. When adjusting for these items, earnings per share growth is expected to be in the low single digits in the first quarter, primarily as a result of the year-over-year operating margin decline in the RMS segment.

To conclude, we are pleased with our financial performance in 2017. We believe that 2018 is positioned to be an excellent year, particularly with the expected completion of the MPI acquisition early in the second quarter and the associated benefits this acquisition provides to our clients in Charles. We are also optimistic about our outlook for earnings per share growth this year. When adjusting for the previously mentioned headwinds, growth is 8% to 11%, excluding MPI and 13.5% to 16.5%, including MPI. In addition to the benefits from the MPI acquisition, we are confident in our ability to achieve our long-term targets of high single digit organic revenue growth and an operating margin greater than 20%, because of our ongoing focus on disciplined investing to support the growth of our businesses, our efforts to drive global efficiency, the speed and responsiveness with which we operate and our goal to enhance the relationships with our clients.

Thank you.

Susan Hardy

That concludes our comments. The operator will take your questions now.

Question-And-Answer Session


[Operator Instructions] And we’ll go to Eric Coldwell with Baird.

Eric Coldwell

Questions on MPI. First off, I'm sorry if I missed any of this. Facility utilization, can you talk about where they are with their capacity utilization and also any additional commentary on overlap you might have with their client base or perhaps lack of overlap in terms of ability to crosssell or upsell into MPI’s specific accounts?

Jim Foster

So Eric, we have a similar client base. So, I’d say that highly complementary, their client base is largely small and medium size biotech clients and obviously that's been the major driver of our growth. As we said in our remarks, it's a very large facility, 1 million square feet, conservatively larger than the ones that we have. Facility has some capacity available, which we think is extremely opportune, both in terms of its geographic footprint and the scale and diversity of what they do at that site. It will allow us to expand smoothly into new space as we need it, probably in lieu of building it out somewhere else. So we think this will be a highly strategic facility addition to our portfolio and one that expands our capabilities in a few new areas, but also expands some of the areas that we are currently participating in a more robust way.

Eric Coldwell

Jim, can you share with us whether they were using Charles River’s animal model business or in part or in whole or were they using other providers?

Jim Foster

I don't think we have a lot of details on that yet. So I'm going to modify my answer by saying that I suspect that they are meaningful client of ours. And we'll have to get back to you on the extent of that. Most of the large CROs are meaningful clients of us. So I suspect at least in part, Eric, this will add to our assertion that our largest client of the RMS business is indeed our DSA business as well. And additionally, regardless of what percentage of their research models came from us, we would hope to have an opportunity to supply more to them and there is just great operational elegance and symmetry in that, as we've seen in France in particular and as we've seen in other parts of our business across the world. The supply of the animal models is obviously critically important from both a timing point of view and the diversity of models point of view.


And our next question will go to the line of Dave Windley from Jefferies.

Dave Windley

Jim, I know you -- sounds like you want to kind of sunset comments around pricing in DSA. I wanted to explore margin improvement trajectory there. I guess I'm thinking about 2017 as being a year where the WIL acquisition achieved kind of its 20% target. I think you said on more of a sustainable basis. So margin contribution from WIL would have been positive, but you highlighted that year-over-year margins were under pressure a little bit for, I think you said, labor costs and some other things. So just wanted to understand the moving parts in margin in BSA and how you believe that can continue to improve over time?

Jim Foster

So, it's multi-factorial as we've discussed previously. It's the mix of work principally between specialty and general tox, which we tend to have more specialty than most. There will be some price. There will be continued enhanced capacity utilization. I think some of the aggressive hiring that we have been undertaking should moderate because we're close to being caught up. We continue to drive efficiency, as David said in his remarks, we saved 65 million -- we drove 65 million of efficiency savings in ’17. It's going to be 60 to 65 again. A lot of that is in safety and some of that is in discovery. And while WIL’s margins got to where we wanted them to be north of 20%, they're still lower than legacy Charles River.

So we have margin accretion there. We’re happy that we’re starting with MPI, with margins higher than WIL’s where when we acquired them, but also lower than legacy Charles River. So we feel that there is improvement there. And then, the last piece with regard to the DSA segment is margin improvement in discovery as a whole. So when you roll that up, maybe, you want to talk about just safety or just DSA, we should have improving margins and we believe commensurate with the long term goals that we just upgraded.

Dave Windley

And Jim, the promotions that you announced today, congratulations to those two. I think natural progressions of two folks that have been with the organization for a long time. Could you talk about how your focus may evolve and perhaps what your horizon is?

Jim Foster

So. We're very pleased, as you say, to have two significant contributors to the company, take on large responsibilities, particularly as the company gets larger, I mean, just the advent of MPI makes us a larger more complex business. So we have to continue to parcel out the work to additional shoulders and of course there's a whole range of people who will be working with that for the two of them, who have new and different and somewhat enhanced jobs.

As I said in my remarks, I look forward to continuing to work closely with them. We flagged the five year horizon for two reasons. One is that we look at the world that's in five year chunks, commensurate with our strategic plan and we really do think we can double the size of the business. I did not say explicitly in my remarks, but I will say explicitly in response to this question that I have just signed a five year contract with the company. So I intend to stay here and participate significantly, principally in my current role and more and more strategic focus I would say going forward.


We'll go to the line of Jack Meehan with Barclays. Please go ahead.

Jack Meehan

Hi, thanks. I wanted to ask about the synergies. So the $13 million to $16 million you outlined, is that all in the cost side, and what are you targeting? And then what would the underlying MPI EBITDA growth be in 2018?

David Smith

So, the $13 million to $16 million is all to do with cost synergies, same as we did with WIL. We didn't feel at this stage we should be factoring in any revenue synergies. So our valuation model is based on the $13 million to $16 million in cost and slight subtlety with WIL. WIL, we said $17 million to $20 million over two years. With MPI, we're talking $13 million to $16 million by the end of '19, so slight difference in timeline there. As we've mentioned, we have called out that the LOI, the operating margin for MPI is slightly above 20%. And we do intend to be able to walk that up as we've been walking up on WIL to the sort of legacy safety assessment margins that we have.

Jack Meehan

Great. And then could you just give us a sense for the recent growth of MPI over the last few years. I know you gave us 2017 and 2019 range. But maybe just a little bit of a view on what the trailing has been, and then what gets us to the step up in 2019?

Jim Foster

MPI has been performing extremely well, at least at the same growth rates we have enjoyed. The diversity of their capabilities I think has made them an important partner for lots of companies, particularly small and large high-growth biotech clients. And we're confident because of their scientific footprint, and capability, and client interface, that they will be able to continue at similar growth rates going forward. We didn't justify this deal from a valuation model point of view on sales synergies. There are some cost synergies, so we called out. We of course have had some sales synergies with WIL. We'll really work hard to have clients have a positive experience with Charles River generally, and specifically with our MPI capabilities. So we would be disappointed if we didn't have some sales synergies, but premature to call those out specifically.


And we'll go to the line of John Kreger with William Blair. Please go ahead.

John Kreger

Hi, thanks very much. Hey, Jim, can you just talk a little bit more about the strategic review that you did? What's the sort of underlying macro view of your broader markets baked into that sort of updated five-year targets? And the organic revenue growth goals that you gave across the three segments, what do you think the underlying market growth is there versus some share gains that you think you can deliver over the next five years? Thanks.

Jim Foster

Sure. So, obviously we're in multiple markets that are somewhat disparate. I suspect your question is about DSA or maybe just SA. If it isn't let me know. So just to talk about that, our sense is that biotech is the principal driver, even though pharma is aggressively dismantling space and outsourcing a lot of work, we have some really interesting conversations going on right now with some big pharma companies to do more for them, both individually and collectively. But biotech has an enormous infusion of capital from the capital markets and directly from VC investments in big pharma.

And so we think between being extremely well financed, having multiple breakthrough technologies, and the fact that, while not an enormous number, more drugs were approved last year than the year before. That the market dynamics are as good as we have ever seen them. And the breadth of our portfolio and our client interface, as evidenced by the fact that we work on 74% of the drugs that were approved last year, and we think that's a number that could increase, sort of puts us -- the epicenter might be an overstatement, but we're sort of in the middle of demand and needs that both pharma and biotech have to do work for them, and instead of them doing it internally, and in some cases to work -- to provide the interface between clients.

We would say that the safety assessment market as a whole is growing at about 5%. So we have been growing in excess of the market. Obviously the denominator is getting bigger. We're pleased with the growth rate, we're pleased to be growing ahead of the market, we're pleased with an opportunity to continue to improve the margins. We're pleased with the scale and diversity of our clients, and our ability to play a greater role. And one of the raison d'êtres of the organizational change with Davide and Birgit and others who are working with them besides their own talent, is the opportunity and necessity for us to have greater pull-through from Discovery into Safety, and some working backwards with clients -- current Safety clients who want to do Discovery work with us.

And so managing those businesses as one without any demarcation from an operating point of view or a sales and marketing point of view, we believe we'll be very meaningful in terms of supporting the growth rates going forward.


And we'll go to the line of Tim Evans with Wells Fargo Securities. Please go ahead.

Tim Evans

Hey, Jim. The big picture question here for me is basically trying to square up your 2018 revenue guidance with your long-term targets. Long-term, you're looking for high single digits organic. 2018, your consolidated organic growth rate looks to be about 6%, which I would think is maybe just more like mid-single digits. And it looks like maybe you're expecting the DSA piece to be the thing that accelerates more in the longer term. And I guess the thing that I'm struggling with is it's hard to imagine living in a better environment than we're living in right now for DSA given where biotech hunting has been. What gives you -- number one, am I reading that correctly, is it really the DSA segment that bridges the gap between 2018 and the long-term target? And then secondly, what is it that creates that acceleration?

Jim Foster

So, there's multiple pieces that should contributed to the high single-digit growth rate. RMS delivering at low double digits, which it was very low -- sorry, low single digits. It was very low single-digit in '17. So we think as China grows and the services businesses grow, we should be able to do that. That's still a large business for it, albeit one that isn't growing as quickly as it was historically, although the China growth rates are significant. And as we indicated in our prepared remarks, it was capacity constrained in the back-half of the year, so going forward, as we build more sites that should be significant. Discovery has also been a drag. And so we feel confident going forward that we should get an uplift there. We feel we should get continual uplift in safety as we provide more solutions to clients.

And I guess most importantly, as we really get to execute and derive the benefit of having both Discovery and Safety and using them more in a comprehensive way, I think we've been a bit too siloed in the way we've thought about it, and sold it, and the way the clients have heard about it. Plus, Discovery still is feeling like a new business to a lot of clients. And so I think managing and selling in a more holistic basis should be extremely powerful. And then we would expect manufacturing to continue to deliver low double-digit organic growth rates. The Avian business has been a bit of a drag lately. We should be freed up from that as well.

The whole notion for us, I think our principal and distinct competitive advantage is the breadth and diversity of the portfolio. And I think every year we're telling that story better, and every year we're having more of a pull-through, we're having more clients buy more from us than less, because it's a better value proposition, and it's better for them to manage that. I think as we continue to invest aggressively in our current businesses and add to that portfolio through M&A, and perhaps add some additional capabilities through M&A that that should also fuel the organic growth going forward.


And we'll move to the line of Ricky Goldwasser with Morgan Stanley. Please go ahead.

Ricky Goldwasser

Yes, good morning. So, Jim, when you talk about doubling the revenue over the next five-year period, obviously that includes the combination of organic growth and acquisition. So obviously you've just announced a very large acquisition, so -- but I guess never too early to talk about what's next. So, personally, what do you expect the leverage to be following the close of the acquisition? And when you think about kind of like your strategic plan in the next five-year, what do you think you need to kind of continue and augment growth?

Jim Foster

So, I'm going to let David talk about leverage in a second. But I just want to remind you that we like to hang out below three turns. So that's kind of our goal as we come off of acquisitions. Obviously this is the big one. We have a lot of confidence in our ability to integrate this one well because we did a really good job with WIL, probably our best integration effort and result. They're obviously not the same company, but WIL had multiple sites, and this is a single site, so we feel that we're going to be able to focus on this WIL. And of course we have a guy who was a senior WIL executive who is running a WIL site now and a Charles River site who's going to be full time on the integration. So we have a really strong feeling that the integration will go well.

Having said that, we need to close it, and we hope that will be early in the second quarter, and then we need to get to work on the integration. And I think we need to do that before we move on to the next deal. Having said that, we have been active across multiple fronts, obviously in Safety, as you've just heard, definitely in Discovery, and in a few areas that we're not in, in Discovery. We actually have opportunities across most of our businesses, including RMS, including Biologics, including Microbial, and for sure in China. And what the cadence of those deals will be, it would be inappropriate for me to say because we can't really control it. But we have a very clear line of sight on what we would like to buy, what we can afford, and how we will feather those into the portfolio over the next, let's say, three to five years.

And the whole purpose is not just scale. The purpose is to have a much better value proposition or much greater service offering for our clients, all of whom want that. So whether you're a second-year startup biotech company or the biggest pharma company, you just want to stop doing this work yourselves. And you don't want to find 15 partners to do it; you'd prefer to have one or two. So, we feel very good about our ability to afford these deal -- find them, afford them, and integrate them, and increasingly to promote them. And I'll let David talk to you about leverage.

David Smith

Yes, so about two years ago, when we bought WIL, we went to 3.5 turns. As we speak, at the end of 2017, we're actually at 2.2 turns. So it's interesting how it looks like it can be a bit of a repeat performance because the MPI acquisition will also take us back up to 3.5 turns, similar to where we were with WIL. And again, it is our intent to bring that leverage down below 3 turns.

Ricky Goldwasser

Okay. And then one follow-up, as we talk about the opportunity to grow with biotech customers, can you just remind us of anything about your revenue mix, where is biotech now versus pharma versus academics and government? And how do you think this mix will look like five years out?

Jim Foster

So, a little bit tough to slice that cleanly since so much of what's biotech sort of -- grey areas as it becomes pharma, and there's so much money from pharma going directly into biotech. So we don't spend as much time on the demarcation as we would like to. I think the last time we did at pharma was kind of 25% to 30%. And the biotech clients were probably 50% or 60%. I think academic was around 20%, so yeah, biotech -- biotech and other, which includes chemical companies and agricultural companies and CROs, et cetera. So, there's no question that we have a disproportionately fast growth in biotech clients which should continue. And so that demarcation between biotech and pharma to the extent that it's an important one will become even greater.

And so we're spending a lot of our time thinking about how we do a better job communicating with and servicing clients who are in a race to get to market, and some of whom have a single compound, but we have organized ourselves to do that well.


And we'll go to Sandy Draper with SunTrust. Please go ahead.

Sandy Draper

Thanks very much. A lot of my questions have been asked and answered, so I appreciate the commentary, and also add congratulations on the transaction and the promotions. Maybe, Jim, just a little bit on RMS and the outlook there. Obviously there are a couple of positives in terms of around China, some biotech, the negative especially big pharma in the US. When you think about the long-term, how much risk is there? How do you think about the risk of that business actually not doing low single-digits, but actually being in a moderate -- three to five years from now ending up being flat to slightly down. What would happen to drive that type of scenario? Thanks.

Jim Foster

Yes, we obviously don't think that's where we're headed, or we would have said that. We are confident that we will continue to get price. We always have, and always do. We get appropriate levels of price. And this is not a business -- this is not an activity that clients engage in. So animals are procured externally, and they're critical to getting your work done, so we will get price. We have a unique, and exquisite, and large geographic footprint even through we're trimming it with the Maryland facility, and have trimmed it previously. And if we had to, we hopefully don't, but if we had to we would trim it further if the demand wasn't there.

We think we have growth opportunities principally in US, and secondarily in Europe to grow our share in the academic market, where I would say while we have significant dollar revenue we could have more. We have a huge pharma footprint and a huge biotech footprint, and a growing academic one. So I think that's in the offering. We will continue to have more specialty models that are higher value, and potentially higher margins. And the service businesses are performing well. They're not high-growth businesses, but they're low to approaching kind of mid-single-digit growers. They look good geographically. We have strong capabilities. So those should continue. Those aren't services that clients want to engage in internally.

And of course, China is the big growth area, and it is a very nascent market, with competitors that I think we are doing well against, and continue to do well against. And it's really all about building out capacity -- sufficient capacity in advance of the demand. And it has the potential to be large enough to really stabilize the growth rate for this business. And we believe ensure that low single-digit growth that we were talking about.


And we'll go to Derik de Bruin with Bank of America. Please go ahead.

Unidentified Analyst

Hi, this is [indiscernible] for Derik. Our question is on the tax rate. You provided tax rate guidance of 25% to 26% for 2018, and excluding MPI. What can you tell us at this time about your anticipated tax rate in the out years, including MPI beyond 2019?

David Smith

So, while I'm not really going to comment beyond 2019, but I am certainly happy to comment about MPI; MPI being based entirely in the US actually fits quite nicely into the 2018 guidance that we've given on 25% to 26%. So we actually don't think that the acquisition of MPI is going to distort the effective tax rate for '18.

Unidentified Analyst

Thank you. And then regarding your recent acquisitions in the DSA segment, Brains On-Line and KWS Test; at what run rate of an M&A revenue contribution do you expect out of these two businesses?

Jim Foster

If you’re talking about exact dollar amounts, we haven't given those. I would describe those businesses as quite small, but highly strategic from a scientific point of view. So, Brains On-Line enhances our CNS franchise, KWS enhances our oncology franchise, but they're not moving the needle very much in terms of top-line contribution.


And we'll go to Tycho Peterson with JPMorgan. Please go ahead.

Tejas Savant

Hey guys, this is Tejas on for Tycho. Jim, just one big picture question here on MPI for you, you know, preserving the high-touch responsive feel of the service offering is probably very important to their customer's skew towards the mid-cap segment, how exactly post-integration do you expect to continue to preserve that within sort of the broader Charles River structure, particularly as you seek to drive some of those cost efficiencies that you talked about earlier on the call?

Jim Foster

We had a similar opportunity; let's put it that way, with WIL. We had a lot more small clients who had great expectations on personalized service, because we try to give personalized service to all of our clients. And so, I think we've done a very thoughtful professional job in making those clients feel good, keeping them close to us, and to the extent that they wanted to continue to work at a WIL site with the same study director; nothing really has changed.

So we're going to be very cognizant and sensitive about the same need and desire from MPI clients and change as little as possible, except to probably have more consistency across SOPs and allow them the opportunity to work with other Charles River sites to get to no other Charles River sites and get to work with them if they want to. And if they are delighted with where they're at, which I suspect most of them will be, then we will preserve those opportunities for them.

So we are buying this company because we think it's a very good company, with happy clients, they had a nice growth rate, they're profitable, they do very good science. And our responsibility is to embrace that and to extent that we can enhance the science and some of the capabilities, we will do that. To the extent that we can't enhance them, then we won't, we will herald what they're capable of doing.

In terms of cost synergies, we've been working really hard for approaching a decade on driving efficiency. It's something that we've done progressively better from year-to-year. It's hard work. And we believe we can provide them with the same capabilities while enhancing their work. So that's an opportunity that we are excited about.

Tejas Savant

Got it. And then one quick follow-up sure, given that a bunch of these clients are presumably at the pre-revenue stage, is there any shift in terms of contracting structures perhaps that you need to put in place, or do you anticipate that your bad debt levels might pick up a little bit, or since it's all sort of upfront payments before the work begins, you don't really anticipate that as a real risk?

Jim Foster

We wouldn't anticipate that, does it as client basis significantly different, and the WIL client base, having said that, this deal has just been signed. We really haven't spent a lot of time studying this nor have we had access to lot of those materials. So we will be working our way through that during this interim integration period pre-close. We also have a team that look at client's worthiness in terms of ability to pay, letting down -- we do ask them pay ahead and actually we have had historically a very low bad debt write-off in our industry and in Charles River as well.


And we will go to line of Erin Wright with Credit Suisse. Please go ahead.

Erin Wright

Hey, thanks. Can you comment on what you're seeing from the VC partnership? I know you shared some metrics in the past on that front. But can you give us an update on the traction there and how that's helping you to get new customers? Thanks.

Jim Foster

Sure. Very, very pleased with our VC relationship. Some of those as you know we are LPs and some we are not. The relationships are slightly different when we are LPs just in terms of the level of activity, amongst and between us, and more strategy with regard to therapeutic area of focus and some M&A. But increasingly the VCs like to work with us and get the benefit of our science and capability and value as if they were one large client, which is kind of the way we work with them to ensure that they have access to us in great response times. None of these little companies will ever, that's probably a fair statement, ever internalize the capabilities that we provide to them now. So, we are providing a significantly important capability for them. And of course you get so many new companies mentored by these VCs every year that access to this sort of work is really critical, we get the drugs filed, and to get them in market.

I think the last time we reported on this, collective revenue from our VCs was approaching a 100 million. That should continue obviously to increase both as we have new services and we reach out to more VCs, and they meant more companies. So very, very important part directionally of our client base; most of the new companies are literally virtual, small number of people buying everything externally. All they own is IP, and they’re very much dependent upon us. And so, our job is to communicate effectively with them often, and to help them with regulatory filings and interpretation of data. And they really make us better. They really demand explicit science and fast turnaround time. So, we are enjoying our relationships with them a lot.

Erin Wright

And just a quick clarification in terms of MPI growth rate, you said a similar growth profile to yours, is that on an organic basis?

Jim Foster

Yes, MPI haven't done any acquisitions.


Thank you. And we have time for one last question, and it will come from George Hill with RBC. Please go ahead.

George Hill

Hey, good morning guys, and thanks for squeezing me in. I guess, Jim, most of my questions has being answered, I guess the last thing I would come back to is that if we think about like the emerging and development stage biopharma companies, the venture-funded companies, it sounds like given the visibility you guys have assumed that the current growth rate continues, I just want to think about how do we think about the risk to the guidance, should we see some type of funding slowdown should something in that end-market reverse or stagnate?

Jim Foster

Yes, it's bit of an imponderable. I mean there is always that risk we suppose. Those companies are exquisitely well-financed currently, there's multiple years of cash in the bank. There is more cash available, we believe if the companies hit the milestones and continue to get drugs on the market that are novel, and are treating or curing diseases, and pharma is very is becoming very much dependent, reliant on these companies as the discovery engines and of course end up buying some of the companies are minimally having a deal with them. So, it's not -- look, at anything's possible. It's not foreseeable at all. This is a fundamentally different market that we're in, and the scourge of 2008, in terms of numbers of biotech companies, in terms of prominence and success in terms of their getting drugs to market and relationships with pharmas and pharma company's independence on us.

So, look, we watch those numbers carefully. We watch the sort of demand curve and the ebbs and flows from these clients to see if we have any even early indications of funding slowdowns. And we haven't heard anything from any clients that they have a concern, and I think it's unlikely for the long-term foreseeable future.

Susan Hardy

Thank you for joining us on the conference call this morning. We look forward to seeing you at the Leerink conference tomorrow or Raymond James or Barclays conferences in March. This concludes the conference call.


Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.