James C. Foster
Chairman, President and Chief Executive Officer at Charles River Laboratories International
Good morning. Our financial results reflect the sustained trends that continue to support our businesses and resulted in 9.5% organic revenue growth in the second quarter. These trends were offset by headwinds from our CDMO business and foreign exchange, which were the factors that led to the revised second quarter outlook in early June, and coupled with interest rates, have intensified since then, leading to today's reduction in our revenue growth and earnings per share guidance for the full year. We believe that our guidance for the year appropriately reflects the current macroeconomic environment with regard to foreign exchange, interest rates and cost inflation, which have changed dramatically since the beginning of the year.
I would also like to note that our revised guidance does not reflect any meaningful slowdown in biotech client activity as biotechs continue to be the principal driver of revenue growth, and demand remains healthy. In fact, we are pleased that our DSA and RMS segments remain on track to achieve their initial revenue outlooks for the year of mid-teens and high single-digit organic growth, respectively. Our largest business, Safety Assessment, continues to benefit from a growing backlog that is well above the prior year level and solid booking activity. As usual, we continue to monitor key performance indicators and are having regular conversations with our biopharma clients whose spending patterns for the Safety Assessment programs to date remain largely unaffected by any change in biotech funding.
Our Discovery Services business, which only represents about 15% of DSA segment revenue, is experiencing longer decision-making processes by some clients to initiate new projects. Before I provide more details on these trends, let me provide highlights of our second quarter performance and updated outlook for the year. We reported revenue of $973.1 million in the second quarter of 2022, a 6.4% increase over last year. Organic revenue growth of 9.5% was driven by strong performances from the DSA and RMS segments, partially offset by a lower growth rate in the Manufacturing segment due to the CDMO performance.
The lower-than-expected CDMO revenue reduced the organic revenue growth rate by slightly more than 100 basis points in the second quarter. The operating margin was 21.8%, an increase of 100 basis points year-over-year. The improvement was driven by the DSA segment as well as lower unallocated corporate costs, reflecting actions we have taken to responsibly manage our expenses. Earnings per share were $2.77 in the second quarter, an increase of 6.1% from the second quarter of last year.
Low double-digit operating income growth was largely offset by higher interest expense and tax rate compared to the prior year. Second quarter earnings per share were in line with our revised outlook despite incremental pressure from the lower revenue from our CDMO business, the strengthening dollar and rising interest rates over the past two months. These factors are the primary reason for the reduction of our revenue growth and earnings per share guidance for the full year. We now expect revenue growth in the range of 9% to 11% on a reported basis and 10% to 12% on an organic basis. For the year, foreign exchange is now expected to reduce the reported growth rate by 350 basis points or 200 basis points more than we forecast in May.
And the lower-than-expected CDMO revenue is expected to be 150 to 175 basis point drag on the organic growth rate in 2022. Non-GAAP earnings per share guidance is expected to be in the range of $10.70 to $10.95, which represents a reduction of $0.80 at the midpoint. Foreign exchange and interest expense have generated a combined headwind of approximately $0.40 since early June. Flavia will provide more details on these nonoperating items shortly. Tempered expectations for our CDMO business in the near term are the primary driver of the remainder of the earnings shortfall and are a result of several factors.
First, following last year's completion of a large COVID vaccine production contract at our Cognate U.K. site, we are retooling the production suites and retraining staff to return the capacity to its original purpose: producing plasmids, which is taking longer than expected. We have also invested time and resources in preparing for regulatory audits and upgrading other sites to CGMP production quality. These actions will generate new business opportunities in the future, but they have had a near-term impact on the business. Furthermore, like the Early Discovery acquisition in 2014, the business development process for cell and gene therapy CDMO services is highly technical and scientifically complex, requiring longer lead times for clients to place new projects and partner with us across our expanded offering.
We are making good progress bringing our cell and gene therapy services together and working towards these businesses becoming fully integrated within themselves and with our broader portfolio. With regard to the integration of last year's Cognate and Vigene acquisitions, we have implemented a refined vision and a strategy for our combined CDMO business, which includes developing centers of excellence for plasmids at our Cognate U.K. operations; for viral vectors at Vigene in Rockville, Maryland; and for gene-modified cell therapy production in Memphis, Tennessee. We believe this new structure will provide us with a distinct competitive advantage because it will enable us to optimize our internal processes and offer clients greater flexibility, efficiency and enhanced speed for their development and go-to-market efforts.
We have also strengthened the management teams and are rebuilding the CDMO sales team, creating more contact points with clients as we endeavor to further strengthen the pipeline of new projects. We are also adding new capabilities through modest facility expansions. As we announced in June, we are expanding our Alderley Park U.K. operation as part of our center of excellence for plasmid, and we are upscaling other sites for regulatory compliance and commercial readiness. We are very pleased to report that our Memphis site was recently audited and approved by European regulatory authorities, or the EMA, to commercially manufacture cell therapies.
This is a significant accomplishment that prepares us to undertake future commercial projects. We are encouraged that these developments will help improve the performance of the CDMO business next year. Like Early Discovery, we believe our CDMO business is an integral part of our essential portfolio because it enables clients to access a comprehensive solution for cell and gene therapy research, development and production from one scientific partner. Clients are continuing to require high-quality scientifically-differentiated solutions in the cell and gene therapy sector, and this will only intensify as more therapies are commercialized. As a result, we believe the CDMO growth opportunity remains robust, that we have the right scientific capabilities in place to be a uniquely ideal partner for our clients.
I will now provide details on the second quarter segment performance, beginning with the DSA segment. Revenue for the DSA segment was $591.9 million in the second quarter, a 12.9% year-over-year increase on an organic basis. We are very pleased that the DSA organic growth rate improved by 340 basis points from the first quarter level and reached the low double-digit range, as previously expected. This performance reinforces our expectation that there will be meaningful DSA growth acceleration throughout the year. Based on demand and backlog trends, including working through higher pricing already booked, we continue to expect that the growth rate will approach 20% in the second half, tracking to our initial plan. Higher demand and meaningful price increases drove the sequential growth acceleration in the Safety Assessment business in the second quarter.
The second quarter backlog increased on a sequential basis and also continued to be significantly above prior year levels. The backlog, coupled with solid booking activity in the second quarter, firmly supports our second half outlook. Clients are emphasizing speed, study lead times and the availability of space today more so than price when determining which CRO to partner with for their preclinical programs. This year, several clients have chosen to secure space with us in a take-or-pay arrangement to reserve this study space in advance. We anticipate that additional clients will agree to similar terms to secure space. Our speed and flexibility when working with clients, our superior client service and our broad scientific expertise continue to resonate with clients and differentiate us from the competition.
With our capacity well utilized both in terms of people and infrastructure, we continue to implement new operational initiatives and evaluate others to enhance labor utilization and infrastructure efficiency as well as study scheduling. We also believe that we are better positioned to accommodate the higher demand that we are forecasting in the second half of the year because of the significant number of staff that we hired over the past year. And because of the strong backlog, we believe that we have excellent visibility in the Safety Assessment business and are confident that the anticipated DSA growth acceleration will continue in 2022. For next year, we already have a large portion of our Safety Assessment revenue booked in the backlog.
The revenue growth rate for the Discovery Services business improved meaningfully from the first quarter level as expected. As I noted, we have experienced some lengthening in the time clients take to commit to and begin new projects. And given the shorter-term nature of the backlog and project cycles for this business, it's expected to slow the Discovery growth rate for the remainder of the year. Our technology partnership strategy has been a very successful means of broadening our portfolio since it has enabled us to continue to add cutting-edge scientific capabilities across many of our businesses with limited risk. We continue to believe our clients' willingness to outsource more of their Discovery programs will be predicated on our ability to provide them with innovative capabilities to meet their critical research needs.
The DSA operating margin increased by 180 basis points to 25.3% in the second quarter due to increased pricing and leverage from the investments in staff to support higher study volume. For the year, we continue to expect DSA operating margin will improve as the growth rate accelerates and we continue to leverage staffing investments. RMS revenue was $186.4 million, an increase of 8.5% on an organic basis over the second quarter of 2021 and in line with our high single-digit outlook for the year. Organic revenue growth was driven by strong demand and meaningful price increases in the Research Models business in North America as well as for Research Model Services, particularly Insourcing Solutions and GEMS. The RMS growth rate did not improve from the first quarter level as previously anticipated due primarily to the Research Models business in China.
Revenue for our China business increased, but due to COVID-related restrictions in the Beijing and Shanghai regions, the growth rate was limited and reduced the RMS growth rate by just under 200 basis points in the second quarter. These restrictions in China have now been eased, and the overall revenue impact will be modest, so RMS is still on track to achieve its outlook for the year. Research Model Services also had another excellent quarter led by the Insourcing Solutions and GEMS businesses. Insourcing Solutions growth was driven by the CRADL initiative, or Charles River Accelerator and Development Labs, which provides turnkey research capacity to small and large biopharmaceutical clients in key bio hubs. Clients are increasingly adopting a flexible model to access laboratory space without having to invest in internal infrastructure.
The acquisition of Explora BioLabs in April came at an opportune time, enabling us to provide clients with additional capacity and scientific capabilities, principally on the West Coast. It also added a new growth engine for the RMS segment by allowing us to accommodate more of our biopharmaceutical clients' needs, particularly biotech clients who have limited or no internal infrastructure in which to conduct research. Demand for CRADL and Explora continues to be robust, and Explora had an excellent first quarter as part of Charles River. We are continuing to expand the footprint of CRADL and Explora to support growth and have added new facilities in California and London in the second quarter, with the goal of operating at least 25 vivarium facilities with over 300,000 square feet of turnkey rental capacity by the end of 2022.
CRADL and Explora also provides us with a new and unique pathway to connect with clients at earlier stages as these clients will be able to easily access additional services across our comprehensive discovery and nonclinical development portfolio. We are very pleased with the performance of this business and delighted to welcome Explora to Charles River. In the second quarter, the RMS operating margin declined by 250 basis points to 24.9% driven primarily by the COVID-related revenue impact in China. Explora has healthy margins for service business and had an excellent second quarter, but it is expected to be a small margin headwind to the RMS segment for the remainder of the year as it continues to open new sites.
Revenue from the Manufacturing segment was $194.8 million, an increase of 1% on an organic basis, reflecting lower revenue in the CDMO business as discussed as well as a challenging prior year comparison for the Biologics Testing and Microbial Solutions businesses, with a 26.6% segment organic growth in the second quarter of last year. Both of these businesses are expected to generate revenue growth that approach their targeted levels for the year. The growth prospects for these legacy manufacturing quality control businesses remain robust, and they will continue to be principally driven by demand for biologic drugs, including cell and gene therapies and other complex biologics.
Cell and gene therapies will continue to be the primary growth driver for our Manufacturing segment, reflecting the rapid increase in the number of cell and gene therapy programs in development. Today, more than 3,000 cell and gene therapy programs are in the pipeline, a number which has grown at an average rate above 20% over the last three years. With approximately 70% of programs in the preclinical phase and less than 5% of programs in Phase III clinical trials or later, we expect these advanced drug modalities will continue to fuel robust Biologic Testing growth and generate new business opportunities for the CDMO business, particularly as additional therapies reach commercial approval.
We believe our consolidated Biologics Solutions offering will provide incremental opportunities for clients to streamline their biologics development workflows and conduct their analytical testing, process development and manufacturing activities with Charles River. The Manufacturing segment's operating margin declined by 460 basis points to 28.6% in the second quarter of 2022, almost entirely driven by the CDMO business. We have taken actions to manage costs and investments both in the CDMO business and in other areas in order to limit the impact of the revenue shortfall for the year. With regard to our company-wide capital priorities, we have built an excellent foundation for cell and gene therapy solutions since 2020 through M&A., and we will focus on integrating these enhanced scientific capabilities as well as all of our recent acquisitions.
While we will still evaluate strategic acquisitions, we intend to focus on debt repayment for the remainder of the year. We also continue to diligently monitor key performance indicators and modify plans for investments, including hiring and capacity expansions, should the growth prospects for business change. In this regard, we are strategically aligning our hiring and facility expansion plans for our CDMO business with the current and projected growth rate. Our goal is to balance the need to continue to make disciplined investments to support our growing businesses while responsibly controlling costs and enhancing value for our shareholders. We have reset our financial outlook for 2022 to account for the escalating headwinds that have emerged throughout the year.
We remain well positioned to deliver low double-digit organic revenue growth for the year and stable operating margins amidst today's challenging macroeconomic environment. Furthermore, we continue to believe that Charles River is a stronger company today than it has ever been and the partner of choice for our clients' nonclinical development needs. Clients are increasingly choosing to partner with us for our flexible and efficient outsourcing solutions, the scientific depth and breadth of our portfolio and our unwavering focus on seamlessly serving their diverse needs. With that, I'd like to thank our employees for their exceptional work and commitment and our clients and shareholders for their support.
Now Flavia will provide additional details on our second quarter financial performance and 2022 guidance.
