James C. Foster
Chairman, President and Chief Executive Officer at Charles River Laboratories International
Good morning. We had a strong start to the year with organic revenue growth of 15.4% and non-GAAP earnings per share of $2.78, both wildly exceeding the outlook that we provided in February.
The year began with a continuation of the strong demand and pricing environment in our DSA segment that we experienced through the end of last year. This was expected based on the strength of the backlog which supports more than a year of DSA revenue. Clients continue to choose to partner with Charles River for our industry-leading scientific expertise, for the breadth and depth of our portfolio, and for the flexible, efficient outsourcing solutions that we are able to provide to them. We are a large stable scientific partner focused on holistically supporting our clients' drug discovery, non-clinical development, and manufacturing efforts, which we believe is increasingly important in the current market environment.
The biopharmaceutical end market seems slightly less robust than last year, which we had anticipated and factored into our initial guidance in February. Clients appeared to be more thoughtful about their spending and have prioritized their programs at the beginning of the year. This is not surprising in light of the changing macroeconomic factors that are present today and the unprecedented level of biomedical research activity that occurred over the past several years. However, we still believe that our client base remains adequately funded with one sell-side analyst recently estimating that public biotechs still have about three years of cash on hand.
Although we continue to watch the market closely and are seeing a normalization of demand trends towards pre-pandemic levels, our clients are continuing to move thousands of their critical programs forward with us. So we believe these trends and current business development activity firmly support our financial guidance for the year. Before I provide more details on our first quarter financial results, I would like to provide a brief update on the non-human primate or NHP supply situation.
As you know, we suspended shipments of Cambodian NHPs into the U.S. in February. We took this action so that we could develop and implement new testing procedures that would reinforce our confidence that the NHPs we import from Cambodia are purpose bred. We have made advancements towards identifying a new testing platform and implementing the new testing procedures and are engaged with the relevant government agencies in furtherance of the needed resolution. We have also been working in parallel to accommodate our clients' NHP-related study starts by utilizing our global safety assessment site network. Our global scale is one of the key factors, which we believe differentiates us from the competition.
We believe that these efforts will mitigate some of the NHP supply impact on our client's programs that we expect during the second half of the year and afford us greater confidence in our 2023 financial guidance. Our wider guidance range continues to accommodate a number of scenarios related to the success of our mitigation efforts since our plans have not yet been fully implemented and NHP supply remains a fluid situation. As a reminder, biologic drugs cannot be approved for commercial use without NHPs and it is critical that we work diligently with industry and government agencies to resolve the NHP situation and restore this important supply chain so that lifesaving therapies can continue to move forward.
I will now provide highlights of our first quarter performance. We reported revenue of $1.03 billion in the first quarter of 2023, a 12.6% increase over last year. Organic revenue growth of 15.4% was driven by the robust DSA performance as well as solid RMS growth. The manufacturing growth rate was impacted by a challenging year-over-year comparison as well as lower-than-anticipated biologics testing volume to start the year. By client segment, global biopharmaceutical companies, small and mid-sized biotechs, and academic and government accounts, all made significant contributions to the growth rate. The operating margin was 21.2%, a decrease of 20 basis points year-over-year. The decline was driven by the Manufacturing and RMS segments.
Earnings per share were $2.78 in the first quarter, an increase of 1.1% from the first quarter of last year. Strong, low double-digit operating income growth was modestly -- was mostly offset by increased interest expense and a higher tax rate compared to the prior year as well as the impact of the Avian Vaccine divestiture.
Based on the strong first quarter performance and expectations for the remainder of the year, which remain largely consistent with our initial outlook, we are narrowing our organic revenue growth guidance to a range of 5% to 7.5%, and our non-GAAP earnings per share guidance to a range of $9.90 to $10.90 for 2023. We've increased the lower end of the ranges by 50 basis points and $0.20 per share, respectively. As I mentioned, our outlook continues to reflect the anticipated financial impact of the Cambodian NHP supply constraints, which will have a greater impact on the second half results.
I'd like to provide you with additional details on our first quarter segment performance beginning with the DSA segment's results. DSA revenue in the first quarter was $662.4 million, another significant increase of 23.6% on an organic basis. The Safety Assessment business continued to be the principal driver of DSA revenue growth with significant contributions from study volume and base pricing with NHP pass-throughs also adding to the growth rate. Although revenue for Discovery Services increased in the quarter, growth rate continued to modulate, which we believe is reflective of the current market environment coupled with the shorter-term nature of both discovery projects and the business's backlog.
The DSA backlog decreased modestly on a sequential basis to $3 billion at the end of the first quarter from $3.15 billion at year-end. As previously mentioned in February, this trend is reflective of the normalization of booking and proposal activity that we experienced at the end of last year and in the first quarter. Clients are not booking work as far out as they did over the past few years and we believe this is the result of their evaluation of pipeline priorities and scheduling with a nearer-term focus. That said, we believe these trends and the current market environment coupled with the strength of our current backlog, which still affords us 14 months of revenue coverage in our Safety Assessment business will drive the expected DSA revenue growth this year.
Our client base remained stable and resilient. Our biotech clients continued to send us new programs and generated healthy, double-digit revenue growth in the first quarter. It was also encouraging to see that biotech funding levels increased year-over-year by more than 20% in the first quarter to approximately $15 billion. We believe this higher funding demonstrates that venture capital remains a reliable source of funding to enable biotech clients to spend on their promising molecules and the public markets had a better quarter. Moreover, large biopharmaceutical companies continued to move programs forward with vigor with first quarter revenue growth outpacing biotechs and demonstrating the strength and balance of our client base.
Through the first four months of the year, 14 new drugs were approved by the FDA, which is on pace to exceed last year's total. Since we have worked on over 80% of the FDA-approved drugs over the last five years, we believe the pipeline of new drugs supports ample future growth opportunities for us. However, after three consecutive quarters with extraordinary revenue growth above the 20% level, the DSA growth rate is expected to moderate over the course of this year due to three primary factors. The normalization of the demand trends as just discussed. More challenging year-over-year comparisons as 2023 progresses, and the impact of NHP supply constraints mostly in the second half of the year. We expect less of an impact from NHP supply constraints in the second quarter than originally planned because of our ability to collaborate with our clients, optimize steady schedules, leverage our flexible global infrastructure, and also due to our extensive backlog coverage across multiple study types.
And as I said earlier, the strong first-quarter results and our progress with regard to additional mitigation efforts from NHP supply constraints over the course of this year have also improved our confidence in our full year financial guidance. We are moving forward with plans to reconfirm NHP study starts that are already scheduled for the second half of the year. Based on communications with our clients, we are confident that we remain the preferred partner for their preclinical development activities because of our global scale, scientific differentiation, exceptional quality, and the value that we bring to the research and development efforts. Even in this time of disruption in the NHP supply chain, we do not believe the competition can provide a better value proposition to clients than we can.
DSA operating margin was 29% for the first quarter, a 610 basis point increase from the first quarter of 2022. The increase continue to be driven by operating leverage associated with a meaningfully higher revenue in the Safety Assessment business as well as price increases. RMS revenue was $199.8 million, an increase of 6.8% on an organic basis over the first quarter of 2022. The RMS segment benefited from broad-based demand for small research models in all geographic regions, for Research Model Services, and for the Cell Solutions business.
The RMS growth rate was below the high-single-digit target for the year, due primarily to RMS China. While demand for small models remained strong, the timing of NHP shipments to clients in China impacted the first quarter growth rate. Since exports from China were shut down at the beginning of the pandemic, we had been selling a relatively small number of NHPs locally to clients since we were unable to utilize these models in our global Safety Assessment operations. We expect the RMS growth rate to meaningfully improve in the second quarter as the NHPs shift in China and we continue to expect RMS to deliver high-single-digit organic revenue growth in 2023.
Outside of China, revenue growth for small research models in North America and Europe remained strong, driven by healthy volume increases in North America and continued pricing gains globally. We believe demand for research models is an excellent indicator of the health and stability of early-stage research activity. The demand and pricing trends year demonstrate that clients are continuing to move their research programs forward which will drive solid RMS revenue growth.
From a services perspective, revenue growth was also broad-based with the Insourcing Solutions and GEMS businesses leading the way. Insourcing Solutions or IS growth to be primarily driven by our CRADL operations which offer flexible vivarium rental space at Charles River sites to both small and large biopharmaceutical clients. Having expanded significantly last year through both the acquisition of Explora BioLabs and by adding nine CRADL and Explora sites, we are now focused on ramping-up utilization of the new sites as well as continuing to moderately add new sites. This will generate a runway for continued robust revenue growth and margin enhancement opportunities for CRADL.
Our traditional IS model, which provides staffing and vivarium management at our client sites still resonates with clients. It has historically had a larger academic and government client base. However, commercial clients are also seeing the benefits of driving cost-savings and greater operational efficiency by allowing us to manage their internal vivariums. We were pleased to add a new meaningful commercial biopharmaceutical contract in the first quarter.
We also continue to expand our GEMS business in North America to accommodate increasing demand from both biopharmaceutical and academic clients as they partner with us to maintain their proprietary genetically modified model colonies. These models are playing an increasingly critical role as drug research becomes more complex with the shift to oncology, rare disease, and cell and gene therapies.
In the first quarter, the RMS operating margin decreased by 650 basis points to 23.4%. Most of the decline was driven by the temporary headwind related to timing of NHP shipments within China. Revenue mix was also a factor, due in part to the Explora acquisition in April 2022 and the ramp-up of utilization in our CRADL and Explora operations which we expanded last year. We expect the RMS operating margin to meaningfully improve in the second quarter as these headwinds subside.
Revenue for the Manufacturing Solutions segment was $167.3 million, a decrease of 1.8% on an organic basis compared to the first quarter of last year. The decrease was driven by the CDMO and Biologics Testing businesses, partially offset by a solid performance for the Microbial Solutions business. As we mentioned in February, we expected the segment's year-over-year revenue comparison would be challenging due to commercial readiness milestones in the CDMO business and Covid vaccine testing revenue in the Biologics Testing business, both of which occurred in the first quarter of last year. We believe these factors will be largely anniversaried beginning in the second quarter.
In addition to these factors, the Biologics Testing business experienced a slower start to the year. Testing volume tends to be seasonally softer in the first quarter with lower sample volume reflecting reduced client manufacturing activity over the holidays. This year, we also experienced lower-than-anticipated volumes particularly for viral clearance and cell banking services because clients seem to be prioritizing their programs and more budget focused at the beginning of the year.
Microbial Solutions delivered a solid first quarter performance, led by the continued strength of the Accugenix microbial identification platform, due to both instrument placements and demand for our testing services. Our advantage as the only provider who can offer a comprehensive solution for rapid manufacturing quality-control testing continues to resonate with our clients.
The cell and gene therapy CDMO business continued to make progress towards its targeted growth rate goal. As expected, the growth rate was affected by the comparison to the commercial readiness milestones paid in the first quarter of last year but the initiative that we have implemented to improve the performance of our CDMO business continue to gain traction and earn positive feedback from clients. We believe that the success of these actions and an increasing sales funnel will result in a marked improvement in the CDMO growth rate in the second quarter and we expect to the CDMO business will drive a rebound in the Manufacturing segment organic growth rate over the course of the year.
Manufacturing segment's first quarter operating margin was 13.7%, a significant decline from 33.1% in the first quarter of last year. The decline was primarily related to lower operating margins in each of the segment's business units, particularly CDMO and Biologics Testing. This was driven largely by the prior year headwinds and the slower start in the Biologics Testing business that I discussed as well as an asset impairment in the segment.
As anticipated, end market dynamics have moderated somewhat in 2023 but it is important to reiterate that our client base remains stable and resilient, particularly biotechs. These companies have now become the innovation engine for the entire biopharmaceutical industry with a number of biopharma companies with active pipeline doubling over the past ten years. We believe the early-stage research that we conducted instrumental to our biotech clients' achievement of the important milestones that enable them to secure additional funding, and therefore, they will continue to partner with Charles River for our flexible and efficient platform that accelerates their therapeutic innovation.
These factors coupled with the strength and scale of our DSA backlog and the substantial visibility that it provides, will enable us to better withstand any near-term fluctuation in the market. We believe the power of our unique portfolio differentiates us, today more than ever, from other companies that provide R&D support services to the biopharmaceutical industry. We are continuing to further distinguish ourselves scientifically by adding capabilities in biologics and cell and gene therapies, by investing in technology partnerships to bring cutting-edge tools to our clients, and by building greater digital connectivity with our clients, including through the launch of Apollo in March. Apollo will revolutionize client access to real-time study data, planning and cost estimates, and other self-service tools.
To conclude, I'd like to thank our employees for their exceptional work and commitment and our clients and shareholders for their continued support. Now, Flavia will provide additional details on our first quarter financial performance and 2023 guidance.
