Ladies and gentlemen, thank you for standing by. Welcome to the Charles River Laboratories Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.I’d now turn the conference call over to your host Corporate Vice President of Investor Relations, Todd Spencer. Please go ahead.

Thank you, and good morning, and welcome to Charles River Laboratories’ fourth quarter 2019 earnings and 2020 guidance conference call and webcast. This morning, Jim Foster, Chairman, President and Chief Executive Officer; and David Smith, Executive Vice President and Chief Financial Officer, will comment on our results for the fourth quarter and the full-year 2019 and our guidance for 2020. Following the presentation, they will respond to questions.There is a slide presentation associated with today’s remarks, which will be posted on the Investor Relations section of our website at ir.criver.com. A replay of this call will be available beginning at noon today and can be accessed by calling 866-207-1041. The international access number is 402-970-0847. The access code in either case is 8093484. The replay will be available through February 25. You may also access an archived version of the webcast on our Investor Relations website.I’d like to remind you of our Safe Harbor.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 under the Private Securities Litigation Reform Act of 1995. Actual results may vary materially from those indicated by any forward-looking statements.During this call, we will primarily discuss results from continuing operations and non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core operating results and future prospects. 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 on the Investor Relations section of our website through the Financial Information link.I will now turn the call over to Jim Foster.

Good morning. I’m very pleased to speak with you today about the conclusion of another excellent year for Charles River, our expectations for 2020 and the accomplishments we’ve made and expect to make as we execute our strategy to achieve our financial targets. We believe the strong finish to 2019 demonstrates what we’ve worked hard to achieve, the breadth of our leading early stage portfolio, which more fully supports the discovery, nonclinical development and safe manufacturer of new therapies for the treatment of disease; the deep relationships we forged with our clients, both large and small, by leveraging our flexible and efficient outsourcing model; investments we’ve made in our scientific capabilities and in the necessary staff and capacity to ensure that we could meet the needs of our clients; and our greater operating efficiency, which has enabled us to improve speed and responsiveness to clients while generating margin expansion.The success of these efforts was evident not only in our outstanding financial performance but also in the fact that we worked on 85% of the drugs approved by the FDA in 2019. This is an accomplishment few CROs can claim and we believe is a testament to the value that our clients place on our contribution to their research efforts.Let me now give you the highlights of our fourth quarter and full year performance. We reported revenue of $691.1 million in the fourth quarter of 2019, an increase of 14.9% on a reported basis. Broad-based growth in all three segments resulted in organic revenue growth of 7.4%, with the largest contribution coming from the DSA segment.For 2019, revenue was $2.62 billion, with a reported growth rate of 15.7% and an organic growth rate of 8.5%. The organic growth rate was consistent with the 8.7% reported in 2018and both years were firmly…

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 and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions and foreign currency translation.My discussion this morning will focus primarily on our 2020 financial guidance. We believe that we will deliver strong revenue growth this year and achieve meaningful operating margin expansion, which gives us confidence that we are well positioned to deliver non-GAAP earnings per share between $7.45 and $7.60. Supported by a healthy funding environment, we expect client demand will continue to be robust. Consequently, we expect organic revenue growth this year in the range of 7.75% to 8.75% and reported revenue growth of 13% to 14.5%, both of which are consistent with our two-year revenue growth target.The trends in each of our business segments in 2020 are expected to be similar to last year. The RMS segment is expected to achieve low-to-mid single-digit organic revenue growth with HemaCare acquisition adding at least $50 million or approximately 10% to the reported RMS growth rate. In addition to the HemaCare contribution, the RMS segment is expected to benefit from robust demand for research models in China, broad-based growth in the services business from GEMS, RADS and insourcing solution and price.We expect the DSA segment to deliver high single-digit organic revenue growth based on continued strong contributions from both the Safety Assessment and Discovery Services businesses. The Manufacturing segment is expected to grow low double-digit organic revenue growth again in 2020, with both the Microbial Solutions and Biologics businesses driving the increase. Foreign exchange is expected to contribute 100 to…

That concludes our comments. Operator, we will now take questions. Thanks.

Thank you. [Operator Instructions] Our first question will come from the line of Eric Coldwell with Baird. Please go ahead.

Congrats on the nice outlook. Question on microbials. You made a couple of comments about the timing of orders. I was curious if you’re really focused more on prior year demand comparisons or maybe just some sluggishness in 4Q development for whatever reason?And then secondarily, the availability of new systems was brought up a couple of times. I’m hoping you can dig into exactly what you’re speaking about, about the availability and the issues you’ve had there, if any, and when those might be resolved. Thanks so much.

Yes. So, I guess, to start, we continue to be pleased with the growth rate of that business and it grew at double digits for 2019. We’ll grow it double digits for 2020 and it’s essentially growing at double digits since we’ve owned it. And we’re constantly talking about the nonlinearity of our businesses pretty much in every call. So, I want to remind you again on this one. So nothing really unusual. It’s the way the orders fell. We’re constantly upgrading our systems in terms of new generations of both hardware and software, staying multiple generations ahead of the competition. And sometimes, you don’t have that right in terms of having – put something new in the marketplace and people will wait for that. So there’ll be harmony between new products and software, new hardware and software in 2020 and going forward. It was a bit out of sync, and it’s tough to sort of predict what systems people will buy when, if we had a stronger third quarter, for instance.So, nothing particularly unusual. It’s just the continued cadence of the business and continued innovation of the business and continue to really enhance the systems we have out in the marketplace based upon feedback and input from our clients, who are using them.

We will next go to the line of Tycho Peterson with JPMorgan. Go ahead, please. [Operator Instructions] One moment, please. And Mr. Peterson, your line should be open now.

Okay, thanks. Jim, I’ll start with HemaCare. You talked at our conference about the opportunity to drive more clients to start cell therapy discovery program. So, can you talk a little bit about cross-selling? I think you said that you can tap at about 75% of the cell therapy market. Is there an opportunity to expand that? Is there an opportunity to do additional M&A around HemaCare? And then overall, for cell and gene therapy or expanded capacity, can you just talk a little bit about the incremental capacity adds and how we think about that in the context of the margin targets?

Sure. We are really thrilled with this deal. I was just visiting the location. It’s a really great and enthused management team. The technology is terrific and the demand is meeting our expectations. The terrific sales organization, which is being enhanced by the Charles River sales organization, who’s out with a bunch of clients that they wouldn’t otherwise have previously accessed. The continuity and ability to hand off cell therapy drugs from product and service within the Charles River portfolio is really, really powerful and not something anybody else can do. And I think we reported that we have about between $140 million and $160 million worth of revenue in this space. It’s obviously going to increase dramatically. HemaCare is going to grow at least at least 30%. It’ll be terrific for the research models segment but also really expand the initiation of so much of this work, whether it’s an R&D process improvement or manufacturing with clients, who are in this space who can count on us. And like all clients, they’re always going to rush to market, and the ability not to have to find new providers of particular products or services in this space will be quite powerful.We’re enhancing our portfolio of assays in our biologics business. We have capabilities in our microbial business to test these products. We have special immunocompromised animal models in the research model business. And of course, we’re going to do these combination studies between Discovery and Safety which will be powerful as well. So, it’s a wonderful fit in our portfolio. It enhances it nicely. Like a lot of other things that we’ve been doing in the Discovery space, in particular, gets us to start really early with the clients. There are other acquisitions in the cell and also in the gene therapy space, both on the product and the service side that we are pursuing at various stages. We’re thinking about geographic expansion of this business. The capacity they have right now is a California-based operation. The capacity they have right now in California is relatively new and will help them grow in that locale for a while, but we want to take advantage of other locations. So, we’re seriously pursuing that. I think I’ll stay away from the specifics of exactly where that is.

We will move now to the line of Robert Jones with Goldman Sachs.

Question. I guess, just on DSA and probably more specifically, on Safety Assessment. Jim, you talked about Citoxlab being largely integrated at this point. Obviously, you guys have successfully integrated a few other large deals in the last few years in that space. I was wondering if maybe you could comment just on where you’re running today from a capacity standpoint. And then as it relates to that, on the margin side, you guys feel very confident about the mid-20s operating margin target but it seems like your – I know there’s some seasonality. It seems like you’re getting pretty close to that already. So just was hoping maybe you could just talk about capacity and then the path and how comfortable you are with getting to that 25% or mid-20s and maybe beyond.

Sure. As a general proposition, capacity is well utilized pretty much across the board. And having said that, we have, and we’ll continue to add, strategic amounts of space at multiple facilities pretty much simultaneously because we can’t drive all of our clients to a particular site. So we want them to be able to have the benefit of proximity and the specialization services at certain of our sites. Having said that, we still have a meaningful amount of space at our MPI site, which is a very large building. We had the space when we bought that site. We’re continuing to fill it up, but we have that additional lever to be able to open runs that are already built out, which we’re very happy to have.We also have some small amount of space, available space that came with the CiTox deal. So between those two locations, and remember, CiTox has big locations in France and Canada and smaller ones in other parts of Europe. So the geographic dispersion is very powerful. The margins for WIL, which were in the mid-teens, have been improving. The margins for Citoxlab will continue to improve in that business. We will continue to get price and volume, and we hope the mix between specialty and general tox is favorable, so that should continue to drive margins, certainly in the mid-20s and longer. Maybe David wants to say some more about margins.

Well, we’ve been talking about Safety Assessment or DSA being the most important driver for getting Charles River to the 20% target that we’ve committed to getting to for the end of next year, along with unallocated corporate costs. But DSA, yes, that’s a key driver for getting there and we’ve been signaling that for a while. It’s pleasing to see the second half results for DSA coming in the way that we had signaled. I know you’re talking about – you mentioned on the call that we’re kind of at the mid-20s, we have for quarter four. But for the full year, we’re still at 22%. So, there’s still some opportunities available to us to continue to grow that DSA segment up to the mid-20s for a full year basis, and that’s how we’ll see the Charles River performance get to the 20%.

Our next question will come from the line of Jack Meehan from Barclays. Go ahead, please.

Yes, thank you. Good morning and congrats on the quarter. I wanted to stick with the DSA topic. I was hoping you could just comment a little bit more on the Discovery side. In the deck, I think you called it out as having an exceptional quarter. I was wondering just if you look at the third quarter growth relative to the fourth quarter step-up on both organic and margins, how much did Discovery contribute to that versus kind of the base Safety Assessment progress?

If you’ll bear with us, we’re going to not peel that onion back too much. We want – we look at the DSA segment as a continuum and we want you to do that as well. So, our guide is about high single-digit top line growth, and operating margin getting to the mid-20s is the composite. I would say that Discovery is the aggregation of several acquisitions, most small, one sort of medium size. We bought all of those businesses with the goal and assumption that they could grow it at least low double digits. And we bought them with the assumption that they would have at least a 20% operating margin. So, I think all I would say is they’re continuing to move in that direction. And both the margins have been improving and the top line growth has been improving. We’ve been particularly pleased for the last couple of years with our Early Discovery business, which is a larger piece and sort of one of the things that really crystallized and solidified the Discovery strategy for us starting very, very early with the clients.So, we’re seeing some nice, nice growth rate there. I think we’ve also called out an oncology franchise throughout the year. Obviously, given the significant amount of investment by our clients in cancer, we should and are the beneficiaries of that. So, we’re very pleased with Discovery, pleased that 20% of those clients are also doing Safety with us, that will only be enhanced and continue to be improved. And we’re seeing some nice pull-through from one service offering to another. We’re also seeing Integrated Discovery, Complex Integrated Discovery deals across multiple sites that are getting some traction.

We’ll go now to the line of David Windley with Jefferies. Go ahead, please.

Hi, thanks for taking my question. Good morning, congratulations. I wanted to also focus on Discovery, but more around the longer-term build-out of that business. Jim, we’ve certainly watched the company be very acquisitive in Safety Assessment. As you said, you’ve built Discovery by a lot of mostly small acquisitions. You’ve laid out a path of kind of a commitment to acquire another $1 billion of revenue. And I think I or maybe many of us think that Discovery is maybe a logical place for that to happen. Is that right? Do you think there are – is the path another or a continuing series of relatively small acquisitions? It’s my sense that that’s probably what’s out there. And then how does that influence or how does your desire to get to the mid20s margin on a full year basis influence what you’re willing to buy between now and the end of 2021?

Yes. So, I would say that Discovery is an area of focus for M&A. It’s not – certainly not the only one. We have opportunities in RMS and we have opportunities across other parts of the portfolio as well, including Biologics and Microbial. So it’s a robust marketplace for us to look at deals, many of which are private equity owned. So, they’re sort of always for sale, just depending on the timing and the price. So, there are some straight-up Discovery opportunities that we’re looking at, we are interested in adding to our therapeutic area of capabilities, and we’re interested in other services in Discovery. What you should pay attention to are the technology deals that we have been and will continue to announce. So just to reiterate, the strategy there, we need to be, if not cutting-edge, close to it. And it’s very hard to assess the strength of all of these new technologies and to place bets.So, to enhance the probability that the bets that we place are successful, we’re making small equity investments or providing some debt financing to a host of companies, primarily in the Discovery space. We have large molecule discovery. We have an AI deal. We have a – we have a bioinformatics deal and several others and several more in conversation. And so typically, the structure of the deal will be for us to be a sales and marketing partner for these companies, which will allow us to interface with the clients and get direct feedback on how responsive they are and whether the science is really as good as the companies say they are. In certain instances, we will prenegotiate buyouts at a predetermined price. So with a certain point in time, we can buy the companies if we want.So as…

Great. thank you.

And for our next question, we’ll go to John Kreger from William Blair. Please go ahead.

Hi, thanks very much. Can we go back to your remarks about China? It’s encouraging that it doesn’t sound like it’s going to be that big of an impact. Curious, you said it’s close to 10% of your RMS business. What about the rest of the portfolio? And then, I guess, a quick follow-on to that. Do you expect any weakness to sort of bleed into the second quarter? Do you think it’s just kind of an isolated first quarter impact? Thanks.

We’re closely monitoring the impact and relative to movement of animals and people in and out of China. So, we feel quite confident that there will only be a small impact in the first quarter. Since it’s kind of an evolving situation day to day, I think it’s kind of dangerous for us to predict the impact on the balance of the year. Having said that, the sort of issues that we think could impact us, we think that we backstopped them pretty well so far and we think that we will be able to backstop them in a way that it doesn’t impact or adversely impact our forecast. I would say that – I don’t know, we haven’t said this in a while, but we always have a meaningful contingency in our operating plan that can cover a whole host of things. Most of the things we intend to cover are things that have happened in the business from time to time. And while we don’t expect them, we know that they’re always out there. And then when you think of things like big pharma mergers that could have an adverse impact on the business and just things beyond our control.So, this certainly falls into the category of things beyond our control. We’ll manage our activities in China as best as possible. I think we’re a very important part of the drug development and discovery paradigm in China. We’re very interested in making sure that our colleagues and clients are healthy. And we hope to be able to work with some of our clients to – as they begin the search for vaccines. So we feel that it’s a manageable situation for us with what we know right now. And I think your first question was what other parts of the business does it impact. We have a very successful but rather small microbial detection business in China that we’ve had for years. That’s in our forecast thinking about having only a very small impact in the first quarter that we think is quite manageable from a guidance point of view.

Thanks much.

For our next question, we’ll go to Patrick Donnelly with Citi. Go ahead, please.

Great, thanks. Jim, maybe just at a high level, you guys obviously have a pretty comprehensive view of the biotech funding environment. Can you just update us on what you’re seeing there? Obviously, the guidance seems to suggest a pretty high level of confidence, but I just wanted to get your view of the overall funding environment as we head into 2020 here.

Sure. It was the third best year in the history of biotech, and in and of itself, just a lot of money went into – directly into the biotech companies. So I think that’s a commentary on the strength of the businesses, the success rates, the number of IPOs, the number of companies that are being sold and just the new modalities to treat diseases, which are working. So these are places that invest, these are companies in which investors want to place bets, because the companies are providing a really nice returns. So, we think they have at least three or four years of cash in the bank, more money coming in from the capital markets, more money coming in directly into the VC funds, which seem to have accelerated the historical five year – five to seven-year fundraises seem to be two to three years.So, they have a whole bunch of companies to either create or to finance right off the bat. So – and you also have money, for sure, coming directly from big pharma directly into biotech because they become the discovery engine. So, we don’t hear our biotech clients talk about any concern about funding either presently or in the future. They seem to be busy at work and have pretty full pipelines and we would expect that certainly to continue strongly through 2020. And we look at the year and look at the world in five-year increments because we do a five-year strategic plan, then we would expect that funding would remain strong throughout that time frame.

Appreciate it.

We’ll move now to the line of Dan Brennan with UBS. go ahead, please.

Great, thank you. Thanks for the question. I just wanted to go back to the HemaCare deal. So, you just closed this not too long ago. I just wanted a little flavor, Jim, from you in terms of what’s been some of the earlier – early customer feedback that you’re receiving. And then more broadly, as you look at this opportunity, I think you’ve talked about filling in some adjacencies. And how should we think about the opportunity around HemaCare to build out your exposure in this market? Thanks.

So, customer feedback to us acquiring the company has been extremely positive because it gives them, I don’t know, it gives greater – gives HemaCare greater context. It gives HemaCare a greater sales ability, technical ability, ability to expand geographically and have a more professional back office, et cetera. And when I say context, it’s part of a large portfolio where we already do a significant amount of work in cell and gene therapy in the cell therapy space. I happen to – the day that I was there, they’re largest client happened to be there. And I don’t think he was just saying this, because we had just acquired the company. But this wasn’t a brand-new company. It’s been around for about 15 years. And this was the founder, and he said to me that he would not have been able to grow his company at all without HemaCare.His reliance on the quality of these cellular products was everything and he couldn’t rely on anybody else. And he was very happy that we were involved, and then he was hoping that we would maintain, if not enhance, the quality of the company. So, we feel really good about the asset that we bought. We feel really good about its ability to enhance our portfolio. As I said earlier, we do have several other acquisition opportunities squarely in the cell therapy product arena and also service arena. And also, we’re looking at gene therapy as well. We want to be able to support clients. There are so many INDs that have been filed by so many companies in this space, who all need outside resources to develop their drugs, because most of them are biotech companies that don’t have internal capabilities.So, our ability to do all of this work is really a necessity for these companies. So we take our responsibility seriously. We’re going to continue to add to and enhance our own infrastructure while, hopefully, acquiring additional companies in the space so we can provide the core tools for them to do cell and gene therapy, both discovery and scale-up and, ultimately, manufacturing the products to go into the clinic.

We have a question in queue from the line of – one moment, please, while we – having some difficulty. Okay. We have a question here from the line of Donald Hooker with KeyBanc. Your line is open.

Great. Good morning. I wanted to sort of hear a little bit more context around your progress in the IS-based in-sourcing solutions space within the RMS segment. You commented that there would be a large contract in China rolling off, offset by some new wins in the U.S. with the government. Just maybe, given you had a huge deal last year, is there any way to kind of size this, contextualize this for us in terms of ebbs and flows there? And would love to hear your general commentary around – do you see like any kind of turning point with clients with regards to the service?

Yes. Thanks for that question. It’s a successful service offering that we don’t get to talk about that much on these calls, which is growing quite nicely around the world. It’s not just a U.S. phenomenon. We do it everywhere that we do business. It’s this taking off – taking the management to these complex laboratory and animal facilities off of the client’s hands, the clients that already have them, and the client could be, obviously, the government an academic institution, biotech or pharma. We never literally sized this business, but it’s a meaningful business, it’s growing nicely. It has some great opportunities. It has good legs.So, while the NIAID contract was particularly large, there are other government contracts of significant size, and we signed several during 2019. Also, this CRADL initiative, so we have this sort of incubator space in Cambridge, Mass, where clients go and we house their animals for them and we either can do the work for them or with them or they can just simply come in and use their space. Obviously, you’ve got this huge concentration of biotech and pharma companies in Cambridge, and the space is really well utilized. The growth rates are terrific and the margins are terrific as well. We’ve opened another one of these facilities just in South San Francisco. We should have the same uptick and we’re considering, on a longer-term basis, opening additional of these CRADL facilities in other strong geographies where there’s a big concentration of biotech companies. I do think, as I’ve said, historically, I don’t want you to overread this, but there’s no reason why the big pharma companies that have these big facilities and big staffs to do this work in some of the big biotech companies don’t outsource the work to us in the same way that they’ve outsourced much of Safety and, increasingly, Discovery.We can run these facilities more efficiently, reduce the cost and I think, enhance the science. So, we have felt for a long time that this business could pop for us. It hasn’t, so which is – I don’t want you to overread it. But while it hasn’t popped, it’s growing very nicely and the constituent puts and pieces coming together in a meaningful way. So, this will continue to be an important business for us, particularly as large clients have to look at their cost structures in more aggressive ways and get comfortable outsourcing it.

And if I heard your question right, just a clarification. I think you described it as a large China contract that was running off, partially offset by the U.S. contract. It’s actually the other way around. The contract that we have won in the U.S. is larger, and therefore, it’s been partially offset by the Chinese contract that is being completed.

We’ll move on to the line of Elizabeth Anderson. Just one moment while we open your lines. And Mr. Anderson with Evercore ISI, your line is open.

Hi, guys. Congrats on a nice quarter. I had a specific question about the Biologics capacity buildout. You mentioned, obviously, that you’re sort of finished with the duplicate costs, but how do you see the capacity filling up over the course of maybe 2020?

Yes. So, Biologics had a really nice, nice growth rate in 2019, notwithstanding the fact that I would say we were slightly capacity-constrained. So, demand is fabulous. There’s just a whole cadre new biologics being developed, pretty competitive business for us, but all of the competitors are doing well, because there’s so much work. We have a broader geographic portfolio than the competition. So, we added small amounts of space at several of our sites that weren’t in the U.S. And we added this very, very large facility in Pennsylvania, which – that’s where we had the duplicate costs and which have now run off and we’re largely using the space. That building in Pennsylvania is going to give us sort of three, maybe five – three to five years of incremental growth capacity there. I hope it’s three and not five. I do think the uptake will be – well, could be significant. We added a lot of – we added some capacity to a German operation of ours, which is quite large and really, really good science. And we have some space there, but that should be taken up quickly as well.So we’ll probably have to continue to add capacity. Certainly, nothing meaningful in 2020, but the having sufficient capacity and getting new assays up and running, particularly in areas like cell and gene therapy, are absolutely essential to continuing to grow this business at the growth rate that we think the market will drive us to. So feeling very good about where we stand, having gotten the new Pennsylvania facility in a good place as we go into 2020.

Okay. That’s very helpful. Thank you.

Sure.

We have a question in queue from the line of Juan Avendano with Bank of America. Go ahead, please.

Hi. Congrats on the quarter. Related to the last question, I guess, would you say that the capacity expansion that you just completed in Biologics Testing Solutions, did that expansion primarily serve to maintain the low double-digit growth profile in this business? Or would you expect to see an acceleration in the growth rate as you leverage the new increased capacity? And related to that, I guess, you already exited 2019 with an operating margin in Manufacturing Support in the high-30s. So what costs or investments outside of incremental capacity possibly are you looking to undertake over the next year that would keep the margin profile in Manufacturing Support in the mid-30s?

Yes. So we’ve – for a long time now, been commenting that the margin expectation for Manufacturing is mid-30s. And for a while, we’ve been knocking on the door of the – well, we’ve been in the mid-30s for a while. 2019 was slightly different because we had to double running costs of Biologics and that dragged it down. But we’ve never really committed to growing the margins above mid-30s for Manufacturing.There are other things we can do to invest in the sales force, for instance. There is some R&D that we can do in Microbial. There are other things we can do in Biologics, for instance, to enable us to grow that top line, continue to get the double-digit growth rates in Manufacturing and enjoy the sort of mid-30s margins. So that has been a signal that we have given to The Street for a while, and we see no reason to change that at this stage.

In terms of the growth rate, we – as I said, we had terrific growth rate in 2019 notwithstanding, I would say, tight capacity. So having additional capacity, having additional assays, getting some price, having the mix of business continue to improve should help the growth rate in a meaningful way.

Thank you.

And for our next question, we will go to the line of Erin Wright with Credit Suisse. Your line is open.

Great. Thanks. We’ve covered a lot here, but can you describe where you stand now in terms of the hiring, staffing levels? Are you where you want to be? And how much wage pressure, if any, kind of, are you seeing? And then also, you commented on M&A opportunities, but I’m curious, are you just more willing to also do more partnership-type models, such as the BitBio partnership as opposed to outright M&A? And what could some of those partnerships potentially look like? Thanks.

Sure. We were hustling in 2017 and 2018 because demand exceeded our operating plan essentially, which is a high-class problem. We’re really hustling to get sufficient numbers of people in the door and getting them trained to accommodate the demand. And as you recall and based upon your question, we also ran into some wage inefficiencies or ineffective wage levels as starting pace. So we feel that we’ve caught up nicely from a capacity and an IT and a head count point of view. We corrected those starting wage anomalies.Generally, I think you can stay ahead of that. Every once in a while, you have a geographic locale. We had one or two in particular. It just changes on you where you get some big competitors that come in and start businesses out of nowhere and they’re hiring a bunch of people and paying whatever it takes. So we had a little bit of that. So I think the onetime midcourse correction was quite effective. We’ve got a really good, focused, staying-ahead-of-the-game HR analysis on every geographic locale. So I think it’s highly unlikely we have to go in and do that again.We feel really good about the headcount. I go to most of the big safety sites every year and you can see that people are much uncomfortable with the pace of work and the pace of training. And so we’ll have to hire people to keep pace with the basic growth rate of that business, but really nothing extraordinary.On the M&A front, I think the answer to your question is really both. So we’re going to do – we have done and we’ll continue to do a bunch of these partnerships, for sure. Some of them will turn into acquisitions, for sure. As I’ve said earlier, some of the prices for the deals will already be prenegotiated, in other words, the terms of the deals, which is terrific. So some of those will turn into acquisitions, a lot of those would be in the Discovery space. We have other fully baked companies that are further along in their life cycle than some of these that will help fill out the portfolio really, really nicely. So we’ll do both.I would remind you, we have no artificial goals for M&A or we’re not interested in just being bigger for the sake of being bigger. We will pursue deals that are strategic in nature, that make our portfolio better than it is now and that are affordable and meet our return metrics. Otherwise, we will walk, and that goes for the technology deals. If we want to do them, and we don’t have a prenegotiated purchase price and the prices are too high, we’ll walk. So we feel really good about both of those ways of increasing and growing the portfolio, and I think you’ll see us be doing a combination of both going forward.

Okay. Thank you.

We do have time for one more question. That will be from the line of Tycho Peterson [JPMorgan]. Please go ahead.

Thanks for taking the follow-up. I wanted to ask on Takeda, just how we should think about the $50 million in milestones flowing through. And anything embedded in guidance this year? And then, Jim, you mentioned at our conference that you may see other similar deals to Takeda. Just curious what the pipeline looks like there. Thanks.

Yes. So enthused about the deal. Very creative, I think, on both of our parts. Yes. They’ve offered us a small portfolio of potential molecules to develop. We can pass on whichever ones we want. Obviously, we’ll do some of them. They’re across four different TAs. And they’re milestone-based payments, notwithstanding a small upfront payment that we get from them, which will offset some of the discovery cost. We don’t have anything meaningful baked into our guidance.So we don’t know – I don’t – I think it’s unlikely, no matter how much we hustle, that we’re going to get through much in 2020, although we do have some upfront payments from them. So I don’t think it will be not a headwind or a tailwind, but we should be progressing with maybe one or two molecules. I think that it’s further down the road, and we wanted to – we’re excited with it. We had a release, but we didn’t want to get ahead of ourselves in terms of its financial contribution.We’re open to doing deals like this. I wouldn’t – I don’t think we’re out looking for them. If clients want to work that way and if clients only want to work that way, and we think the structures of the deals make sense. When we think this one does and we like the client, and we like the fact that they’ve just done big M&A and it’s an interesting portfolio, it’s something that we’ll pursue. So we have a tiny amount of our revenue associated with these milestone deals right now.We hope – as we said, I think, at your conference, if one of these goes all the way through to market approval, it will be a nice financial return and we’d like to keep the expectations modest. And we hope to please ourselves as well as the shareholder base.

Thank you.

That will conclude our question-and-answer session. I’ll now turn the conference call back over to Todd Spencer for closing remarks.

Thank you. That concludes our – thank you for joining us on the call this morning. We look forward to seeing you at an upcoming investor conference. This concludes the conference call.

Ladies and gentlemen, that does conclude your call for today. Thank you for your participation and for using AT&T’s executive teleconference service. You may now disconnect.