But we talked about the reprioritization of their pipelines. So even big companies, big pharma, who is well financed, has budgets and they’re very tight on the budgets, both in terms of headcount and other things. So we’ve definitely seen just a conservatism on the part of almost our entire client base who has — they have really good portfolios. They are just not developing and prosecuting their entire portfolios, maybe the way they did in 2021 and 2022. Again, it’s all transitory. So as stuff gets through the clinic and into the market, and when the economy feels better for these folks, I’m not an economist, so I have my opinion that kind of — not useful on this call, I do think we’ll start to see a lot more spending in discovery. But to answer your question specifically, you’ll see a lot more testing of commercial products to go into the clinic.
Dan Leonard: Thanks, Jim.
Operator: Thank you. We will take our next question from Tejas Savant with Morgan Stanley. Your line is open.
Tejas Savant: Hey, guys. Good morning, and appreciate the time here. Maybe one on RMS, more of a cleanup really. Flavia, can you parse out that 460 bps decline in RMS margin across the NHP timing in China and the academic in-sourcing mix? I know you mentioned it was mainly the latter as far as top line growth. So is it fair to assume that, that sort of flows through to the margin sort of dynamic as well? And over what time frame do you expect to see a little bit of help from exiting the lower margin and sourcing contracts? I mean, is that a 2024 dynamic? Or is that more 2025 and beyond?
Flavia Pease: Hi, Tejas, how are you? So the RMS impact, both on top line as well as margin was a combination, as I said, of the lack of significant shipments of NHPs in China as well as a mix of businesses in our RMS segment. As you pointed out, we had a higher growth of some of the lower — on a relative basis, lower margin subsegments within RMS. So we expect that to continue into the fourth quarter. We’re seeing, from a demand perspective, more resilience on the larger pharmaceutical clients and government contracts. So that plays into the margin. And then in the fourth quarter, though, we will have NHP shipments. So the margin for RMS will pick up in the fourth quarter. I think we had telegraphed data or signal that in Q3, we weren’t going to have any meaningful shipments and therefore, the margin was going to come down.
So again, this is consistent with what we have been expecting. As far as the government contracts that we expect that we announced in the Investor Day, that are lower margin and that we would be exiting will likely start in the 2024 horizon.
Tejas Savant: Got it. That’s super helpful. And then one on just the margin outlook here on a go-forward basis. Jim, I mean, obviously, you mentioned in your prepared remarks, manufacturing support is the biggest driver of margin expansion. Just in light of the 3Q headwinds here, what flattish margins next year be a fair additional assumption? I know it’s a complex environment, but you also called out RMS seeing a little bit of macro headwinds here beyond China NHPs. So just any directional color for — sort of on 2024 margin trajectory would be super helpful. Thank you.
Jim Foster: I know it would be super helpful, but I have to wait until February to get that clarity, but I appreciate you asking.
Flavia Pease: Tejas, I would say, though, we still feel good about the 150 bps over a three-year period that we shared with all of you during Investor Day. The timing of that, as Jim said, it’s not linear in that three-year horizon. And obviously, the main environment will play into that as we go into 2024. But we also, as I indicated in my prepared remarks, have also appropriately adjusted or started to ensure we are appropriately reflective of the current demand environment with some of the actions that we took already this year. So I’ll let you take those pieces and make your estimates for 2024 until we provide guidance in February.
Tejas Savant: All right. Thanks, guys. Appreciate the time
Operator: Thank you. We will take our next question from Max Smock with William Blair. Your line is open
Max Smock: Hi, all. Thanks for taking our questions. To start, maybe I’ll try to get at Derik’s question from a lot earlier here, just in a different way. So your disclosures imply about $780 million of NHP-related revenue in 2023. How do the margins associated with this NHP work compared to your DSA operating margins this year? And how have the margins on that NHP were changed over the last few years as a result of the pricing increases on the NHP side? And then in terms of assumptions moving forward, I’d be curious to hear your take on what you actually have baked in for margins on NHP work as part of your midterm guide here, given your comments about pricing normalizing some here as we move forward. Thank you.
Flavia Pease: So maybe I’ll start, and Jim can add. And I think I’ve — we commented on this over the last several quarters. NHP work, on a relative basis, has slightly higher margins than some of the other species more — we do. They tend to be more complex, sometimes longer. And so there is a mix impact that has been favorable as biologics had grown, and that drives higher demand for NHP work within our total study species work that we do. So that has been a tailwind. We don’t know if that will continue or not, but that is unrelated to the discussions that we’ve been having on price. And I think maybe, Jim, if you want to add some comments.
Jim Foster: I think that’s all.
Max Smock: Okay. Perfect. And then maybe just following up on Dan’s question from a couple of minutes ago here. You mentioned the slowdown in discovery doesn’t change your strategy in preclinical. But I just wanted to confirm that I heard you right, that we’re not close to the point where the slowdown in discovery that we’ve seen over the last couple of quarters here starts to impact gross bookings and safety assessment. And then ultimately, gets work is like the pipeline towards the clinical stage. Like when do you think do we get to that point? And when should we start to get concerned? I guess, at the slowdown we’ve seen in discovery will start to impact preclinical more heavily and eventually clinical trial demand? Thank you.
Jim Foster: Don’t be concerned. It’s not the first time this has happened. When times are good, we see a balanced spending in discovery and development. That benefits our whole portfolio. When client base is concerned about revenues, they tend to nuance the clinic. And with regard to preclinical stuff, the post-IND stuff, and there before. And in terms of the growth in development and solidity and strength of the companies, they have to go back and spend a discovery. So it’s just a matter of time, and it’s impossible to call it, although we’ll obviously have to call for our operating plan for next year. But as I said before, our discovery business, which we’re pleased with the scale, pleased with what we put together is still trivial by comparison.
So it’s really going to have no impact on the growth of our safety assessment business any time soon. As I said before, positive about as we continue to work hard to have a flow-through for successful molecules for discovery safety, it could be a benefit, but I really don’t see this being a detriment. I suppose if the business was much larger, and 90% of our clients were moving stuff from discovery to safety, I might give you a different answer, but that’s — maybe we’ll be there someday. It’s not where we are right now. So I understand that they are connected, but it’s actually useful to look at it on a connected basis. So what you see when we report DSA is essentially primarily our safety assessment results.
