Buried within the latest earnings transcript of Charles River Laboratories (CRL) NYSE:CRL is a story that's likely to send ripples through the entire biopharma industry. While analysts focused on the expected stabilization of the company's Discovery and Safety Assessment (DSA) segment and the shifting tides of NHP pricing, a silent revolution is brewing within their Manufacturing Solutions division, specifically the Contract Development and Manufacturing Organization (CDMO) business.

The CDMO sector has been a source of both frustration and potential for Charles River. As CEO Jim Foster candidly admitted, the unit has been a "huge headwind" for the past couple of years, struggling with profitability despite decent growth. But in the latter half of 2023, the CDMO engine started to roar, exhibiting strong growth, a trend that continued into the first quarter of 2024. This isn't just a temporary blip. Multiple factors suggest that Charles River's CDMO is poised for explosive, sustained growth, a reality that could significantly outpace current analyst expectations.

First, consider the recent landmark announcement: Charles River secured FDA and EU approval for its Matas site to manufacture Casgevy, the groundbreaking gene-edited cell therapy for sickle cell disease developed by Vertex. This isn't just a client win; it's a seismic shift. As Foster emphasized, this high-profile success story serves as "wonderful marketing," attracting the attention of other major players in the biopharma space. In an industry where reputation is paramount, this validation from Vertex is akin to a gold seal of approval.

Beyond the Vertex deal, a robust pipeline of late-stage clinical and commercial projects further fuels this CDMO growth story. Foster highlighted the almost weekly influx of new projects spanning various stages of clinical development, with cell therapy production for two commercial clients ramping up. This diversification across multiple therapeutic areas and client stages de-risks the business and points to its broad appeal.

The key driver of this CDMO surge is Charles River's strategic transformation of the unit, a painstaking process that involved restructuring, restaffing, and the establishment of specialized centers of excellence for cell therapies, viral vectors, and plasmids. This focus on cutting-edge technologies, combined with the meticulous preparation for regulatory audits, has significantly enhanced the CDMO's competitiveness.

Now, let's examine the potential financial impact. The company's current guidance for Manufacturing Solutions revenue is a modest low to mid-single-digit growth. However, given the confluence of factors mentioned above – the Vertex halo effect, the accelerating project pipeline, and the operational enhancements – it's highly plausible that this forecast proves overly conservative.

The potential for margin expansion within the CDMO is even more striking. While the segment's operating margin has suffered in recent years due to investments in regulatory readiness and commercial capacity, a significant improvement is anticipated for 2024. Foster alluded to the potential for the segment to return to its historical mid-30s operating margin, a level achieved before the acquisition of the CDMO business. However, he also hinted at the possibility of surpassing this mark, particularly as commercial revenue streams from Casgevy and other blockbuster drugs gain momentum.

Hypothetical Financial Impact of CDMO Growth

Let's delve into a hypothesis. If Charles River's CDMO business secures just two additional commercial projects of Casgevy's scale by the end of 2025, the segment's revenue could easily double, exceeding $400 million. Assuming even a moderate operating margin improvement to 28%, this translates to an additional $56 million in operating income. Given Charles River's current market capitalization of approximately $11 billion, this incremental profit could drive a significant share price appreciation.

Emerging Markets Revenue vs. Greater China Revenue

The following chart is a hypothetical representation of Charles River's CDMO revenue, emphasizing the potential growth trajectory of the business.

In conclusion, while the market focuses on short-term fluctuations in DSA and NHP pricing, Charles River's CDMO is quietly positioning itself as a force to be reckoned with. This is not a speculative bet; it's a strategic transformation backed by tangible results and a strong pipeline. Investors who recognize this underappreciated narrative have the opportunity to capitalize on a potentially explosive growth story, one that could redefine Charles River's future and reshape the entire CDMO landscape.

"Fun Fact: Charles River Laboratories started in 1947 when a young veterinarian named Henry Foster started breeding rats in his garage to supply researchers. Today, the company is a global leader in preclinical drug development, supplying over 80% of the research models used in FDA-approved drugs!"