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Charles River Laboratories International Inc (CRL -0.29%)
Q3Â 2018 Earnings Conference Call
Nov. 07, 2018, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Charles River Laboratories Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Corporate Vice President of Investor Relations, Mr. Todd Spencer. Please go ahead.
Todd Spencer -- Corporate Vice President of Investor Relations
Thank you. Good morning and welcome to Charles River Laboratories Third Quarter 2018 Earnings 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 third quarter of 2018. Following the presentation, they will respond to questions.
There is a slide presentation associated with today's remarks, which is 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 1 (800) 475-6701. The international number is (320) 365-3844. The access code in either case is 455326. The replay will be available through November 21st. You may also access an archived version of the webcast on our Investor Relations website.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 make about future expectations, plans and prospects for the company constitute forward-looking statements under the Securities -- Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by any forward-looking statements.
During the call, we will be primarily discuss results from continuing operations and non-GAAP financial measures which we believe help investors to gain a meaningful understanding of our core operating results and future prospects. The non-GAAP financial measures are 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.
Jim Foster -- Chairman, President and Chief Executive Officer
Good morning. In August, I mentioned that we were benefiting from an extremely healthy market environment and believe that the pace of demand for our essential products and services we accelerate in the second half of the year. We're very pleased with our third quarter results, which are evidence of that demand and successful execution of our strategy.
We reported organic revenue growth above 10% for the first time since 2008. And while we expect the growth rate to fluctuate over time, we believe the third quarter growth rate supports our view high single-digit revenue growth over the life of our strategic plan. Fundamental changes in the biopharmaceutical industry over the last decade and changes we have made internally to drive greater efficiency and create a seamless best-in-class early stage portfolio are driving tremendous opportunity for us by continuing to invest in our portfolio, our people and our infrastructure, we believe we are extremely well positioned among early stage CROs to support our client's increasingly complex research needs. The success of our strategy has been validated by the fact that we worked on 80% of the FDA approved drugs in 2017. And we were once again ranked as the best-positioned non-clinical CRO to work with by our clients and dtwo recent sellside analyst surveys. Let me give you the highlights of our third quarter performance. We reported revenue of $585.3 million, a 26.1% increase over the third quarter of last year, broad-based growth across our portfolio. Early stage drug, research and manufacturing products and services delivered strong organic growth of 10.7%. Both our RMS and DSA segments reported significant increases in the organic growth rates from the second quarter level. And the manufacturing segment continued to grow at a low double-digit rate. From a client perspective, biotechnology clients with the most significant driver of growth and sales to global biopharmaceutical clients also increased meaningfully. At 18.8%, the operating margin was stable, despite continued investments across our businesses. Higher revenues and improved operating efficiency offset the cost associated with the additional personnel and capacity required to accommodate increasing client demand, and the 50 basis point headwind associated with the hourly wage adjustments that were implemented on July 1.
The manufacturing operating margin was lower on a year-over-year basis, primarily as a result of duplicate costs ahead of opening new capacity in the Biologics business. Earnings per share were $1.53 in the third quarter, an increase of 17.7% from $1.30 in the third quarter of 2017. The increase was due primarily to higher revenue and operating income including the contribution from MPI and lower tax rate. Venture capital investment gains totaling $0.08 per share in the quarter compared to $0.07 last year. We remain enthusiastic about the outlook for our business, which we believe supports have increased guidance for organic revenue growth to a range of 8% to 8.5%. We narrowed our non-GAAP earnings per share guidance to $5.87 to $5.97 in 2018, which is within our prior range.
Our updated earnings per share guidance reflects our strong operating performance in the third quarter, offset by anticipated venture capital investment losses in the fourth quarter. With respect to VC investments, we believe the third quarter $0.08 gain will be offset by an approximate $0.10 loss based on the preliminary performance of the VC funds at the beginning of the fourth quarter. I'd like to provide you the details on the third quarter segment performance, beginning with the DSA segment. DSA revenue in the third quarter was $352.3 million, a 13.1% increase on an organic basis, driven by broad-based growth across the Discovery and Safety Assessment businesses. We were exceptionally pleased by the DSA segment's performance, which we believe is being driven by robust biotech funding environment, coupled with increased spending from large biopharma client. Clients, both large and small are increasingly choosing to partner with Charles River due to our science, our broad, early stage portfolio from target discovery through nonclinical development, and the flexible relationships that enable clients to work with us for a study, a project or an entire therapeutic program.
The 580 basis point increase in the DSA growth rate to 13.1% from the second quarter rate of 7.3% was primarily the result of an acceleration in the pace of demand for our safety assessment services, which we had anticipated based on the robust booking and backlog activity in the second quarter. Third quarter bookings and backlog were also robust, suggesting a strong fourth quarter to end the year. As a result, we expect the DSA organic growth rate will be at the upper end of the high single-digit range for the year. All of our in-life safety assessment facilities reported higher revenue year-over-year and MPI continue to exceed our expectations. Capacity remained well utilized and the study mix continued to improve. We are continuing to win new business on the basis of our scientific expertise, our broad portfolio that has been enhanced by the acquisitions of MPI and WIL, and our flexible and customized working relationships, which enable our clients to improve the efficiency and effectiveness of early stage research.
Clients appreciate the value we bring to the research and the emphasis we place on individualized services, which has differentiated us from the competition. The robust demand environment is also placing greater focus on capacity management and resource planning to accommodate new business. This is particularly important when our global Safety Assessment network is operating at near optimal levels of utilization with the exception of MPI, which has available capacity. Our efforts to enhance operating efficiency and better harmonize our Safety Assessment sites and not only benefiting our internal workflow, but are also creating a more seamless experience for our clients. Many of them are increasingly choosing to work across multiple Charles River sites and then select cases. Clients are willing to place their work at whichever site can pass to accommodate them.
The Discovery Services business also had an excellent quarter with strong performances from both our Early Discovery and In Vivo Discovery businesses. The actions that we have implemented over the past two years to improve the performance of the Early Discovery business are generating the intended benefits by focusing on our scientific expertise for the discovery of novel therapeutics, target sales strategies and the harmonization of the Discovery portfolio, we are attracting new business from both large biopharma and mid-tier biotech clients including for integrated discovery programs. Many of these integrated programs begin with the target identification capabilities of our Early Discovery business and encompass additional discovery and safety assessment capabilities as the programs advance. While currently about 20% of our DSA clients work in an integrated fashion across both businesses, we believe that as our clients continue to outsource more of their early stage drug research programs, we will be able to achieve our long-term goal to have at least half of our DSA clients working across both businesses. We believe that we will continue to enhance our value proposition for clients by leveraging the synergies that exist between the two businesses and by continuing to expand and enhance our early stage capabilities through both acquisition and internal investment.
To enhance our discovery capabilities, in October, we signed an exclusive partnership with Distributed Bio. This partnership gives us access to the early stage therapeutic antibody discovery and optimization platforms, which are critical tools to support our clients' large molecule discovery efforts. Distributed Bio's platform intersects perfectly with our existing early stage biology and pharmacology services, which will greatly enhance our ability to support our clients' development of new antibody therapies. With large molecule discovery comprising nearly half of the global drug discovery pipeline, this area represents a significant growth opportunity for our Discovery business.
Our In Vivo Discovery business continued to perform very well, particularly in both oncology and bioanalytical services. Oncology is the largest and one of the fastest-growing areas of drug research, and our continued investment in this critical therapeutic area has driven demand for our oncology expertise. Demand for our comprehensive suite of large and small molecule bioanalytical services including for Agilux's services also continues to increase significantly. To better support our West Coast clients and the robust demand for our early stage services, we recently expanded service offering at our South San Francisco biohub site, which is located in the second largest region in the US for biotech investment behind Boston, Cambridge area. The site which was an existing Brains On-Line facility, CNS Discovery Services has expanded to include additional discovery capabilities, including DMPK and bioanalytical services. We plan to further expand the service capabilities, because we believe a multi-service West Coast location will enable us to generate new business opportunities by providing critical services proximate to the fast-growing biotech client base.
The DSA operating margin increased by 30 basis points to 22.6% compared to a year ago despite the hourly wage adjustments, which reduced the third quarter DSA operating margin by approximately 75 basis points. The margin improvement was driven primarily by leverage from higher revenue in the Discovery business. As we have previously mentioned, the DSA segment, is by far the largest client of our research models business. While new technologies and more complex specialty models have led to more targeted research, the underlying demand for our research models and associate services is based largely on the level of early stage R&D activity that is being conducted across large biopharma, biotech and academic institutions. We believe that the acceleration of biopharmaceutical research activity in the third quarter, which led to the significant increase in the third quarter DSA revenue growth rate, also drove higher demand in the RMS segment. RMS revenue was $126.8 million, an increase of 4.5% on an organic basis over the third quarter of last year. Our research model business in China delivered another exceptional performance and our In-Sourcing Solutions and GEMS businesses also performed very well. Demand for our research models in mature markets also improved modestly for the third consecutive quarter of this year.
In China, we continue to add capacity at our new Shanghai facility, to support the robust market demand and win new business in this important geographic region. You may recall that we began shipping models from this site in early 2018 and are continuing to expand our presence in the Shanghai market to take advantage of the growth opportunity. In-sourcing Solutions or IS continues to perform well. Our clients increasingly adopt strategic in-sourcing to enhance the operational efficiency of the variant management and research efforts. We were very pleased to be awarded the five-year, $95.7 million contract, with the National Institute of Allergy and Infectious Diseases or NIAID. One of the largest institutes of the NIH under which we will be managing and staffing NIAIDs onsite Vivarium and related Research Model operations.
We expect the contract to generate annual revenue of approximately $18 million. Because the contract didn't commence until September 14, we will provide only a small benefit to RMS revenue growth this year, but we will enhance the RMS growth rate by more than 300 basis points over the first year until it anniversaries in September of 2019. As a reminder, the profitability of our IS contract can be significantly lower than our corporate operating margin, but they generate good cash flow and returns and because of the low capital investment required.
Academic and government institutions have historically been IS' primary client base, but we are also attracting new biopharma clients because of the flexible models under which they can opt to work with us. In the third quarter, the RMS operating margin increased by 40 basis points to 25.9%, due primarily to leverage from improving demand and higher pricing across RMS business. The RMS margin increased despite several headwinds including MPI intercompany sales for which the revenue and profitability I now recognized in the DSA segment and the hourly wage adjustment implemented on July 1. Beginning in the fourth quarter, the NIAID contract will also pressure the RMS operating margin by approximately 50 basis points however. We are continuing to focus on driving operating efficiencies throughout the RMS business and intend to expand the use of technology to further enhance productivity and differentiate Charles River from the competition.
The Manufacturing Support segment reported another strong quarter with revenue of $106.2 million. The organic growth rate was 12.5% led by the Microbial Solutions and Biologics testing solutions businesses. We were very pleased with the performance of the Microbial Solutions business, which benefited from robust demand from our Endosafe testing systems and cartridges, core reagents and microbial identification services. The advantages of our unique portfolio, which includes both rapid endotoxin and microbial testing systems and microbial identification libraries continue to resonate with clients. We are optimistic that our ability to provide a total microbial testing solution to our clients will be a driver of our goal for Microbial Solutions to continue to deliver low double-digit organic revenue growth to drive greater client adoption and support its growth.
We are continuing to invest in the business to enhance its product and service offerings, technological interface and geographic scope. In the third quarter, we entered into a strategic agreement with Hygenia, a leading rapid food safety testing solutions provider that will optimize the commercial reach of our celsus innovate and rapid screen solutions by leveraging Hygenia's global dairy, food and beverage distribution network and product portfolio.
The Biologics business reported strong revenue growth in the third quarter. As we discussed at our Investor Day in August, the increasing number of biologics in development represents a significant market opportunity for our biologics business, which provide services that support the manufacture of biologics including process development and quality control. We believe the Biologics market opportunities expanding at a low double-digit rate annually, which is why we continue to significantly invest in additional capacity for this business. We continue to make progress with our plans to open a new facility in Pennsylvania as well as other smaller expansions globally.
Once the new Pennsylvania site opens, we intend to transition certain laboratory operations to the new site at a measured pace, a process which is expected to continue through 2019. We are incurring duplicate costs as we hire and train new staff ahead of the opening, which moderately pressured the Manufacturing segment's operating margin in the third quarter and is expected to continue to do so until the transition to the new facility is complete. Due primarily to the additional cost associated with the Biologics capacity expansion, the Manufacturing segment's third quarter operating margin declined by 310 basis points year-over-year to 33.4%.
We expect that the Manufacturing segment's operating margin will be slightly below our long-term target this year due to the Biologics capacity expansion and the slower start to the year, but we firmly believe that the margin will expand to our mid 30% target once the Biologics expansion is complete. We're extremely pleased with the third quarter performance and the demand, which drove it. We are recognized as the premier early stage CRO at a time when the biopharmaceutical industry as strong as we have seen it in the last decade. Large pharma is continuing to restructure to create a more efficient R&D platform by externalizing the research effort through partnerships and investments in the biotech industry academia and NGOs, and by outsourcing their work to flexible CRO partners like Charles River.
Biotech has become the innovation engine of the drug industry supported by funding from large biopharma and the capital markets, in fact funding for the capital market is on track to be the second best year on record. Funding will inevitably spur continued investment in biotech pipelines for years to come and we believe our biotech clients will choose to partner with the CRO like Charles River because we have the scientific expertise and business acumen to best support them in their research for new therapies.
We believe that many factors from the execution of our strategy to the strength of the biopharmaceutical industry are driving demand for our products and services. We remain optimistic that the progress we have made and the favorable market conditions will continue through the end of the year and beyond. To accommodate the current pace of demand, we intend to continue to enhance our scientific capabilities through both M&A and internal development, expand capacity and staff and invest in technology to provide critical data for both internal and client use. Through these critical investments, we believe we will achieve our goal of providing greater value to our clients and to our shareholders.
In conclusion, I'd like to thank our employees for their exceptional work and commitment, and our shareholders for their support. Now, I will ask David to give you additional details on our third quarter results and updated 2018 guidance.
David R. Smith -- Executive Vice President & Chief Financial Officer
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, the divestiture of the CDMO business in 2017, and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, the CDMO divestiture and the impact of foreign currency translation.
We are very pleased with our results for the third quarter, which included double-digit increases in revenue growth and non-GAAP earnings per share, as well as significantly higher free cash flow. Our business continues to benefit from robust market conditions and the accelerating pace of client demand for our early stage products and services. Despite the disciplined investments in portfolio and people and infrastructure that we made, the operating margin was flat year-over-year and would have increased by 50 basis points when adjusted for the previously discussed change to our compensation structure. The strong performance is reflected in the third quarter earnings per share of $1.53, an increase of 17.7% year-over-year, exceeding our expectations due to the combination of the strong operating performance and an $0.08 gain on venture capital investments . We anticipate that the third quarter VC gains will be offset by an approximate $0.10 loss in the fourth quarter based on the preliminary market performance of the funds and in particular a loss from one of the portfolio company.
For the year, we now expect VC gains of $0.24 per share. As a reminder, given the inherent difficulty of forecasting VC gains or losses, we will eliminate VC investment performance from our guidance beginning in 2019. In that spirit, our normalized third quarter earnings-per-share growth rate excluding these fees was essentially the same at 17.9% year-over-year. Unallocated corporate costs for the third quarter was $37.5 million or 6.4% of revenue, 80 basis points below last year's level of 7.2% . We continue to invest in a more scalable operating model, managing investments in personnel and IT to support our growing business while driving greater operating efficiency. At 6.7% year -to-date, we now expect non-GAAP unallocated corporate costs to be slightly above 6.5% of total revenue for the full year as we continue to leverage the investments we have made to build a scalable platform.
Net interest expense was $17 million in the third quarter, a slight increase of $300,000 sequentially reflecting higher LIBOR rates associated with the Federal Reserve rate increases this year. Full year, we narrowed our outlook for net interest expense, $59 to $60 million. Our tax rate has been trending to the low end of our outlook over the course of the year, due primarily to the continued refinement of U.S. tax reform guidance, tax savings from operational efficiency initiatives and discrete tax benefit. These trends were reflected in the third quarter tax rate of 23.5%, which was lower by 310 basis points year-over-year and essentially unchanged on a sequential basis. For the full year, we expect our tax rate to be in a range of 22% to 23% on a non-GAAP basis, which is below our prior range of 23.5% to 25%. Turning to free cash flow, the third quarter was exceptional and $94.8 million compared to $37.5 million last year.
The significant increase reflected the strong underlying operating performance of our businesses and our continued focus on working capital management. In addition, we received an upfront cash payment from Hygiena as part of the Microbial Solutions strategic agreement that Jim discussed, which was mostly offset by advance payments we made to fund our U.S. and UK pension plan. For the full year, we expect free cash flow to be in the range of $290 million to $300 million, an increase of $30 million over our previous outlook, reflecting the strong third quarter cash flow generation. CapEx increased slightly year-over-year to $22.4 million in the third quarter and our outlook remains at approximately $120 million for the full year. We continuously evaluate our capital priorities and intend to deploy capital to those areas that we believe will generate the greatest returns. Strategic acquisitions remain our top priority for capital allocation followed by debt repayments . At the end of the third quarter, we had an outstanding debt balance of $1.67 billion, reflecting the repayment of $144 million of debt since the second quarter. On a pro forma basis, our gross leverage ratio was 2.8 times and our net leverage ratio was 2.6 times.
Since our leverage ratio is now below 3 times, we will benefit from a 25 basis point reduction on the interest rate for the variable rate debt to LIBOR plus 125 basis points. Looking ahead, we are comfortable with the gross leverage ratio below 3 times, and absence any acquisitions, we will continue to repay debt. Looking at our 2018 guidance, we increased our reported revenue growth outlook to a range of 21% to 22% and our organic growth outlook to a range of 8% to 8.5%, reflecting continued strong market demand trend and a slightly higher contribution from acquisitions, primarily MPI .Foreign exchange is expected to be slightly less favorable because of the strengthening U.S. dollar. We now expect an approximate 1.5% benefit from FX for the year compared to our prior outlook of a 2% benefit.
This will translate into a slight incremental headwind to full year EPS when compared to our prior outlook in August. Although we increased the outlook for both reported and organic revenue growth, the segment ranges will stay the same on an organic basis. However, we expect DSA and RMS to be at the higher end of the ranges, which remain high-single digits and low-single digits respectively. We continue to expect the Manufacturing segment to grow at a low double digit rate for 2018. We are narrowing our non-GAAP earnings guidance to a range of $5.87 to $5.97 for 2018 compared to our prior outlook of $5.85 to $6.00 . Our updated guidance reflects our strong third quarter performance, largely offset by anticipated losses from our venture capital investment of approximately $0.10 per share in the fourth quarter. Excluding VC, we expect normalized earnings-per-share growth of 13% to 15% for the full year. Our 2018 outlook also reflects our current expectation that the operating margin for the year will be lower than our original estimate. We have made necessary investments in our business to accommodate demand and to position the company for future growth.
These investments include capacity expansions, hiring additional staff and adjustments to our compensation structure. We believe that we are beginning to realize the intended benefits and operating leverage from these investments, and coupled with our robust revenue outlook, expect to generate sequential margin improvement in the fourth quarter. However, the improvement will be partially offset by headwinds from the new Biologics site, the NIAID contract and normal seasonality in the RMS segment. A detailed summary of our updated financial guidance can be found on slide 38. For the fourth quarter, we expect reported and organic revenue growth to be driven by continued strong demand trends across all of our businesses. The RMS revenue growth rate will improve modestly benefiting from a full quarter of revenue generated under the NIAID contract. With regard to earnings per share, the continued strong operational performance and our expectation for sequential margin improvement is expected to be partially offset by an anticipated loss from our venture capital investments and the tax rate in the mid 20% range.
In closing, we are very pleased with our third quarter performance. We are on track to exceed the full year outlook that we originally provided in February for reported and organic revenue growth, earnings per share and free cash flow. We will continue to take a disciplined approach to investing in our people, infrastructure and technology as we build a larger organization and enhance our ability to support existing client relationships and support new ones. We believe this focus will continue to enhance our position as the premier early stage contract research organization and showing continued success for our business and generating great returns for all of our stakeholders, clients, employees and shareholders.
Thank you.
That concludes our -- sorry, operator?
Operator
Yes.
David R. Smith -- Executive Vice President & Chief Financial Officer
It's now time for the Q&A session to begin.
Questions and Answers:
Operator
Okay. Thank you, ladies and gentlemen, (Operator Instructions) Your first question comes from the line of Ross Muken with Evercore ISI. Please go ahead.
Ross Muken -- Evercore ISI -- Analyst
Good morning, and congrats, guys, on a great quarter. Maybe I thought calling out the effort in RMS around the IS unit was kind of interesting. And it seems like a really sensible long-term strategy. Maybe just talk a bit about sort of how long that group spend together, what sort of the -- sort of success has been so far and why you're kind of highlighting it now and why it feels like there's sort of a potential for maybe some elevated momentum in that unit?
James C. Foster -- Chairman, CEO & President
The business and we've had for quite some time, Ross, I would say , certainly couple of decades anyway. It's been historically largely government and academic, but I'd say the last decade has been more biotech and pharma. It's been international business. So we manage these Vivaria all over the world. It's a very efficient way for the clients to utilize this and particularly those who have had headcount limitations or lack of expertise. To be frank, as we -- as you probably heard us say a few years ago we're somewhat surprised that this business has been growing faster and as some logic given the dramatic outsourcing trend. And I don't want to get out over my skis, but -- that we still would anticipate that it would follow similarly as -- that the -- as the expertise is requested and demanded externally. But it's happening slowly, but it's happening and it's picked up as of the last few years. It's a big contract that we just got is obviously a particularly meaningful, it's one of the biggest institutes of the NIH and it's a large cadre of employees that we're taking over from veterinarians all the way to entry-level employees and it's all the pretty powerful stuff.
So in terms of additional government work, it's obviously helpful when we have some and we do really good work for one agency. These are the others. We have conversations with every client, certainly all the big ones and big pharma and mid-to-large sized biotechs about the ability and desire for us to do this sort of work for them. And the receptivity is all over the place, but it's a business that we are definitely seeing accelerate, one that we know we can make a difference for our clients, one that's utilization of our expertise in a really meaningful way, so worth watching, again don't want to overstate it, but this is a big contract.
Ross Muken -- Evercore ISI -- Analyst
Thanks, Jim and maybe just on the margins, obviously I know you've commented, you took down sort of the full year expectation a bit, but it -- the incremental margins for the momentum has been kind of gaining over the balance of the year, as we sort of jump off, I mean there's a lot of moving parts between the new contract which is sort of dilutive and then obviously the wage hikes, but then you're getting all the volume absorption. I guess how do you feel about kind of that progression and the jump off into 2019 and sort of the ability to get back to kind of expanding margins, giving all of the efficiency initiatives et cetera, you have going on as well?
James C. Foster -- Chairman, CEO & President
Yeah, we feel very strongly that we're making the right investments for our clients and our employees and to the company. So we are investing heavily in staff and capacity. We are -- we did make our wage adjustments, which is sort of essentially a one-time catch-up. But really important one in terms of it enhancing our recruitment efforts. We continue to work aggressively on efficiency across all of our businesses and we'll continue to do so. The Discovery business is improving nicely, but it's still a drag. So the WIL business is a little bit of a drag Biologics. We've definitely called out it's a drag, but we've very clear reasons for it. So we're certainly not going to talk about 2019. But we are organized all always to drive margin in this business, it's a combination of additional business, the mix of business, how much price we get, how well capacity is utilized and how much share we're able to take with respect to de novo work and work from the competition and we feel really good about the strength of this franchise. We feel really good about the strength of the demand. Pretty much across all of our businesses on a worldwide basis and we don't see any logical reason why that demand should dissipate any time soon and it certainly gives us confidence in the balance of the year and I suspect it will give us confidence when we talk to you about 2019.
Ross Muken -- Evercore ISI -- Analyst
Great, thank you.
Operator
Thank you. Next question comes from the line of David Windley with Jefferies. Please go ahead.
David Windley -- Jefferies -- Analyst
I kind of want to -- at the risk of being repetitive, I kind of want to follow up on Ross' question on margin. Jim, is it possible or maybe it's a David question. But is it possible to kind of bridge. I appreciate that you quantified the wage impact, I guess, 75 basis points to, I think, you said DSA and 50 basis points overall. Is it possible to kind of walk us forward from your margins that were in DSA. For example, about the same level last year, you've added over $100 million in revenue, which included MPI, which I think was a higher-margin business. And margins are relatively flat, so I'm kind of hoping to understand how much underlying operating leverage and efficiency are you getting? That is then being offset by some of these discretionary investments.
James C. Foster -- Chairman, CEO & President
That you seem not to be satisfied with my...
David Windley -- Jefferies -- Analyst
I just want to hear you say it again.
James C. Foster -- Chairman, CEO & President
Previously, we will let David go on that.
David R. Smith -- Executive Vice President & Chief Financial Officer
So, I was kind of -- we got a list of things that we were going to comment on margins and Jim actually did a great job and jumping to all of the different pieces that we think you ought to be aware of. The only item I would add is that we have been investing as we made clear for a while now in the infrastructure including back office to make sure that we're a scalable business for the future. And in the comments that we've actually shared with you today about the un-allocated corporate costs, you can see we're beginning to get some of that leverage now as we scale up. So I think the commentary is very similar to what we said in New York. I'm -- there are difficult choices that we're making between investing in it today to generate and benefit for the future. There's a lot of puts and takes, it's difficult to call out all the different math to help you get to the end of 2019. We will clearly give you more information in February to give you a greater insight when 2019 will end up. But we remain -- as we said in New York, we remain over a five-year period, end of '19 (ph) to get north of 20%. And we think that the investments that we've made have been thoughtful and generating the returns. And I think the quarter returns you are seeing today beginning to show some of the fruits of those and double.
David Windley -- Jefferies -- Analyst
Great. I appreciate the extra color. Thank you.
Operator
Thank you. Our next question comes from the line of Tycho Peterson with JPMorgan. Please go ahead.
Tycho Peterson -- JPMorgan -- Analyst
Hey, good morning. Want to start with DSA. Sounds like things have gotten better study mix issues in SA are maybe still bit of a drag. So can you talk to kind of where we are in that process which is more structural versus temporal (ph) on the study mix issues and then any comments, Jim, you are willing to make on pricing trends and then future capacity expansion. I know you talked about South San Francisco, can you just talk to if there's other planned expansion in the way?
James C. Foster -- Chairman, CEO & President
Yes. So on the study mix, as we've said in the last two quarters, sort of impossible to design the study mix, it comes as it comes and profitability, as essentially comparable between long and short-term studies, so we had long-term studies nuance at the beginning of the year as you recall once you added to the cost. That has continued to sort of moderate out through the year and we'll continue to do so. And it was kind of an unusual quarter, it's kind of always -- you always have whatever study mix comes through the door and say the first time I think we've ever had to comment on it. So what we're most pleased with is that we are essentially extremely well utilized in our capacity throughout the entire world. We still have enough to take on in that business for these -- the growth rates we've talked to you about today plus MPI has a significant amount of capacity which we hope to use as soon as -- as the work comes in. So we feel that we're in really good Symmetry with capacity and demand. You know we're not going to talk specifically about pricing except I would say that, you obviously get the benefit of mix if and as specialty work is nuanced or strong. You'll recall that our specialty work is more significant than anybody else's in the industry and we actually picked up some specialty capabilities with both of these acquisitions. So you should presume that the specialty business is strong. You should also presume that anybody the calls us doesn't have a long-term agreement with some sort of pricing escalation limit. We're going to try to get price and you should show the surprise playing through these numbers. In terms of capacity, I would say that we're looking carefully across the world. We are -- we will continue to add space at multiple sites, because proximity is important, because some sites were out of space, because some sites, we wanted to turn on space, but was available but it's being used. And we feel very good about this, the scope and span of our geographic footprint just in terms of really being able to be responsive to our clients. We have a lot of clients who want to come and visit, we have a lot of clients who just sleep better knowing the work is being done closely and maybe something can speak to them in their own language and they can get built in their own currency and if it's a problem or an opportunity that go in dialog with their study directors. So we think that the geographic footprint of the portfolio continues to be a strategic advantage for us.
Tycho Peterson -- JPMorgan -- Analyst
And then just a follow-up on RMS, it sounds like some of the uptick was driven by better growth in mature markets outside of China. I assume, and Jim, so can you maybe talk to the sustainability of the 4.5% growth we saw. And then on IS it seems like that's dilutive to margins, Is there anything you can do to kind of improve the margins for that part of the business?
James C. Foster -- Chairman, CEO & President
So IS will never generate the margins, the core business is extremely profitable. And all we can do is reiterate maybe a couple of things. We can reiterate the fact that, well, it's a drag on margins, the cash flow generation is quite significant and the return on investment capital is quite significant, because the investments in CapEx is somewhere between 0 and trivial depending on what deal we're working on, sometimes it's a little bit of CapEx. So it's going to be part of who we are, also is we didn't say this, perhaps should have. It also is a way to literally live inside of your clients and provide an opportunity to talk to them about the other products and services that we provide and pull some of that work through. So on a see-through basis, there is a larger -- there is a larger benefit from it. What's the first part of your question?
Tycho Peterson -- JPMorgan -- Analyst
The growth was driven by OpEx growth in mature markets.
James C. Foster -- Chairman, CEO & President
Okay, you've asked about mature markets. Yes, so, and I want you to get overly focused on that except to say that if you step back, we're extremely pleased with the organic growth rate of RM assets. So low single-digit grower and I'ld say this is better than low. We'll take a quarter at a time. All of the parts and pieces are performing well, so you have the drag of the MPI business going into the Company. Notwithstanding that, China rocks IS and GEMS do extremely well and the mature markets did better, and as we said in our prepared remarks, that business does tether it more research is being done by our clients, both large and small. So that's a pure play growth in that business with mix and some pricing playing through. So we feel really good about the RMS quarter, so that quarter we've had in a long time. We obviously feel wonderful about the added benefit of having us an NIAID contract on top of that. You have to adjust your thinking a little bit about the impact on margins. Having said that, we will continue to work hard to drive efficiency in that business, use better IT solutions in that business, their inventory management in that business and also to take share in that business. We don't have a 100% share. So some share growth opportunities, particularly in the academic marketplace, so I think RMS is in a very good place right now.
David R. Smith -- Executive Vice President & Chief Financial Officer
And just to make sure people understand some of the math, I mean, while we don't call out the margins on any individual customer and what we have called out on the NIAID contract, given how large it is. We've given you the revenue for the five-year contract, we've given you the revenue per annum and we've also told you that the pressure on the RMS margin is 50 basis points in Q4.
Operator
Thank you. Our next question comes from the line of John Kreger with William Blair. Please go ahead.
John Kreger -- William Blair -- Analyst
Hi, thanks very much. Jim, can you maybe talk about kind of the inherent cyclicality of the business that you guys have looked through before and how you might manage it. It's interesting to hear some of the comparisons to 2008 given the lessons learned in 2009 and '10. How are you thinking about things like pricing and capacity expansion, so when we get some inevitable cooling off in demand? Thanks.
James C. Foster -- Chairman, CEO & President
Okay, so seasonality is a little bit of a moving target for us. And so the Research Model business has always and historically been seasonal. So this (ph) business has got a third quarter and fourth quarter pressure. The Biologics business tends to start slower and accelerate during the year and Safety tends to accelerate stronger in the back half of the year, but more pronounced these days than before. So the seasonality is a bit hard to predict. And I would say it's improving. In other words, the business is remaining stronger except for our math which is -- people aren't going to buy animals that they can't use during holidays. Having said that, we've had last few years where even RMS isn't strong in the fourth quarter because we're getting ready to do studies and then get back from vacation where they don't take vacation. I fundamentally disagree with the use of the word cyclicality in our business. I just don't think it's cyclical anymore. I don't think it was historically. You had a fundamental shift in the very structure of the pharmaceutical industry. So they do less work internally and the work is coming outside to folks like us and their money is coming outside to support biotech companies. And then you just have an enormous additional cadre of biotech companies, most of whom are virtual and have no internal capability with science that's working. So whether that's immuno-oncology or early gene therapy where it's been directionally a thousand I&Ds being filed and (inaudible) continuing in the first RNAI drug getting in the market, it's just a different marketplace. So clients are externally focused and spending more money in discovery and they have more tools at the disposals. So we don't worry about the cyclicality and go outside of your question is an interesting one. And by the way, I think the good news about our business, somebody is probably going to ask, so I'll just say it is, we don't look at a lot of external issues that we keep us up at night. It's all about our own execution and having enough people well trained to do the work in advance when the work gets to us, not sitting around when nothing to do. But coming online as we need to work slightly ahead of it and the same thing with space. So if we wait until we get an order and hire the people and make the space ready to wait. So I think we've been doing that really well for the last, six plus years. I think we will continue to do that well. It does certainly, obviously it looks like the demand is accelerating. The scale and scope of our infrastructure and the amount of empty space that we have for instance places like Massachusetts and Reno and MPI to just finish that internally and have small amounts of space at our other sites, while it will cause us directionally to spend more capital, we're doing that to grow the business and I think that's exactly where we're doing it and it's embedded or not embedded in your question, if overtly in your question, is this sort of concern about going back to 2009 when we had built too much space in the economy blew out. Even if something bizarre and unimaginable as the economy growing up what happened, let's say today except for MPI, we don't have excess space. We don't have people sitting around and I think the worst thing that could happen to this Company. I don't think it's going to happen. And the worst thing that would happen is, our growth rate will slow. Our margins would hold and I think pricing would hold. So we don't see a lot of storm clouds, but there is -- for sure, there is a balancing test between opening the states, and adding the people too slowly and doing that too quickly. We have to accommodate the demand which has increased and we think we will continue to be strong.Hope that's helpful.
Operator
Thank you. The next question comes from the line of Erin Wright with Credit Suisse. Please go ahead.
Erin Wright -- Credit Suisse -- Analyst
So, a couple of RMS questions here. I guess what do you think kind of the supply demand dynamics look like outside of that IS segment. And do you still anticipate the ability to take price for the foreseeable future and how is the China business growing in the quarter? And do you see that longer-term runway for growth there, is it running ahead of your expectations? Thanks.
James C. Foster -- Chairman, CEO & President
Yes. So China is a very high-growth business, it's -- I don't oversimplify it, but the market is so robust. Competition is sort of government infused with kind of the lack of historical scientific prowess that, as we build the states and make animals available. We will be able to sell them. I think we have extremely good reputation in China, really, really big market. So we have to -- we have to accommodate for that. So we opened a new facility in Shanghai at the beginning of this year. We had finished that whole facility. And we were in the process of doing that. So, we had incremental animals available to sell to that market. You'll recall from last year Chinese growth rate was a little slower than we would have like, as we were capacity constraint. We are not any longer. So it's growing as quickly as we can build the space and we don't see any possible slowdown there for us. We look at the world and five-year increments in that strategic plan, we certainly think it will continue to grow nicely as long as we accommodate the space. And I would say (inaudible) we have a very strong management team there. So I'm confident in their ability to meet the market demand. If you strip away the IRS contract and just figure that IS will continue to grow nicely as another business that we have. The supply quotient is good. It was a little better in the third quarter than we had seen historically in some mature markets like the US and Europe. We are getting price and we'll always get price. And so if you can just you can plan on that, and as I said earlier, we're quite confident that we also some mix obviously with very high value of the animals like the immunocompromised animals, animals with no immune system. And we are focused very much on getting market share, particularly in the academic sector. So we're not going to get ahead of it. We still have tagged this business as a low single-digit grower for the foreseeable future. We're really thrilled that it grow -- sorry that it grew faster in the third quarter. If you just do the math with the new contract. It's going to grow faster next year, but you have to be thinking about, say, what happens when that anniversaries with that business fundamentally look like. So the business where we think we can continue to grow, it get priced, get mix, hopefully continue to get share and a lot of this growth depends on how much additional R&D capacity comes out of big pharma, because that sounded good thing for us or conversely how much more pure discovery basic research is nuanced with the clients and we are obviously seeing an increased focus on basic research and that's helping our business. We are larger than our clients and actually is large as all of our competitors put together, so we will get a disproportionate share of the demand going forward. And we have -- we do have a bunch of new IT tools and capabilities in this business and we don't feel really strongly about our ability to deliver a better product and service that our competition.
Erin Wright -- Credit Suisse -- Analyst
Okay, great. Thank you.
Operator
Thank you. Our next question from from the line of Derik Bruin with Bank of America. Please go ahead.
Derik Bruin -- Bank of America -- Analyst
Hey, good morning everyone.
James C. Foster -- Chairman, CEO & President
Good morning, Derek.
Derik Bruin -- Bank of America -- Analyst
So, Jim, I appreciate that the business is not as cyclical as historically was, I agree with you on that. But you clearly tied to the Biotech Capital Markets and the funding cycle in biotech, and I'm just clearly with the VC gains going up and down, you've benefited from gains over the last couple of years, because the market has been strong. I'm just curious about the downturn -- the loss in Q4. And so how should we think about? How well you're hedged in case of biotech downturn in the capital markets and sort of if that comes out of favor, and also I know you're going to exclude gains and sort of commentary on this from your guidance next year. If you can just clarify exactly what that means and how you're going to talk about that?
James C. Foster -- Chairman, CEO & President
So I'll let let David do that on the second. Just want to make sure maybe less for you, more other people who are listening to that question that we bifurcated so. Infusion of capital from the capital markets to biotech is really strong. It continues to be strong in the three to four years of capital there and we have a plethora of new clients. And I think things are very robust. So we don't see any rationale that that's going to slow down for the long-term foreseeable future. And as long as the science is good. I do think that the capital markets and the pharmaceutical companies will invest in them. And obviously that's part of our growth rate. The investment in biotech and the fact that biotech is driving that growth significantly, that's different than returns we get from the VC funds in which we invest and I'll let David talk about that.
David R. Smith -- Executive Vice President & Chief Financial Officer
Yeah. So, couple of things on the VC. So just to talk about what's taking place in Q3, Q4 and then we'll turn to the specific question on the guidance. In an $0.08 gain in Q3, we had one fund, which had a clinical trial issue and that was a known loss, which is unlikely to recover in the short term. And then when we did our mark to market calculation, which we did at the end of last week, when you put Q2s together, that's brought from about a $0.10 loss for Q4. Now clearly the markets can change and that could go up or down, but in broad ways of looking at it, the $0.08 gain in Q3 is somewhat offset by the changes in Q4, so -- in a way to neutralize each of that and that's the way we're kind of looking at the business, we're looking at our core performance. We've been calling out even in this quarterly result. We've been calling out what our underlying performance is being if you exclude the VC going forward and we can talk about this in February. For next year. We will take the VC out of our guidance, but our current intent is to report the losses, actual numbers. But again, we will make sure that when we're talking to our numbers, we would talk about what our core business performance looks like, i.e., with how the VC gain or losses from our results, sort of, if you compare that to the guidance.
Derik Bruin -- Bank of America -- Analyst
Thank you.
Operator
Thank you. Our next question comes from the line of Robert Jones with Goldman Sachs. Please go ahead.
Robert Jones -- Goldman Sachs -- Analyst
Great, thanks for the question. You've covered a lot of the other topics in DSA and RMS and maybe I'll just ask one and manufacturing support looks like the margins there were slightly down from where we were last quarter. It sounds like the expansion related to biologics business, probably largely responsible for that. I'm just curious was there anything incremental relative to what you guys had expected or planned for around the Biologics expansion. And then as we think about 4Q and beyond, can you maybe just help us bridge from where the margins are today to where they are expected to get back into that mid '30s range.
James C. Foster -- Chairman, CEO & President
The Microbial business. The biggest part of that segment continues to be very strong and I suspect that that will continue. We have the big facility that we're moving into in Pennsylvania, it's a complex move. It requires hiring people and a fair amount of cost in setting (ph) the validation of assets that we're moving there and we need to do in a very measured fashion. So that's a comment on 19 except to say that it's going to be a bit of a headwind whether how profound that is or not. We'll talk to you about that in February and I would say that it's nothing incremental to what we thought. It's good, getting to be a good-sized business with low-single-digit -- low-double-digit demand, very frothy market and it simply requires investment capacity, one big one in the few small additions in space and people to stay up with the competition who is quite good in this business and to stay up with market demand. So we feel really good about where we're making those investments and have a modest bit of headwind going forward. Next question, please.
Operator
Thank you. The next question comes from the line of Ricky Goldwasser with Morgan Stanley. Please go ahead.
Ricky Goldwasser -- Morgan Stanley -- Analyst
Yeah, hi, good morning. And congrats on a great quarter. So just a question on the the workforce. Obviously, you've had some incremental costs associated with the increase in wages. Demand is very strong across the industry. When we think about what are the limiting factors, is labor one of them? And where are you hiring people from?
James C. Foster -- Chairman, CEO & President
Yes, so, you said a minute ago we're looking internally. That's our opportunities and challenges, the good news is, it's very much internally based and so (inaudible) us to stay ahead and the demand from people and capacity. Capacity is a bit easier, you have to plan for it. You just have to allocate -- you have to have the cash which we do and you have to allocate it. People is more complicated, because even entry-level staff here takes off in several months to be trained. So you have to find them, you have to keep train them, and you have to keep them. And of course, Rick, as you know, we are recruiting in multiple geographies. And some of them are in remote areas where there's just less competition for the people versus less people. And then if you look in Boston and Cambridge, there's a lot of people available, but there's a lot of competition obviously with biotech and the pharma. So the improvements that we made in our wages was principally directed toward the entry-level employees, where we were not doing, as well as, we would have liked or having some challenges there. As -- simply as a result of improving this in July, we're doing much better and we're hiring a lot of people and I think doing a very good job of having -- we're hiring more of them together and train them together. So they go into the workforce together. We have a little bit of compression with existing employees which we had to moderate as well. So, it is -- the rate limiting factor is one that we focus on dramatically. I would say that we are all spending lots of our time on that, it's a great place to be and it's actually a bit easier to get senior scientists and then actually what was in entry-level people. So I think that we said that we've improved that. We're getting a lot of senior scientist from big pharma and biotech, because I think it has become a very congenial and scientifically rigorous and interesting place to work, particularly given that we work on 80% of the drugs that are approved last year. So that's more straightforward, I would say, and we've made a lot of progress this year, not just since July, but over the year. So I feel very good going into next year and we will continue to check, because every geographic locale is different and we need to make sure that we are at least competitive, if not slightly ahead.
Ricky Goldwasser -- Morgan Stanley -- Analyst
And then one follow-up on the contract that you're seeing. Could you give us maybe some color on what's the average size of the contract that you're winning today and that you have in your pipe versus contracts -- where contracts were a year ago. So perfect size and scope in the term, just to give us a little bit sense of how we should think about the pipeline and the opportunity?
James C. Foster -- Chairman, CEO & President
It hasn't changed much. You've got very short-term studies and talks for couple of weeks or 30 days, and you have long-term carcinogenicity of these studies that are a year or two. So I would say that the overall mix hasn't fundamentally changed and it's unlikely too, because it's so heavily regulated, most of the discovery work is shorter, et cetera, target identification, which can take years. The Biologics were comes in really quickly and goes out really quickly. So, we haven't added any massive shift in the time frame or associated with that. I think the demand is pretty much across the Board has intensified -- certainly intensified. So third quarter as we said, bookings and backlog were quite strong in the third quarter, which should bode well for the fourth quarter. So no fundamental changes in the sort of structural nature of our work.
Operator
Our next question comes from the line of Jack Meehan with Barclays. Please go ahead.
Jack Meehan -- Barclays -- Analyst
H, thanks. Good morning, everybody. I was hoping you could just elaborate a little bit more on where you're going to be investing in the fourth quarter, there's a big stepup embedded to get to the $120 million of CapEx guidance. So just a little bit more color on where some of those funds are going would be great.
David R. Smith -- Executive Vice President & Chief Financial Officer
Yes, we were in a good place these days and that such a large proportion of our capital is going for growth. So meaningful investments in, I'd say, Safety first, some investments in our research models business, definitely some investments in our discovery business and as we've called out significant investments in Biologics. So -- and to a lesser extent in the fourth quarter, but we're always investing in our microbial business. So the good news is, if we also step back and look at the company right now, very high growth rate in the third quarter, growth rate in every one of our business segments at or above our long-term targets, which necessitates additional capital investment and additional space. So yes, we're working hard to make sure that we go into next year with sufficient capacity to accommodate the demand.
And when we were in New York at our Investor Day, we gave some signals for CapEx for 2019. We said it would be sort of mid-to-high single digits as a percentage of revenue. So what you're seeing in Q4 is a little bit of that stepping up to service that great demand that Jim has just mentioned as we scale into 2019.
Jack Meehan -- Barclays -- Analyst
Great. And David, one follow-up, I know you said you're getting, on the tax rate, a little bit more clarity with tax reform and you're gliding a little lower than you previously expected, do you think this is a good run rate as we think about a leaping off point in 2019?
David R. Smith -- Executive Vice President & Chief Financial Officer
Yes, and again in New York. We also shared a little bit of insight to the tax rate in future which we said our normalized tax rate should be about the mid '20s. So what you think for Q4, is we're heading up to that sort of mid 20 range. And the reason that you're seeing a stepping up in Q4 over the previous quarter is really to do with the way the stock compensation benefit gains throughout the year. We get more of the benefit at the beginning of the year than we do at the end of the year. So, yes, and you are seeing in Q4 from an entry point into the sort of normalized level should be (inaudible) for channel which is mid 20s.
Operator
Our next question comes from the line of George Hill with RBC. Please go ahead.
George Hill -- RBC -- Analyst
Hey, good morning, guys, and thanks for squeezing me in. Jim, we saw the news at Novartis this week that they were cutting a lot of their pre-clinical pipeline and I guess maybe just walk through how we should think about that as it relates to either Charles River's exposure or there's been a lot of talk on the call about where are we in the cycle. And I guess just how should we think about the risk if a lot of bigger pharma companies and bigger biotech companies start taking a closer look at the early stage work and doing a lot of pooling around things that might have a lot of future economic value?
James C. Foster -- Chairman, CEO & President
Now we have the Novartis, you currently spoken about, so it's hard to kind of comment on that specifically. I guess there's two answers to that. One is, remember that we get paid to tell the clients whether the drug looks promising or not and whether it should continue through the development pipeline. So we're often helping them make those determinations. So that's something that we've always liked about our business model, and I would say that every drug company obviously has different strengths and different therapeutic area focuses and different quality of pipeline. I think everybody has been very value to -- about the strength of their pipelines over time. But having said that, the flip side is so much more scientifically rigorous and beneficial avenues to go down 19 (ph) in cell therapy that I would be surprised if the the pipelines don't stay where they are or expand and also some initial work is being done, not -- well, sometimes literally by biotech for pharma, but literally instead of pharma which is eventually they'll have deals when these companies revive and so much of the R&D effort of the pipeline is nuance sort of biotech, and as you know, we have more of our revenue with biotech and pharma. So not feeling that hearing that or seeing that with our clients or overall demand.
Operator
And our last question comes from the line of Dan Brennan with UBS. Please go ahead.
Daniel Brennan -- UBS -- Analyst
Thank you, Dan Brennan. So, Jim and David, just a few questions, first, I was hoping, Jim you could discuss cap allocation and M&A. Just give us a little flavor for what the market looks like from an M&A perspective. Any color on types of deals adjacencies, things like that, sizing would be interesting. Thanks.
James C. Foster -- Chairman, CEO & President
Thanks for that. I would say that, so I just want to reiterate the fact that we have -- we plan a $15 billion (ph) market is growing a 5% to 6% a year. So we feel that market is more than sufficient to provide a very long runway for us to do M&A in that space. So you shouldn't expect us to take any dramatic fee toward or they get into adjacencies and that's in turn sounds good, but it's really risky as a scenario that you're trying to understand. So in the businesses which we are currently in with some modest modifications well distributed by which we talked about is an M&A deal, it's a really powerful adjacency providing capabilities to do better this large molecule discovery, target identification, which our clients have really been wanting. So we're going to fill in in areas like that, we're going to fill in in our current space. So we actually have M&A opportunities in every segment of our business right now. Because I mean any of them happen as you know. We have conversations going on with multiple potential sellers. Businesses absolutely will be for sale, not necessarily to us, but many of them are private equity, only a few of them are privately owned. We feel that we are well financed leverages waive (ph) a lot of returns, our promise to ourselves to avoid it to our shareholder base was twofold, why don't we take the time to properly digest MPI, and while I don't think digestion is fully accomplished yet, that acquisition and the integration is going extremely well. I was just said this week, last week and it's really gone well from a client point of view and employee point of view, and any cost synergy point of view, and an operating margin point of view. So going extremely well, but we sort of feel like we have the financial capability, operational strength, integration capability and a significant number of targets. it specifically in our current space that it will make us not just a bigger company, but a better solution for our clients. So we obviously now put M&A in our guidance or even into our strategic plan, because you can't be assured that you will get done, but we know the deals that we would like to do with some level of specificity and we'll be working on them. It's always the best use of our capital. We'll continue to pay down our debt. We've suspended buying back stock. We have no other more thoughtful way to spend our capital and to grow the business, which we talked about strategically growing our business. I don't know how to do that, besides M&A and some organic investments we talked about our San Francisco expansion, our (inaudible) and we hope to do more of that. So stay tuned, but we're doing it methodically and professionally. We won't chase any deals. But the universal possibilities is pretty robust.
Daniel Brennan -- UBS -- Analyst
Great. And then I want to just ask a question on your Tox business. I mean throughout the prepared remarks, you seem to indicate that you're gaining share across the Board. So maybe can you just remind us what you share of that market today and kind of how much your growth is coming from the overall end market growth versus share gains, and are you seeing any any change in your share gains over the last couple of quarters?
James C. Foster -- Chairman, CEO & President
(inaudible) nuanced, how much is fewer market growth, except to say that it's probably slightly more of that with share gain, maybe significantly more, you just have so many new companies, right? So they didn't exist, nor that their work exist last year or two years ago when they hit the need to buy our discovery or toxicology services. So there's a lot of them. Our relationships with venture capital firms whether we're limited partner or not has been very helpful and are securing a lot of that business. So I think we gained share, would have necessary taking from our competitors, it's work that currently available. I think we are consistently taking share from our competition when we have a head-to-head opportunity to win business, but we didn't have where we are trying to protect business that we do have, it's going quite well. We're going to see a lot of work on outside of big pharma. We have several conversations going on now to reup (ph) long-term deals, but also companies that are saying to us, we are considering close in our space. We just want to make sure you have enough capacity to accommodate us, there are fair number of conversations about that. So the demand is good as we have probably ever seen it, but certainly as good as we've seen in the last decade. And since we are the largest player and have such a broad geographic footprint, we have an opportunity not to look at everything, but to look at the vast majority of work that either is new or that's in our PL to go after it. So I don't see any reason why that should not continue.
Daniel Brennan -- UBS -- Analyst
And if I can sneak in one final one. Just back to margins, David. So is it possible to at least just quantify what the drags are that we know of today for 2019, and maybe between NIAID and also the wage increased. Like -- is that, I mean we starting 2019 with a 20 basis point to 30 basis point drag and then we'll obviously with the official guidance in 2019, and then related to that, the hourly wage increase that you've done. Is there any more to do with other parts of the company that need to get wage increase or is there anything in 2019 that could reoccur there. Thank you very much.
David R. Smith -- Executive Vice President & Chief Financial Officer
Yes. The Only other item of what you just called out was, as Jim mentioned, there is still a bit of a drag on Biologics as we go through, and setting up the total running of that Pennsylvania site, other than that you've called out the main drag that we've already shared with on the street either in the Investor Day or today.
Daniel Brennan -- UBS -- Analyst
Okay , thank you.
David R. Smith -- Executive Vice President & Chief Financial Officer
Great. Thank you for joining us on the conference call this morning. We work forward to seeing you at upcoming investor conferences. This concludes the conference call. Thank you.
Operator
Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation, and for using AT&T Teleconference Service. You may now disconnect.
Duration: 81 minutes
Call participants:
Todd Spencer -- Corporate Vice President of Investor Relations
Jim Foster -- Chairman, President and Chief Executive Officer
David R. Smith -- Executive Vice President & Chief Financial Officer
Ross Muken -- Evercore ISI -- Analyst
James C. Foster -- Chairman, CEO & President
David Windley -- Jefferies -- Analyst
Tycho Peterson -- JPMorgan -- Analyst
John Kreger -- William Blair -- Analyst
Erin Wright -- Credit Suisse -- Analyst
Derik Bruin -- Bank of America -- Analyst
Robert Jones -- Goldman Sachs -- Analyst
Ricky Goldwasser -- Morgan Stanley -- Analyst
Jack Meehan -- Barclays -- Analyst
George Hill -- RBC -- Analyst
Daniel Brennan -- UBS -- Analyst
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