Inotiv - Earnings Call - Q1 2025

Executive Summary

• Q1 FY25 revenue declined 11.5% YoY to $119.9M, with RMS down 15.1% on sharply lower NHP pricing and DSA down 4.2%; operating loss widened to $15.5M and net loss to $27.6M; Adjusted EBITDA fell to $2.6M (2.2% margin).
• Liquidity improved via a December equity raise ($27.5M net), boosting cash to $38.0M at 12/31/24; total debt (net) was $396.0M; no revolver borrowings outstanding at quarter-end.
• DSA health stabilized: book-to-bill 1.01x and backlog $130.4M (flat vs Sep-24), though cancellations were elevated due to a single ~$4M project cancellation; management highlighted improving Discovery awards and expects sequential RMS margin improvement as high-cost NHPs are now worked through.
• No FY25 guidance was provided; management reiterated a plan to comply with covenants and expects capex <4% of revenue; “substantial doubt” language remains in the 10-Q pending execution of plans and lender discussions.

What Went Well and What Went Wrong

• What Went Well

  • DSA bookings/backlog resilience: book-to-bill 1.01x; backlog $130.4M vs $129.9M in Sep-24 (“encouraging” Discovery awards momentum).
  • Liquidity actions executed: $27.5M net proceeds from 6.9M-share offering lifted cash to $38.0M at 12/31/24; zero revolver borrowings at quarter-end.
  • Cost optimization trajectory: next phase of North American RMS site optimization expected to generate ~$4–$5M annual savings once complete; CEO: “We are dedicated to building a stronger, more consistent company… enhancing the client experience”.

• What Went Wrong

  • RMS pressure from NHP pricing: RMS revenue fell 15.1% YoY; CFO noted US NHP ASPs were ~30.3% lower YoY and 1.6% lower QoQ; RMS GAAP operating swung to a $1.2M loss.
  • Profitability compression: operating loss widened to $15.5M (from $9.4M); Adj. EBITDA fell to $2.6M vs $9.6M in Q1 FY24; net loss rose to $27.6M.
  • Cancellations: DSA cancellations rose, driven by one >$4M project, muting otherwise stronger awards; management flagged lumpiness risk in shipment timing that can swing quarterly RMS revenue by $3–$4M.

Transcript

Frank Takkinen (Senior Research Analyst)

Good day, everyone, and welcome to today's Inotiv First Quarter Fiscal 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing Star 1 on your telephone keypad. You may withdraw yourself from the queue by pressing Star 2. Please note this call may be recorded, and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. Steven Halper. Please go ahead, sir.

Steven Halper (Head of Investor Relations)

Thank you, Jess, and good afternoon, everyone. Thank you for joining today's quarterly call with Inotiv's management team. Before we begin, I'd like to remind everyone that some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future, operating, and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date. You should not place undue reliance on these forward-looking statements, and the company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise. Please refer to the company's SEC filings for further guidance on this matter, including risks and uncertainties that could cause results to differ from forward-looking statements.

Management will also discuss certain non-GAAP financial measures in an effort to provide additional information for investors. Definitions of these non-GAAP measures and reconciliations to the most comparable GAAP measures are included in the company's earnings release, which has been posted to the investor section of the company's website, www.inotiv.com, and is also available in the Form 8K filed with the Securities and Exchange Commission. If you haven't obtained a copy of today's press release yet, you can do so by going to the investor section of Inotiv's website. Joining us from the company this afternoon are Bob Leasure, President and Chief Executive Officer, and Beth Taylor, Chief Financial Officer. John Sagartz, Chief Strategy Officer, will join us for the question-and-answer portion of the call.

Bob will begin with some opening remarks, after which Beth will present a summary of the company's financial results for our first fiscal quarter of 2025, and then we'll open the call for questions. It is now my pleasure to turn the call over to Bob Leasure, CEO. Bob, please go ahead.

Bob Leasure (President and CEO)

Thank you, Steve. Good afternoon to everyone joining our call today. During the first quarter, we moved forward with many of our objectives, which included improving the company's liquidity position, reducing revenue volatility, continuing to focus on client satisfaction and client relationships, and continued integration efforts as one company. I'll spend a few minutes on our first quarter results and highlights. To enhance liquidity, our recent equity offering provided net proceeds of $27.5 million. We're very pleased with the investor interest in our coming this offering. The additional equity will help reduce liquidity risk going forward, allow us to continue to make long-term strategic decisions, provide additional stability. To reduce RMS volatility, we've expanded our NHP client base for calendar 2025 and pre-sold much of our NHP inventory, which we anticipate should deliver more consistent revenue streams.

In addition, we also expect to continue to see an increase in our revenue from quality management services in calendar 2025, as we did in 2024, and we continue to invest in our NHP facilities in order to maintain this momentum. We continue to make progress integrating and improving our North America transportation distribution systems, which we brought in-house about a year ago. We believe this has helped to improve the client experience as well as our efficiency. Last quarter, we announced we would continue our site optimization program, North America, for the RMS business, which included closing three additional sites, of which two are owned and one is leased, while expanding an existing leased location. We continue to execute on this initiative.

This expansion is expected to be an approximately $5 million investment, and we intend to use tenant improvement dollars along with proceeds from the sale of the two owned facilities to pay for this consolidation project. Once completed, we expect to be at the end of fiscal 2026. We estimate approximately $4-$5 million a year in cost savings from reduced repair and maintenance expense on facilities, lower cost of production, along with improved service for clients, while production capacity is expected to be unchanged. For the first quarter of fiscal 2025, total revenue was $119.9 million compared to $135.5 million in the first quarter of fiscal 2024, representing a decrease of $15.6 million, or 11.5%. This decrease was mainly due to a $13.5 million reduction in NHP revenue, which was driven primarily by pricing.

The lower pricing and some lingering high-cost inventory again negatively impacted NHP margins during Q1 of fiscal 2025. In Q2 of fiscal 2025, we expect to see these margins improve compared to Q4 of fiscal year 2024 and Q1 fiscal year 2025. DSA revenue decreased slightly from $44.7 million in Q1 of fiscal 2024 to $42.8 million in Q1 of fiscal 2025. While DSA operating margins have remained stable, the decrease in DSA revenue was mainly due to a decline in our discovery services revenue. We had a strong quarter for new DSA awards, which was partially offset by cancellations. We saw a continued trend of strong awards for our new safety assessment services that were added over the last two years, and we saw a 16% increase in discovery service awards in Q1 of fiscal 2025 versus Q1 of fiscal 2024.

This was the first quarter of reported growth we saw for discovery service awards in the last two years. For the trailing 12 months, discovery service awards are still down 17% compared to the prior 12-month period. It is still too early to say whether this is truly a trend, but it is encouraging, and we believe that some of the changes we made to our discovery services sales team, the marketing team, and our sales approach a year ago are beginning to have an important impact. Now, let me provide some comments on what we are seeing in the market today and some forward-looking thoughts on our different business segments. Going into calendar year 2025, we will continue to focus on process optimization, innovation, exceeding client expectations.

We expect to see year-over-year revenue and adjusted EBITDA growth each quarter for the remainder of fiscal 2025, as well as reduced NHP revenue volatility as compared to fiscal 2024. In the DSA business, we are emphasizing growing our existing client base through cross-selling our broad portfolio of products and services and attracting new clients to gain market share. We believe the additional investments we made in our sales team in 2024 and planned investments for 2025 will continue to benefit us in fiscal 2025 and 2026. In the RMS segment, we've added new clients, and based on our NHP pre-sales, current purchase orders, and demand for quality management services, we are optimistic about our goals for increasing RMS revenue in calendar 2025. Overall, we remain confident going into 2025, and we're also preparing for 2026 and 2027.

The geopolitical and market condition, risk, and uncertainties will remain with us, as they do for all companies. However, we are committed to building a business that will create value for our clients, employees, and our shareholders, and look forward to our future. I'll now turn the call over to Beth, who will provide a more detailed synopsis of Inotiv's results for the quarter.

Beth Taylor (CFO)

Thank you, Bob, and good afternoon, everyone. For the first quarter of fiscal 2025, total revenue was $119.9 million compared to $135.5 million in the first quarter of fiscal 2024. This was a $15.6 million, or 11.5% reduction in sales from the prior quarter, and as Bob said earlier, most of this reduction was a result of reduced NHP pricing in the U.S. within our RMS segment. RMS revenue for the first quarter of fiscal 2025 decreased $13.7 million, or 15.1%, compared to Q1 of fiscal 2024. As discussed earlier, the decrease in RMS revenue was due to the lower NHP-related product and service revenue, mainly as a result of a lower average selling price for NHPs in the U.S. We sold approximately the same number of NHPs in fiscal Q1 2025 compared to fiscal Q1 of 2024. However, the NHP average selling price in the U.S.

In Q1 of fiscal 2025 was approximately 30.3% lower than in Q1 of fiscal 2024 and 1.6% lower than that in Q4 of fiscal 2024. We have indicated on previous conference calls that NHP sell prices declined from the highs we saw in Q4 of fiscal 2023 and the first half of fiscal 2024. The lower pricing and higher cost inventory again negatively impacted NHP margins during Q1 of fiscal 2025, and we believe RMS margins for the remainder of calendar 2025 should improve from here. DSA revenue in the fiscal 2025 first quarter was $42.8 million compared to $44.7 million in Q1 of fiscal 2024. The quarter-over-quarter decrease in DSA revenue was primarily driven by a decrease in discovery services revenue. Overall, net new DSA orders this quarter were $42.3 million versus $33.7 million last quarter and $63.8 million in Q1 of fiscal 2024.

The conversion rate in the first quarter of fiscal 2025 was 32.8%, slightly up from 32.6% in the prior year period. The DSA cancellations and negative change orders in the first quarter of fiscal 2025 were approximately 54% higher compared to the prior year period, which had the lowest cancellations in the last two years. Cancellations in the trailing 12-month period were approximately 1% less than the prior period. The overall operating loss for the first quarter of fiscal 2025 was $15.5 million compared to an operating loss of $9.4 million in the first quarter of fiscal 2024, primarily due to lower NHP margins as previously discussed. Partially offsetting the decreases in NHP margins were decreases in restructuring costs, transportation costs, and costs related to sites closed in connection with our optimization plan. There were slightly lower DSA sales, which resulted in relatively flat DSA operating margins.

Consolidated net loss attributable to common shareholders in the first quarter of fiscal 2025 totaled $27.6 million, or a $1.02 loss per diluted share. This compared to consolidated net loss attributable to common shareholders of $15.4 million, or $0.60 of loss per diluted share in the first quarter of fiscal 2024. For the first quarter of 2025, adjusted EBITDA was $2.6 million, or 2.2% of total revenue, compared to $9.6 million, or 7.1% of total revenue for the first fiscal quarter of 2024. Non-GAAP operating income for our DSA segment in the first quarter was $7.1 million, or 5.9% of total revenue, compared to $6.9 million, or 5.1% of total revenue in the last fiscal year's first quarter. As we continue to fill recently added capacity, we believe we will see margin improvement through operating leverage.

The net book-to-bill ratio for DSA in the first quarter of fiscal 2025 was 1.01 times to 1. Our trailing 12-month book-to-bill was 0.87 times to 1. DSA backlog was $130.4 million at December 31st, 2024, compared to $129.9 million at September 30, 2024, and $152.3 million at December 31st, 2023. In our RMS segment, non-GAAP operating income in the first quarter of fiscal 2025 was $9.4 million, or 7.9% of total revenue, compared to $16.9 million, or 12.5% of total revenue in the first quarter of fiscal 2024. Interest expense in Q1 of fiscal 2025 increased to $13.8 million from $11.4 million in the first fiscal quarter of 2024 due to an increase in interest rates, interest associated with the second lien notes issued in September 2024, and periodic draws on our revolving credit facility.

Our balance sheet as of December 31st, 2024, included $38 million in cash and cash equivalents as compared to $21.4 million on September 30, 2024. Our quarter-end cash balance includes the net proceeds from our recent equity offering. Total net of debt issuance costs as of December 31st, 2024, was $396 million compared to $393.3 million on September 30th, 2024. This includes $111.6 million of convertible notes as of December 31st, 2024, and our second lien notes of $19.2 million. Net cash used in operations for the three months ended December 31stst, 2024, was $4.5 million compared to cash used in operations of $6.5 million in the three months ended December 31st, 2023. In October of 2024, we entered into a Third Amendment with the seller of OVRC and extended the payable to January 27th, 2026.

Capital expenditures in the first quarter of fiscal 2025 were $4.5 million, or approximately 3.7% of total revenue. The first quarter of fiscal 2024, capital expenditures were $5.6 million, or 4.1% of revenue. We expect to spend less than 4% of revenue for CapEx in fiscal 2025. With respect to guidance, as you know, we withdrew our fiscal 2024 financial guidance after we reported Q2 2024 results. While we continue to feel good about the progress we have made in recent quarters, we are not providing fiscal 2025 guidance at this time. As we have stated previously, we hope to provide guidance once we have greater clarity on the market and client demands. Needless to say, management has developed a comprehensive fiscal 2025 annual operating plan designed to continue to optimize our capital allocation and expense base and improve our operating results as discussed earlier.

The plan forecasts compliance with the updated covenants under our latest amendment to the credit agreement entered into in September of 2024. With that financial overview, we will turn the call over to our operator for questions.

Operator (participant)

Thank you. At this time, if you would like to ask a question, please press Star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing Star 2. Once again, that is Star 1 to ask a question. We'll go first to Frank Takkinen with Lake Street Capital Markets.

Frank Takkinen (Senior Research Analyst)

Great. Bob, Beth, thanks for taking the questions. I was hoping to start with maybe a little bit more of an update around NHPs. I was hoping to kind of ask two parts to it. One, have we worked through some of the higher-cost NHPs throughout the first quarter, or do we still have some of that to work through in the remainder of the year? Two, just any update from ordering patterns from customers would be good to hear as well. Thanks.

Bob Leasure (President and CEO)

Going into calendar 2025, we have worked through all the higher-cost NHPs at this point. I think that that headwind is past. As far as ordering patterns, we have significantly changed. We said we would do last February. We significantly changed our approach this year. Last February, we went into the year without any real commitments, and we were selling most on the open market. It is still fairly volatile. People did not want to, at that point, were not sure you wanted to lock into commitments. Going into this year, as prices normalized a little bit and stayed stable over the last two or three quarters, we do have more solid commitments for this year going into this year. We do know what people's expectations are. We can deliver, and they may move a week or two. We will work with our customers.

What we also do now is we may sell them board so they can board them with us. That gives us the ability to be a lot less volatile than we have. I think we'll be a little more consistent. We can still see, as we have in prior years, things slip in the last, you know, between the quarters. If large shipments may take place, you know, slip from one a couple of weeks or for one month to the next, which can shift some things through quarters. For the most part, you know, as I look at our cash flow and our stability and our volatility, we're going to be much less. I think we're in a much better position going into this year. I think it'll be significant as we get into Q2, Q3, and Q4 going into this year.

Frank Takkinen (Senior Research Analyst)

Okay. That's helpful. I was hoping I could ask one about the site's development. I know it's a little bit challenging to predict exactly how it's going to go. With the contemplation of Cambodia NHPs no longer being able to be exported worldwide, how could that impact your dynamic? I realize it was pushed to the following year, but clearly there's some skepticism around that supply base. Maybe just talk through theoretically how that could impact the global NHP supply-demand dynamic.

Bob Leasure (President and CEO)

Obviously, Cambodia is an important part to the global supply base, and they're still exporting out of Cambodia, I think, in the range of 9,000 a year. If you take that out of the global supply base, that puts a lot more pressure on what is available from the other existing supply bases. They did have the Saudis meeting this week. I think they pushed that decision off. They're going to revisit again probably in November of 2025. Right now, we were ready for, I would say, we prepared for either event. We have a lot of contracts starting for this year on the sales side and buy side. Whatever the Saudis people choose to do, we will prepare for it. I understand it's very important, but we can't control that. We need to be able to adapt.

We have worked very hard in the last two or three years to diversify the countries, diversify the people we work with, to qualify additional suppliers. We continue to keep maintaining relationships with farms in Cambodia. We will comply with whatever they decide and adjust accordingly. I am very proud of the team we have, how they have adjusted. They have become much more agile. I think our customers are looking for ways to reduce risk. With that, the business continues to evolve. We will evolve with it.

Frank Takkinen (Senior Research Analyst)

Okay. That's helpful. Then just last one for me. I was hoping you could help us out a little bit with maybe adjusted EBITDA cadence throughout the year. I heard the comment around staying in compliance with the covenants. Now that we're through some of the higher-cost NHPs and expecting a gross margin lift, how should we expect that to flow into adjusted EBITDA for the fiscal second quarter ended March?

Bob Leasure (President and CEO)

I think what we'll see over the year, and I'm not giving guidance, but for us to hit those covenants, it's probably clear, as some of you have identified in your analyst reports, that we'll have to grow sales. We expect sales will grow year over year. I think I alluded to that in my comments. To see sales grow year over year, having just seen that that quarter that we finished have lower sales, you can pretty well see that we think that we will have a pretty good Q2, Q3, and Q4. I think if you also see that our original covenants, we are supposed to have a trailing 12-month EBITDA in December. Beth, I believe it's $1.5 million. That's trailing six months, two quarters, was our covenant, $1.6 million. We're coming out of this quarter at positive, I believe, closer to $8 million.

We're obviously ahead of where we thought we would be, and we're pleased with the results. I think that the trailing nine months now going into March, I think our covenant is set, I believe it's 13.5, Beth?

Beth Taylor (CFO)

Yes.

Bob Leasure (President and CEO)

We're in pretty good shape. As we look to the future quarters, we're fairly bullish compared to where we have come from. We have some, I think, great opportunities in front of us with what we have done. We have right-sized all of our facilities for pretty good economics. That's something we've worked hard on the last two years. We don't have to worry about as much other than the site consolidation we have going on in North America during a couple of sites. We don't worry as much about brick and mortar and right-sizing. We've done a lot of the integration. We started up some new services and expanded some sites. In the DSA business, as those sites grow, we're going to see some significant margin improvement at those sites. I'm excited to see those growth.

We saw good growth, as I just alluded to, in our discovery services and some of the service, our startups, which I think will enhance, we'll see in the back half of this year. I think we'll see some margin improvement for sure. We'll see some adjusted EBITDA improvement on the back half of the year on the increasing sales and improving margins.

Operator (participant)

Once again, if you would like to ask a question, please press Star 1 on your telephone keypad now. We'll move next to Matt Hewitt with Craig-Hallum Capital Group.

Matt Hewitt (Senior Research Analyst)

Good afternoon. Thanks for taking the questions. Maybe to follow up on one of the things you said earlier, Bob, you kind of noted how there tends to be some lumpiness, particularly at the end of quarters with NHP sales. Did you have any of that this quarter? Did any of those sales slip out of Q1 into Q2?

Bob Leasure (President and CEO)

Yeah, we probably did. We could have some next quarter. That could swing $3 million-$4 million in sales very easily. Again, overall, if it flips four or five weeks, we're not last year, it could slip six months. We don't have anything like that. If it slips four or five weeks or six weeks even, we're okay with that. I'm not really worried about that. Last year was a lot different market, I think, than what we see going into this year. Last year, people had inventory. They were reducing inventory. This year, we even have some deposits going in, which back up some of those sales and orders. I think we'll see less volatility. I think we're doing, hopefully we're doing a good job. This year, one of the big differences from last year, we had brick and mortar.

We had integration. We had optimization. We had volatility. This year, we have taken a lot of that out. This year, what we need to focus on is customer satisfaction and being very customer-driven. We take care of the customer. We are small enough, agile enough. The rest of our business works very well. Economics are set up well right now. What we are doing, we have good people. One of the things we did not talk about, but last year, we had some challenges between the DOJ issues and some of the things going on. We probably had some customers that made very nervous employees. Right now, I am optimistic. I see some of those customers returning. I see our turnover as low as it has ever been. That was a challenging year for our industry and for our business.

As others go through that, I'm really, really pleased with the lower turnover. Our management team has stayed together. It gives us a much better opportunity to do a great job for our customers. We are going to keep that customer focus, continue to bring them back, continue to make sure we keep our employees satisfied. I think the business will take care of itself. No, we do not have all the tailwinds that we have going into a biotech funding that is up 20%-30%-40% right now, nor are we expecting that. If that happens, that is great. Right now, we do not see that. We are not expecting that. I still think we are going to grow in spite of that.

Matt Hewitt (Senior Research Analyst)

Got it. Shifting gears a little bit, the book to bill and a couple of the other metrics have kind of been bouncing around a little bit. The one in particular that I wanted to mention was the cancellations. It seemed like the last couple of quarters, you were seeing some improvement that those cancellations were declining, kind of getting back to a normalized level. It seems like that bounced back up here a little bit. Is that just a function of what's going on with pharma companies kind of reprioritizing pipelines and kind of acting quicker on the fill and kill decisions? Is there some other reason that you saw that number elevated here in Q1?

Bob Leasure (President and CEO)

I think we saw it elevated because we had one large project, which was about $4 million that got canceled. And that's over $4 million. That's significant to us. We have large POs, and if one project cancels, it's significant. One project can make a difference. Usually, we don't have those larger projects be canceled. This quarter, we had an anomaly. We did have a large project that got canceled that drove that book-to-bill number down or it would have been positive. Again, I'm not overly worried about it because I think that was one that we'll see every once in a while like that. Hopefully, we don't have a lot of those out there typically. I think what we can't take away is that we were really pleased.

We made a lot of change to our sales organization a year ago on how we approach discovery, translational sciences, and even a little bit of safety assessment. Seeing that 14%-15% grow in awards for the three months Q1 in discovery, for me, is a pretty good green shoot. We're looking for that where we expect to go. That's something that we've seen year over year decline for several years. That's a pretty important business. It's very high-cost structure. We have a lot of leverage. There's an increase in sales. A lot of those can go to a large percent that goes to the bottom line. I was encouraged. Although the cancellation was discouraging, I think I probably had more positive takeaways from the quarter because I think that was a one-off, one large project that really drove that negative cancellation number up.

Matt Hewitt (Senior Research Analyst)

Got it. Got it. All right. One last one for me, and then I'll hop back into Q. As you look at the remainder of this year and given some of your success with some of the newer tests or services that have been rolled out here recently, do you envision rolling out some additional services over the course of this year? Or is it more about just selling more of your existing portfolio? Thank you.

Bob Leasure (President and CEO)

Matt, we'll continue to be very customer-driven. If our customers are looking for additional service and we're outsourcing or we feel that we can do a better job, we will consider that. Right now, we're not. I want our focus to be on our customers and delighting and meeting and exceeding those expectations and really improving communication. I think we have a lot of good services. Yeah, we're going to—we have a few—I guess I take that—we have a couple of small add-ons that we're looking, but they're not going to be significant. They'll allow us to grow some sites and be a little more sophisticated. They're not significant. We're not buying new equipment or hiring people. What we're doing is we're training and making sure our people are trained to do these things and are really improving.

They're not the new ones we're going to need. New brick and mortar, new technology. It's really training and expanding upon what we have in place.

Matt Hewitt (Senior Research Analyst)

Okay. Great. Thank you.

Bob Leasure (President and CEO)

Thank you, Matt.

Operator (participant)

Again, it was Star 1 if you had a question. We will go next to David Windley with Jefferies.

David Windley (Managing Director)

Hi. Good afternoon. Thanks for taking my questions. Wanted to understand the accounting revenue recognition cadence on pre-sales of inventory. Are these essentially commitments? Or is this a transaction that triggers revenue recognition in the first quarter when you pre-sell inventory?

Bob Leasure (President and CEO)

No, we don't recognize any revenue until there's a transition of ownership. We don't recognize revenue of orders when they come in. It's only after they are sold and the transaction is complete. No, there's none of that that's been recognized.

David Windley (Managing Director)

When you say you're pre-selling inventory, you have more orders in hand than you did entering last fiscal year, but those haven't materialized in sales.

Bob Leasure (President and CEO)

That is correct. We have orders, signed orders, and we may have deposits, but not revenue recognition.

David Windley (Managing Director)

Okay.

Bob Leasure (President and CEO)

We have deposits. Correspondingly, we also have probably more deposits out with our suppliers. We have bought further in advance, and we have sold further in advance.

David Windley (Managing Director)

Okay. In the case of maybe invoking then the colony management services, if I understand correctly the way you're saying that, I mean, I would guess that in those cases, the client has bought the animal, and you're boarding them, and title has changed hands. Is that right?

Bob Leasure (President and CEO)

Yes. If we are boarding for and then the title has passed specifically, we would be boarding.

David Windley (Managing Director)

Okay. Can you give me a sense of proportion? Like how much of your RMS revenue is or first of all, I guess, Colony Management Services are in RMS. Is that right? And then how much of RMS revenue might Colony Management Services represent?

Bob Leasure (President and CEO)

Our colony management services for the RMS business, I think a couple of years ago was 2022, may have been in the range of $17 million. I do not think we have ever given these numbers before, but I can do it publicly. Last year was probably closer to $27 million. I think we will see that grow another 20% as we go forward. I think it is some customers and large pharma and all above looking to make sure they reduce the risk by owning the NHPs, but they may not have a place to store them, but they would like to buy it, make sure that they have access, and reduce their risk and their volatility. We need to make sure that we are setting up our business to be able to comply to help them reduce their risk also.

David Windley (Managing Director)

Do you have plenty of I don't know if the animals even have to be moved, but for colony management, do you have to have a dedicated base? I presume this is in Alice, Texas, but do you have plenty of room to grow that business without kind of.

Bob Leasure (President and CEO)

We have plenty of acreage. That's a very good question. We have about 700 acres down there. We've built up and invested quite a bit in the last couple of years in transportation and roads and water and sewer, hospitals, veterinary support, things that the infrastructure commissary, things that the infrastructure you need to have support for the colonies. Now we are building out brick and mortar places to do boarding and indoor outdoor facilities with improving heating and airflow and water and whatnot. We have been pretty much at full capacity for the last couple of years. As we've been able to expand, we've been able to increase that revenue base. That is where some of our expansion dollars are going this year.

David Windley (Managing Director)

Understood. On your.

Bob Leasure (President and CEO)

We have put in perspective, we have 700 acres. Of those 700 acres, we're probably using about 250.

David Windley (Managing Director)

Yeah. Yeah. On your NHP sourcing comments, so you're through the high-cost inventory. Should we think of the move now to be kind of a step function down? Or is it more of a glide path over the next couple of quarters to a lower cost level?

Bob Leasure (President and CEO)

I think it's a step function down because I think most of the higher-cost NHPs are out in the pricing that's set for next year. I think we'll see that more of a step. I think we'll see increasing sales each quarter. We won't see, I think, the margins could see improvement, but I think that each quarter the sales may improve.

David Windley (Managing Director)

Okay. And then last one for me. I mean, it does sound like the DSA gross bookings were kind of meaningfully better sequentially. You had this one large cancellation. Can you talk to us about the mix of that? I'd love more color on what clients are those coming from and what type of services are they wanting to engage you on. I think if I remember correctly, your DSA business does not have a lot of NHP-related services. I think you would tell me that it's mostly rodent studies. I'd love any additional color on what the kind of the profile of that improving bookings picture looks like. Thank you.

Bob Leasure (President and CEO)

Our DSA backlog in customers are over 95-96% biotechs. If that's what you're looking for, it's mixed between large pharma and biotech. It is biotechs. We are getting, for some of the unique services we have, such as genetic toxicology and some of our discovery work at the moment, we may see some increase in work from large pharma. For the most part, it is biotech focused. As far as different services, I think we, again, some of the services that we've built up, the biotherapeutics and the genetic toxicology, we are seeing some in DSA right now. We saw some pretty good awards last quarter. Those are unique. We have a good scientific team there. Those have been very helpful. I think there's the general safety assessment.

The general safety assessment, again, we'd like to leave it with science and work with customers. We identify them at the discovery stage. That's starting to happen. That probably is still fairly flat to down as far as because there's capacity in the market and people don't need to still book that far in advance. We're also probably seeing an increasing amount of some of those things I outlined as blanket purchase orders come in as people want to move fairly quickly and gain their confidence. They've used us a little bit in the past, but now they're giving us more meaningful blanket purchase orders so we can move more quickly with them and work hand in hand with them and partner with them more than we have in the past. That's very encouraging.

I think for the commodity safety assessment, probably not as I think that's still flat. If we can lead with science, it's good. It's some of the other specialty services and science that we've been working on that we're probably seeing more growth. Again, as I said, discovering translational sciences would be nice for us to see that growth.

David Windley (Managing Director)

Got it. That's very helpful. Thank you.

Operator (participant)

It appears we have no further questions at this time. I will now turn the program back over to Mr. Bob Leasure for any additional or closing remarks.

Bob Leasure (President and CEO)

All right. Thank you, everyone, for joining today's call. We are very pleased with the events and results of this past quarter. As I have indicated, we made progress towards reducing our revenue volatility, improving our cash flow and liquidity. I think, going forward, we will continue building Inotiv as a high-touch, flexible provider with strong scientific capabilities that is focused on our clients' needs, a positive environment for employees to have a career and grow, and generate positive returns for our shareholders. We will continue to pay attention to the details and get better every day. To 4 to 25. Thank you for your time today.

Operator (participant)

Thank you. Ladies and gentlemen, this does conclude today's program. We thank you for your participation. You may disconnect at any time.

Beth Taylor (CFO)

Good.