Early-phase specialist Charles River Laboratories (CRL) became the latest US-based contract research organisation (CRO) to lower its financial guidance for 2008 as the sector feels the knock-on effects of what CRL described as “more measured spending” by pharmaceutical and biotechnology clients.

The company reported net sales for the third quarter up 9.0% year on year to US$342.2 million, while operating income improved by 7.2% to US$$68.2 million. But the market latched on to the revised guidance and Charles River’s share price dived by more 20% on the results announcement.

The problem was softening demand for CRL’s Preclinical Services (PCS), while there was strong growth in the company’s Research Models and Services (RMS) segment. “Our clients are continuing to invest in drug discovery and development, but they are facing a range of unprecedented challenges from drugs losing patent protection to the availability of funding for small biotech companies,” commented chairman, president and chief executive officer James Foster.

“To address these challenges, our clients are restructuring their businesses, reprioritising their drug development pipelines and shifting focus to drugs in late-stage development,” he added. “These actions are leading to significant and accelerating study slippage and delays, pushing work from 2008 into 2009. … We expect these conditions and headwinds from foreign exchange to continue.”

Net RMS sales were US$165.7 million in the third quarter, 14.1% ahead of the same period last year. Operating income in the segment was 11.2% higher at US$50.7 million but the operating margin narrowed to 30.6% from 31.4% in the 2007 quarter, which Charles River blamed on a higher proportion of services in the sales mix as well as heavier operating costs, particularly in North America.

In the PCS segment third-quarter sales grew by 4.6% to US$168.8 million, driven by expanded capacity in Nevada, US and by certain areas of speciality toxicology testing. These gains were partially offset, though, by study slippage and delays as a result of client restructuring and pipeline reprioritisation, as well as negative foreign currency translation.

PCS operating income inched up by 1.3% while the operating margin shrank from 17.8% to 17.2%, mainly due to the slower sales growth but also reflecting the extra costs of transitioning to the new preclinical facility in Nevada.

Muted guidance

Charles River has adjusted its forecast for net sales growth in 2008 to 9%-10% from the previous guidance of 12%-14%. Earnings per share are now expected to be US$2.48 to US$2.52 for the full year, compared with US$2.59 to US$2.65 previously.

The more muted guidance is based primarily on the expectation “that the market for outsourced preclinical services will continue to experience more measured spending by pharmaceutical and biotechnology clients as a result of restructuring and pipeline reprioritisation, budget constraints and reduced funding for small biotechnology companies”, CRL said.

Sales growth is also expected to be hit by foreign exchange during the fourth quarter as the US dollar continues to strengthen. Nonetheless, Foster played down any fears of long-term damage. “We believe that these market conditions are temporary, and will improve as pharmaceutical and biotechnology companies refocus on the drugs in early development,” he stated.

“In the meantime, we are aggressively managing expenses and capital spending, while maintaining an intense focus on supporting our clients with our unique portfolio of products and services … Our balance sheet is strong, with $213 million of cash on hand and a favorable debt to equity ratio. Despite this period of softer demand, we are confident that we will maintain our position as a premier provider of essential products and services to the drug development industry.”