Charles River Laboratories became the latest US-based contract research organisation to deliver a bracing set of quarterly results last week, reporting operating income for the second quarter up by 18.9% to $56.7 million. Net sales for the quarter ended June 30 rose by 14.8% to $307.4 million.

As in the first quarter, sales growth from continuing operations was driven by solid gains in both the Research Models and Services (RMS) and the Preclinical Services (PCS) businesses, the latter in particular. Discontinued operations in both the 2006 and 2007 quarters included the Interventional and Surgical Services business, which Charles River is in the process of closing. Discontinued operations for last year’s quarter also included the disposal of the company’s Phase II-IV clinical services business.

Charles River has been refocusing on its core business of early-stage drug development following a chastening diversion into fully fledged clinical research services, spearheaded by the $1.5-billion acquisition of Inveresk in 2004. The strategy proved costly and ended with the sale of Charles River’s Phase II-IV clinical operations to Kendle International in August 2006.

The CRO did not lose its appetite for acquisitions, however, boosting its capacity in clinical pharmacology services with the $29.5 million purchase of privately held Northwest Kinetics in November 2006. Northwest Kinetics contributed 2.9% overall to net sales growth in the second quarter, with currency translation adding another 2.1%.

RMS segment

Net sales from the RMS segment were $143.8 million, 9.9% more than in the second quarter of 2006. There was strong demand for research models from large pharmaceutical and biotechnology clients in North America and Europe, as well as higher demand for transgenic services and “robust” sales of in vitro products, Charles River reported.

Sales of research models in the US grew by more than 10% year-on-year, while sales of transgenic services increased for the third quarter in a row. In the past, cost pressures in the pharmaceutical industry have offset growth in the latter segment “and could do so again,” the CRO noted. However, no definitive trend is discernible at this stage and, based on indications from customers, second-half sales of transgenic services are expected to be ahead of the same period last year.

Higher sales of in vitro products were attributed mainly to Endosafe-PTS, a portable test system for microbial contaminants launched in August 2003. A multiple-cartridge system was introduced for PTS tests last month.

Operating income from Research Models and Services was $45.3 million in the second quarter, 19.1% more than in the same quarter last year. Charles River recently opened two barrier rooms at its RMS facility in California and expects to begin shipping product with the new capacity by year-end. The company also broke ground last month on a new RMS facility in Maryland to service contract sales to the US National Cancer Institute and commercial business in the segment. This facility is on schedule to open in the third quarter of 2008, Charles River said. The GAAP operating margin for the RMS business was 31.5% compared with 29.1% in Q2 2006.

PCS segment

In the PCS segment second-quarter sales rose by 19.4% to $163.6 million, driven by the Northwest Kinetics acquisition and by continuing strong demand for general and speciality toxicology services. Northwest Kinetics added around 5.5% to the mix, a better than expected performance due to rapid fill of new capacity.

Charles River reported double-digit sales growth at all its preclinical toxicology facilities other than the unit in Worcester, Massachusetts, reflecting the transition to a new preclinical services facility in Shrewsbury, Massachusetts.

The move also affected the operating margin in the PCS segment, which on a non-GAAP basis dropped to 22.0% in Q2 from 25.4% in the same period last year, as Charles River bore the first full quarter of costs for the Shrewsbury facility. Margins improved significantly at the other preclinical toxicology facilities and in GAAP terms the PCS operation margin was 16.8% in Q2 versus 16.4% in the second quarter of 2006. Operating income from preclinical services was $27.4 million, an increase of 21.7%.

Charles River plans to exit the Worcester facility no later than the end of December 2007, as planned. All new in vivo studies will be placed exclusively at Shrewsbury by early September 2007 and the remaining laboratory services will move across during the fourth quarter, it said. Worcester was known for early-stage discovery services and this will continue to be the focus at Shrewsbury, the company added.

Raised outlook

While sales growth overall in the second half of 2007 is expected to be slightly below first-half levels, Charles River has raised its sales guidance for 2007 and narrowed its earnings per share (EPS) forecast to the upper end of its previous projection.

Full-year sales are now expected to be in the range of $1,185 million to $1,205 million compared with $1,160-$1,190 million previously, reflecting projected sales growth of 12%-14% (9%-12% previously). The CRO has adjusted its GAAP EPS forecast from $2.11-$2.21 to $2.15-$2.21.

In the longer term, Charles River is aiming at an overall operating margin of 25% (it was 18.5% in the second quarter), once it has completed the transition to Shrewsbury and a preclinical services facility currently under construction in Nevada, US.