Charles River Laboratories (CRL) joined fellow US-based contract research organisation (CRO) Covance in announcing job cuts and facility closures with its third-quarter results, as the company suffered from a continued slump in demand for its preclinical services in particular.

Operating income plunged by 88.5% to US$5.1 million in the quarter ended 25 September 2010, as net sales declined by 7.2% against the third quarter of 2009 to US$276.1 million. The drop in income was aggravated by a previously reported US$30.0 million break-up fee for the termination of CRL’s acquisition agreement with WuXi PharmaTech in the face of shareholder opposition last August.

Charles River already announced in January that it would suspend by mid-year operations at its US Preclinical Services (PCS) facility in Shrewsbury, Massachusetts. Now the company is closing down a leased satellite PCS facility in Laval, Canada as part of a string of measures that will be taken during the fourth quarter to “align [the company’s] infrastructure to the current operating environment”.

These will also include reducing headcount by around 4% across the PCS and Research Models and Services (RMS) businesses as well as at corporate level; further cuts in discretionary spending; and consolidating CRL’s Discovery and Imaging Services (DIS) operation in Michigan, US with a larger facility in North Carolina.

The fourth-quarter actions are expected to generate annual savings of around US$40 million from 2011 onwards. CRL anticipates recording a one-off charge of about US$15 million to accommodate these measures, mostly in the fourth quarter of 2010. The company has yet to complete an impairment analysis of intangible assets related to the Michigan DIS operation.

Steadfast belief

"We are steadfast in our belief that global pharmaceutical companies will ultimately reinvigorate their early development pipelines and increasingly choose to outsource development services to market-leading contract research partners like Charles River,” commented James Foster, chairman president and chief executive officer of CRL.

“The actions we are taking to appropriately align our infrastructure to current demand will enable us to profitably meet the challenges we are facing, and position us for improved profitability when demand improves," he added.

As Foster noted, the RMS segment “has continued to perform relatively well in the current environment, as our clients invest in discovery of new therapeutic agents. However, the PCS segment has continued to feel the effects of constrained development spending as evidenced by lower volumes, a less robust study mix and continued pricing pressure”.

Specifically, RMS sales in the third quarter dipped by 2.5% year on year to US$159.3 million, with foreign currency translation accounting for 2.2% of that decline. Operating income in the RMS segment was 7.2% lower at US$42.8 million.

In Preclinical Services, net sales dropped by 12.9% to US$116.8 million, with CRL citing mainly slower demand from large pharmaceutical clients as well as continued pricing pressure. Operating income from preclinical services dived 61.9% to US$3.8 million.

Across the company, CRL registered diluted earnings per share (EPS) of US$0.40 for the third quarter, compared with US$0.57 in the same period last year. On a non-GAAP basis, which excluded the WuXi termination fee and other charges, diluted EPS were US$0.45 against US$0.65 in the third quarter of 2009.

Analysts polled by Thomson Reuters were looking for EPS of US$0.49 for the latest quarter and net sales of US$289 million, compared with the US$276 million reported.

Charles River has also moderated its financial guidance for 2010 on the back of the third-quarter results. Full-year EPS are now expected to be US$0.25 to US$0.30, compared with the forecast of US$0.71 to US$0.81 given in August. That would reflect a 5% drop in net sales rather than the 2-3% decline projected three months ago.