A sterling performance from its Preclinical Services segment in the third quarter of 2007 helped US-based contract research organisation (CRO) Charles River Laboratories International to maintain the double-digit sales growth seen in the previous two quarters.

Net sales from continuing operations rose by 18.6% to $314.0 million in the three months ended 29 September 2007. Operating income for the quarter was $63.6 million, 23.7% more than in the same period of 2006. Net income from continuing operations came to $43.5 million, up by 35.5%.

Factoring in a net loss of $759,000 from discontinued operations (a $48.7 million loss in Q3 2006), net income was $42.8 million compared with a $16.6 million loss in last year’s quarter. That gave diluted earnings per share (EPS) of $0.62 for the third quarter against a $0.24 loss in Q3 2006.

Charles River has refocused on its core business of early-stage drug development following an unsuccessful detour into fully fledged clinical research services, spearheaded by the $1.5 billion acquisition of Inveresk in 2004. Discontinued operations in 2006 included both the Interventional and Surgical Services business, whose closure was finalised in the latest quarter, and the Phase II-IV clinical services business, which Charles River sold to Kendle International in August 2006.

PCS up 23%

In the Preclinical Services (PCS) segment, net sales were up by 23.1% in the third quarter to $168.8 million. Operating income was 30.6% higher at $30.0 million, delivering an operating margin of 17.8% (16.8% in Q3 2006). However, the margin improvement was flattered by $8.0 million in acquisition-related amortisation, a $0.8 million charge for pre-acquisition Inveresk stock compensation taxes and a $2.0 million gain on the sale of real estate in Scotland.

Taking these out of the equation, the PCS operating margin declined from 23.6% to 21.8% in the third quarter, although improved profitability at a number of the company’s preclinical toxicology facilities significantly offset the expected profit decline at Charles River’s new preclinical services facility in Shrewsbury, Massachusetts, the CRO noted. Operating costs in the PCS segment were pushed up by the transition from the old preclinical services facility in Worcester, Massachusetts.

The main drivers of PCS sales growth were continued strong demand for general and speciality toxicology services from pharmaceutical and biotechnology customers, Charles River said, as well as the addition of the Northwest Kinetics Phase I clinical services business, which Charles River acquired for $29.5 million at the end of October 2006.

The Research Models and Services (RMS) business generated net sales of $145.2 million in the third quarter, an increase of 13.8% on the same quarter last year. The growth mainly reflected strong demand for research models in the US and Europe, for transgenic services worldwide and for in vitro products.

Operating income in the RMS segment rose by 24.2% to $45.6 million and the operating margin for the third quarter was 31.4% (28.8% in Q3 2006). Without charges of $0.4 million for acquisition-related amortisation, the RMS operating margin was 31.6% compared with 28.8% for the third quarter of 2006.

“Outstanding” performance

“Our outstanding third-quarter performance reflects the results of many of the strategic actions we undertook over the last several years,” commented James Foster, chairman, president and chief executive officer of Charles River. “During that time, we expanded our broad portfolio of essential products and services, enhanced our managerial, scientific and technical talent, and widened our global footprint at this critical inflection point in the drug development industry, and as a result, are extremely well positioned to support our clients’ robust demand.”

In keeping with this bullish outlook, the CRO has raised its guidance for sales growth from continuing operations in the whole of 2007 to 14-16% from 12-14% previously. Full-year sales are now expected to reach $1,205-$1,225 million instead of $1,185-$1,205 million, while the EPS estimate has been adjusted upwards from $2.15-$2.21 to $2.22-$2.25.