Early-stage specialist Charles River Laboratories is the latest contract research organisation (CRO) to lower its financial expectations for 2009 on the back of declining sales and profits for the second quarter, although earnings per share (EPS) before special items were significantly
above analysts’ estimates.
The US-based company is also buying for growth, expanding the scope of its activities with two acquisitions and a strategic partnership announced at the same time as the second-quarter results.
Net sales for the latest quarter fell by 12.5% year on year to US$308.2 million, with declines in both the Research Models and Services (RMS) and the Preclinical Services (PCS) segments. Analysts polled by Thomson Reuters had been looking for sales of US$308.1 million.
Operating income for the second quarter was US$50.7 million, down by 26.9% on the same period of 2008. Diluted EPS were US$0.52 versus US$0.70 in the second quarter of 2008.
On a non-GAAP (Generally Accepted Accounting Principles) basis – ignoring special items such as US$7.2 million (US$7.6 million in Q2 2008) for amortisation of intangible assets; US$1.7 in severance costs; and US$1.1 million for operating losses on a PCS facility closed down in Arkansas, US and on the early-stage clinical research facility in Edinburgh, Scotland that was sold to Quotient Bioresearch last May – diluted EPS for the quarter were US$0.66 compared with US$0.79 one year earlier.
Discounting the special items, the analyst consensus for Q2 EPS quoted by Thomson Reuters was US$0.58. “The cost-saving actions we implemented in the first quarter, augmented by additional actions in the second quarter, enabled us to achieve earnings per share higher than we previously expected,” commented James Foster, chairman, president and chief executive officer of Charles River.
The US$1.7 million charge for severance costs in the second quarter included a reduction in performance-based compensation and benefits as well as “selective headcount reductions”, Charles River noted. Together, actions taken in the first and second quarters are expected to generate cost savings of around US$25.0 million in 2009, with an annual run-rate of about US$30.0 million starting in 2010.
RMS and PCS
Sales in the RMS segment dropped 4.1% to US$165.7 million. Without the impact of currency translation, sales would have been flat for the quarter as growth in academic accounts compensated for softer demand from pharmaceutical and biotechnology clients, Charles River reported.
Lower sales in the Consulting and Staffing Services business and the September 2008 divestiture of the company’s vaccines business in Mexico were partially offset by the acquisitions of MIR Preclinical Services (September) and Piedmont Research Center (May 2009).
Operating income from Research Models and Services slipped 2.5% to US$50.9 million, although the operating margin for the business improved to 30.7% from 30.2% a year earlier, which Charles River said was mainly due to cost-saving initiatives and lower operating expenses in Japan.
The PCS business, which bore most of the brunt of a 3% workforce cut announced by the CRO in February, recorded second-quarter net sales of US$142.5 million, 20.5% below the same period of 2008.
Charles River blamed the decline primarily on slower market demand from both pharmaceutical and biotechnology companies as well as the negative impact of currency translation, which shaved 5.6% off sales for the quarter. These factors were partially offset by the acquisition of NewLab BioQuality AG in September 2008.
Operating income in the PCS segment dived 43.4% to US$16.3 million and the operating margin for the latest quarter was 11.5% against 16.1% in Q2 2008. That reflected lower capacity utilisation, pricing pressure and costs associated with the start-up of new facilities in China and Canada, partially offset by cost-saving, Charles River explained.
Addressing the results overall, Foster commented: “Although continuing softness in demand for both RMS and PCS impacted our second-quarter sales, pricing, inquiry levels and bookings have remained relatively stable through the first half of the year.”
Nonetheless, guidance for net sales in 2009 has been revised from the 2-7% decline expected in February to a 7-9% decline based on the second-quarter results and the belief that “clients will continue to spend carefully through the end of the year”. GAAP EPS are now projected at US$1.78 to US$1.90, compared with US$1.86 to US$2.16 in February.
Acquisitions, partnership
Foster said the two acquisitions and one partnership announced along with the second-quarter results were “strategic opportunities to drive our future growth. We have focused our efforts on identifying those assets and arrangements which we believe will position us to offer clients novel solutions to the challenges of drug development”.
The trio of deals comprises:
– Closing the acquisition, for around US$9 million in cash, of Cerebricon Ltd, a company based in Kuopio, Finland that provides discovery services for therapies in the central nervous system (CNS) diseases category, supported by in vivo imaging capabilities.
Cerebricon will be incorporated into Charles River Discovery and Imaging Services (DIS), a business the CRO has already expanded through the acquisitions of MIR and Piedmont Research Center. Charles River says these deals have made it “a market-leading provider of non-GLP (Good Laboratory Practice) pharmacology and in vivo imaging services for the evaluation of compound efficacy”.
– An agreement to acquire Systems Pathology Company, LLC (SPC), a pathology-based US software company developing the Computer Assisted Pathology System (CAPS). This is expected to be the next generation of automated digital imaging software tools for the augmentation of traditional toxicological pathology practices. Charles River noted.
The CRO is paying around US$24.0 million upfront for SPC, with additional payments contingent on the achievement of certain undisclosed milestones. The transaction is expected to close by the end of August 2009.
The strategic benefits of the CAPS platform are to enhance through automation the objectivity, accuracy, consistency and throughput of traditional toxicological pathology workflow, it added. “By automating the routine aspects of tissue evaluation, CAPS is expected to increase efficiency by allowing pathologists to focus on the higher-value decision-making, thereby shortening the time to report initiation,” the CRO said.
– A partnership with MPM Capital, a venture capital firm dedicated to the life sciences, to advance underfunded compounds with therapeutic potential to the proof-of-concept stage as quickly and efficiently as possible.
Under the joint programme, MPM will focus (with scientific input from Charles River) on identifying promising preclinical compounds from biopharmaceutical companies and will lead investor syndicates that can spin out these assets.
Charles River will have exclusive rights to provide contract research services for discovery and preclinical development to take the compounds through the milestones necessary for a US investigational new drug (IND) application and first-in-human testing at the CRO’s Phase I clinic in Tacoma, Washington. Where appropriate, Charles River will also supply preclinical services to MPM’s current portfolio of companies.
According to the CRO, partnering with MPM gives it the opportunity “to establish itself as a provider of choice for a unique client group which is emerging as biopharmaceutical companies are increasingly rationalising and reprioritising their development pipelines”.
