US-based contract research organisation (CRO) Charles River Laboratories International says it will cut its workforce by around 3% company-wide this quarter, as part of a wider effort to “align our infrastructure for enhanced operating efficiency”.

The majority of the job losses will fall in Charles River’s Preclinical Services (PCS) segment. The company has continued to face softening demand in its PCS business, where net sales dropped by 8.3% to US$158.6 million in the fourth quarter of 2008.

Charles River will take a one-time charge of around US$0.9 million, mostly in the current quarter, to cover the redundancies and other cost-saving initiatives. The net impact of the charge is expected to be about US$0.08 per diluted share.

Chairman, president and chief executive officer James Foster said the company was “using this period of market uncertainty as a window of opportunity to continue to streamline our operations, and [has] implemented actions in the fourth quarter to improve our operating efficiency and cost structure”.

There will be more action in the first quarter, with the goal of reducing operating costs by around $20.0 million in 2009 and targeting an annual run-rate of $25.0 million from 2010 onwards, Foster noted. “We intend to emerge from this period as a leaner, more efficient operation, and combined with our deep scientific expertise, enhance our position as an ideal partner for pharmaceutical and biotechnology companies,” he commented.

Sales decline

The announcement came as Charles River reported that net sales for the quarter ended 27 December 2008 declined by 2.1% to US$311.4 million, slightly below the analyst consensus of US$312.6 million. Gains in the Research Models and Services (RMS) segment, where net sales improved by 5.3% year-on-year to US$152.8 million, were offset by the PCS decline and a 4.2% negative impact from currency translation.

The profit level was hit by a non-cash goodwill impairment charge of US$700.0 million, or US$10.43 per diluted share, in connection with the Charles River management’s annual assessment of goodwill on its balance sheet. This resulted in an operating loss of US$650.8 million for the fourth quarter, compared with operating income of US$52.1 million for the same period of 2007.

The net loss was US$661.9 million, or US$9.91 per diluted share, versus net income of US$36.9 million (US$0.52 per diluted share) in the year-before period. Without the goodwill impairment charge, Charles River would have recorded fourth-quarter net income of US$39.7 million, down by 13.6% on Q4 2007, and diluted earnings per share (EPS) of US$0.59 (-9.2%). Polled analysts were expecting EPS of US$0.55 before any special items.

Sales growth in the RMS business was driven by continuing strong demand for research models in the US market as well as higher sales from the Consulting and Staffing Services business and In Vitro products. While the RMS segment lost out from selling its Vaccine business in Mexico, the effect was “substantially offset” in the fourth quarter by the acquisition of MIR Preclinical Services (completed on 15 September 2008), Charles River noted.

Operating income in the RMS segment inched up 1.8% to US$40.0 million in the quarter but the operating margin narrowed from 27.1% to 26.2%, which Charles River blamed on a heavier proportion of services in the sales mix and higher operating costs due to new US capacity in California and Maryland states.

The PCS decline was due mainly to “slower market demand as a result of pharmaceutical and biotechnology companies’ restructuring and pipeline prioritisation, and the negative effect of foreign currency translation, which reduced the growth rate by 6.0%”, Charles River said.

Lower sales were partially offset by strong sales at the new PCS facility in Nevada, US and by the Biopharmaceutical Services business, which benefited from the acquisition of NewLab BioQuality AG in September 2008. The Preclinical Services segment recorded an operating loss of US$678.9 million versus operating income of US$22.7 million in Q4 2007, while the operating margin was -428.1% (13.1%).

The losses reflected the goodwill impairment charge as well as US$6.7 million of acquisition-related amortisation and a charge of US$1.2 million for severance related to cost-saving measures.

2008 and 2009

In the full year, Charles River’s sales rose by 9.2% to US$1.34 million, generating an operating loss of US$449.8 million versus operating income of US$227.2 million in 2007. The net loss for 2008 was US$521.8 million compared with net income of US$154.4 million in the previous year.

The company expects its net sales to fall by 2-7% in 2009. The guidance is net of the projected negative impact of foreign exchange, with is forecast to cut the growth rate by around 5.0%. EPS are expected to be in the range of US$1.86 to US$2.16.

The guidance “assumes that the market for outsourced preclinical services will continue to experience more measured spending in 2009 by pharmaceutical and biotechnology clients as a result of restructuring and pipeline reprioritisation, budget restraints and reduced funding for small biotechnology companies”, Charles River commented.