US-based contract research organisation (CRO) Charles River Laboratories International has once again lowered its financial guidance for 2009, after third-quarter operating income plunged 34.8% on net sales that were down by 13.1% against the same quarter last year.

The early-stage specialist, which has taken further cost-saving initiatives including a 6% staff reduction in its hard-hit Preclinical Services (PCS) segment, said “continuing soft market demand” for its services was expected to worsen in the fourth quarter, with prospects for a recovery in the second quarter of 2010.

Charles River has been buying for growth recently announcing two acquisitions and a strategic partnership along with its second-quarter results in August.

In the latest quarter ended 26 September 2009, net sales were US$297.5 million, with the year-on-year decline blamed mainly on lower sales in the PCS segment. Operating income was US$44.5 million and diluted earnings per share were US$0.57 versus US$0.64 in the third quarter of 2008.

On a non-GAAP (Generally Accepted Accounting Principles) basis, however – which excluded special items such as US$2.5 million in severance costs, US$1.8 million in impairment and other charges, and operating losses of US$1.2 million on a PCS facility closed down in Arkansas, US and the early-stage clinical research facility in Scotland sold to Quotient Bioresearch last May – diluted EPS for the quarter were US$0.65 compared with US$0.76 in the third quarter of 2008.

This was well above the EPS forecast of US$0.60 from analysts polled by Thomson Reuters, whose estimates normally ignore special items. The analysts’ consensus for net sales in the third quarter was US$306.95 million, higher than what was reported.

Net sales in Charles River’s PCS segment dropped by 24.0% to US$134.2 million in the third quarter, with the CRO citing primarily slower market demand from pharmaceutical and biotechnology companies. Foreign currency translation shaved 2.6% off the sales figure.

PCS operating income was 66.9% lower at US$10.0 million and the operating margin shrank from 17.2% to 7.5% in the face of lower capacity utilisation and competitive pricing pressure, partially offset by cost-saving measures, Charles River reported.

In the Research Models and Services (RMS) segment, net sales dipped 1.4% to US$165.7 million, with a US$0.9% hit from currency translation. The main source of the decline, Charles River said, was lower sales of large research models, which were affected by reduced demand for toxicology services.

Sales contributions from the acquisitions of MIR Preclinical Services (September 2008), Piedmont Research Center (May 2009) and Cerebricon (August 2009) were partly offset by the divestiture of Charles River’s vaccines business in Mexico during the third quarter of 2008.

Operating income in the RMS segment fell by 9.0% to US$46.1 million while the operating margin was 28.2% compared thinner narrower operating margin was mainly down to lower sales of research models and higher amortisation expenses related to acquisitions.

Significant challenges

James Foster, chairman, president and chief executive officer of Charles River Laboratories, said delayed spending on therapies in development by pharmaceutical and biotechnology companies was behind the waning demand for the CRO’s services.

“As we have previously noted, biopharmaceutical companies are facing significant challenges as they reinvigorate their development pipelines and create more efficient infrastructures,” he commented.

“We believe those challenges are being exacerbated by uncertainty surrounding pending merger activity and healthcare reform initiatives,” Foster added. “As a result, and given the availability of capacity for outsourced preclinical services, biopharmaceutical companies have been slow to commit to studies and have continued to exert pricing pressure.”

The picture should look brighter from the second quarter of 2010, Foster believes, when clients “should have improved visibility into the industry landscape post-mergers and healthcare reform, and when funding for biotechnology companies and the economy have improved”.

The revised guidance for 2009 assumes a sequential decline in fourth-quarter versus third-quarter sales in the PCS segment, “as clients have become increasingly hesitant to commit to studies at the end of the year”. Sales guidance also includes the negative impact of currency translation, which is now expected to cut 2009 sales by around 2.5% year on year.

The new guidance is for a fall of 10-11% in net sales over the whole of 2009, compared with the 7-9% decline expected in early August. Earnings per share for the full year are now projected at US$1.70 to US$1.74 against a previous forecast of US$1.78 to US$1.90.

Among the additional cost-saving initiatives implemented during the third and fourth quarters of 2009, the 6% reduction in PCS headcount last month is expected to generate incremental savings of around US$15.0 million per year. Severance costs associated with this measure will be around US$5.0 million or US$0.05 per share, to be recorded in the fourth quarter of 2009.

In all, measures taken in 2009 should achieve cost savings of around US$40.0 million for the year, with an annual run-rate of about US$50 million starting in 2010, Charles River said.