Increased ‘front-loading’ of research and development in an effort to drive productivity and reduce compound attrition, as well as tight budgets at smaller clients, continued to limit sales and profit growth at Charles River Laboratories during the third quarter of 2011.

The US-based company reported a 2.5% increase in net sales from continuing operations, to US$277.6 million, for the quarter ended 24 September. And operating income of US$37.1 million for the third quarter was more than five times the US$6.47 million logged in the same quarter last year.

But the year-before income figure included a US$30,000 termination fee for CRL’s planned acquisition of WuXi PharmaTech, which was abandoned in the face of shareholder opposition in August 2010.

Moreover, the 7.7% sales growth in Charles River’s Research Models and Services (RMS) segment for the latest quarter was partly offset by a 4.9% decline in the company’s troubled Preclinical Services (PCS) business.

Below consensus

The overall sales figure came in below the consensus estimate of around US$280 million from analysts polled by Thomson Reuters.

Analysts were expecting earnings per share (EPS), ignoring special items, to reach US$0.58 for the third quarter.

The reported figure, in non-GAAP (Generally Accepted Accounting Principles) terms – which included severance costs and operating losses for PCS facilities in China and the US among other provisions – was US$0.57 on a diluted basis, compared with US$0.46 in the third quarter of 2010.

On a GAAP basis, Charles River recorded diluted EPS of US$0.37 for the third quarter of 2011, compared with a US$0.40 loss one year previously.

Earlier research

James Foster, chairman, president and chief executive officer of CRL, said the third-quarter performance, particularly in the PCS segment, reflected an ongoing trend whereby clients were focusing on earlier in vivo biology research at the expense of regulated safety assessment, including Good Laboratory Practice (GLP)-standard toxicology.

“Our RMS and PCS businesses have benefited from increased demand for non-GLP services, although the contribution to PCS revenues in the third quarter is being overshadowed by the continuing decline in demand for GLP safety assessment, as well as softer demand from mid-tier pharmaceutical and biotechnology companies as a result of a decline in available funding,” Foster added.

RMS growth

Net sales in the RMS segment were US$171.5 million for the third quarter, with favourable foreign exchange contributing 4.6 % of the 7.7% increase year on year. Operating income in the RMS business was up by 13.4% to US$48.5 million.

Net sales of Preclinical Services were down from US$111.6 million in the third quarter of 2010 to US$106.1 million in the latest quarter. According to CRL, the decline was mainly due to a continuing preponderance of shorter term, less complex studies in the sales mix, as well as fewer GLP safety assessments.

PCS sales to large biopharmaceutical clients were stable but sales to small and mid-tier biopharmaceutical companies declined, it noted. Foreign currency translation benefited PCS sales growth by 2.4%.

The performance of CRL’s preclinical services unit has consistently lagged behind that of the research models segment of late, prompting a string of cost-cutting and other initiatives in an effort to restore momentum to the PCS business.

Charles River recently sold the assets of its in vivo pharmacology facility in China to local company ShangPharma Corporation. And in August, CRL announced that it was unifying the PCS and RMS operations under a new regional management structure to exploit synergies between the two businesses.

Opportunity knocks

Foster said the company believed there were opportunities out there to support customer requirements for outsourced in vivo biology services that were “historically considered core by our clients and not available to contract research organisations like Charles River”.

Partnering with CRL “will enable our clients to achieve a flexible drug development model at lower cost and increased efficiency”, he commented.

The company has maintained its guidance for “slightly higher” net sales growth in 2011 versus 2010, assuming a “moderate sequential increase” in RMS sales and flat sequential PCS sales during the fourth quarter of the current year.

The estimate for GAAP EPS has been lowered, however, from US$2.11 to US$2.21 in early August to US$2.03 to US$2.08 now.

On a non-GAAP basis, CRL has tightened up its earnings guidance for 2011 from US$2.38 to US$2.48 previously to US$2.40 to US$2.45 now.