Charles River Laboratories' CRL third-quarter earnings revealed another quarter of top- and bottom-line deterioration. However, we did not expect the contract research organization industry to recover in the third quarter and are maintaining our fair value estimate. Net sales totaled $297.5 million for the quarter, down 13.1% from the third quarter of 2008. Revenue from the firm's research models and services segment held relatively strong on a year-over-year basis and yielded operating margins of 28.2%, compared to 30.6% in the year-ago period. Stagnant revenue growth was mostly due to lower sales of large models because of low demand for toxicology services, although the firm did see strong growth in academic accounts that helped offset softer demand. Conversely, Charles River's preclinical services segment continued to deteriorate. Revenue in this segment fell 24.0% from the third quarter of 2008, and the segment's operating margin fell to 7.5% from 17.2% in the same period last year. The sales falloff is primarily due to lower demand from pharma and biotech firms who are postponing clinical trials amid economic uncertainty. This weak demand has led to lower capacity utilization and competitive pricing pressure, which have impacted the firm's profitability. Consequently, diluted earnings per share fell to $0.57 from $0.64 from in the year-ago period.Management announced that it expects the firm's fourth quarter to be similarly weak. Despite its dreary expectations for the remainder of the year, management predicts that demand will rebound in the second quarter of 2010 as several large pharma mergers close, the impact of health-care reform legislation becomes clearer, and the biotech funding crunch eases. We similarly believe that this slowdown in drug development spending is temporary and that drugmakers will turn to CROs to help bring new drugs to market as they quickly approach major patent cliffs.
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Analyst Notes
08-05-09 | 11:45AM Weak Demand Continues in Charles River's 2Q
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