Charles River hunts for deals to serve strategic discovery clients

Shifts in preclinical development have hit Charles River Laboratories’ core toxicology business but are also creating growth opportunities. Biopharm companies want efficacy data earlier in development, to allow them to focus on the most promising compounds, and this is driving demand for services.

“[There is] a greater focus on discovery services, which include non-regulated testing such as drug metabolism and pharmacokinetics, or DMPK, and in vivo pharmacology​”, James Foster, CEO of Charles River, said in a call with investors.

“Two years ago [non-regulated work] was not on the table​”, Foster said. Now, after inking a “very large​” deal in November, Charles River is seeing increased interest in strategic outsourcing of discovery work and is in talks with seven companies.

Charles River expects the November in vivo ​biology deal to add one per cent to sales growth and be profitable in 2012. When the deal is ramped up in 2013 Charles River expects the client to account for five per cent of total sales but the experience of clinical vendors suggests delays are possible.

“Given the delays other CROs (contract research organisations) have experienced getting preferred vendor relationships off the ground, a slow revenue ramp is certainly possible​”, David Windley, equity analyst at Jefferies & Company, wrote in a note to investors.

Acquiring assets​

To serve these potential discovery clients Charles River plans to bolster capabilities. “We’re looking more in the discovery area as drugs are discovered, and different technologies that provide greater throughout and analysis​”, Foster said.

In August Foster said a deal could be made in 2011 but this now looks unlikely. Some of the targets were dropped but Charles River is still considering others and expects to make deals next year.

As well as adding capabilities to help clients predict a compound’s efficacy earlier in development, Charles River also wants to expand geographically. Some of these targets would simply extend Charles River’s existing capabilities overseas but others would also add upstream capabilities.

The year ahead​

Foster made the comments during a discussion of the outlook for Charles River in 2012. Charles River predicted adjusted sales growth of two to four per cent, with the uptick being driven by the research models business.

Guidance was in line with analysts’ expectations and shows the market stabilising. “We expect the sales declines we have experienced from [preclinical services] since 2008 will level off in 2012​”, Foster said. Analysts welcomed the stability but cautioned that growth must come from other areas.

“The PCS segment seems to be largely stable from both a pricing and volume perspective, which is a positive given the weakness throughout 2011, but we do not expect GLP toxicology to return to growth anytime soon​”, John Kreger, equity analyst at William Blair, wrote in a note to investors.