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Helen Han

Dima Ter-Ovanesyan

CRL AT A GLANCE

P/E ► -3.99   EV/EBITDA ► -7.50   ROA ► -21.4% AVG ROE ► -34.3% AVG Debt to Equity ► 0.623 AVG Current Ratio ► 2.23 AVG Interest Coverage Ratio ► -25.9 AVG

 

 

 

 

 

 

Charles River Laboratories International (NYSE: CRL) sells genetically engineered mice and rats to pharmaceutical and biotechnology companies and academic research institutions.^[1] CRL has two main business segments: its Research Model Services (RMS) breeds research animals for laboratories around the word, and Preclinical Services (PCS) performs tests for pharmaceutical companies in the FDA drug development and licensing process. ^[2] RMS accounted for 46.9% of CRL's total revenue in FY 2007, while PCS represented the remaining 53.1% of total revenue. ^[3]

CRL is the largest provider of genetically engineered mice and rats in the world, facing competition from just three small suppliers in the U.S., two of which are privately-owned and the last a nonprofit governmental organization.^[4] Due to stringent governmental regulations and application procedures, it is costly to enter the business of selling genetically engineered animals for research purposes.^[5]

In Preclinical Services, CRL has had an aggressive acquisition strategy since 2006, absorbing Northwest Kinetics, MIR Preclinical Service, and NewLab BioQuality. Pharmaceutical companies use CRL to outsource the initial toxicology studies in the rigorous FDA new drug approval process, and as such the company competes with the in-house preclinical drug testing services of its own clients.^[6] 50% of the global market for outsourced drug testing is controlled by just five companies, including CRL.^[7]

Business Financials

Major Product Divisions

CRL sells tools and services for drug discovery and development to commercial labs at biotechnology firms and academic institutions. CRL's two main divisions are Research Models and Services (RMS) and Preclinical Services (PCS).

The above chart compares CRL's total revenues and net income for fiscal years 2003-2007. Total revenue increased 16.3% from FY2006 to FY2007 due to increased customer demand, an increase in pricing, and revenue from Phase I clinical trials (which began in late 2006 after CRL acquired Northwest Kinetics)^[8].^[9]

The above graph shows the breakdown of CRL's total revenue by division as well as total revenues (in bold above bars) for fiscal years 2005-2007.^[10]

Research Models

The RMS division mainly provides materials and various animal models for use in research studies. This division is a steady revenue stream for CRL because the products are consumable, and there are few competitors in this industry, and it accounted for 46.9% of total revenues in FY 2007. ^[11] This division offers the following: ^[12]

• Research models: CRL breeds and distributes purpose-bred mice/rat models, for lab research and drug testing;
• Research model services: CRL provides maintainence consulting services for animal models;
• Vaccine support: CRL supplies essential materials used for vaccine production for its animal models;
• In-vitro technology: CRL produces non-animal products for testing of toxic contamination by substances such as endotoxin in drugs and medical devices. In 2006, the FDA approved CRL’s Endosafe Portable Testing System (Endosafe®-PTS), a kit that tests for endotoxin contamination.

Preclinical Services

The PCS division provides services to drug manufacturers to perform early (preclinical) stage testing for candidate drugs for purposes of FDA approval. The PCS division has grown in the past few years, from 49.4% of CRL's total revenues in FY 2005 to 53.1% of total revenues in FY 2007. Services include: ^[13]

• Toxicology and Pathology studies: CRL offers services to investigate possible toxic effects of a candidate drug on human tissues and animal models in order to verify whether the candidate drug is too toxic for human tissues to handle;
• Bioanalysis: CRL also performs FDA-required tests for validating a candidate drug's effect on human metabolic processes in order to verify whether the candidate drug would have detrimental side-effects that would severely disrupt bodily functions;
• Phase I clinical trials: CRL performs these first human drug testing trials at the preclinical stage (using only healthy volunteers to examine drug tolerability).

Acquisitions

CRL has made several acquisitions over the past few years, mainly in an effort to expand its capabilities in the Preclinical Services division. These include:

• Northwest Kinetics : acquired in October 2006 for $29.5 million. This acquisition was CRL's initial venture into building a Preclinical Services division. Northwest Kinetics added high-end preclinical pharmaceutical testing to CRL's available animal model services. ^[14]
• MIR Preclinical Services: acquired in September 2008 for $12.5 million. This acquisition will allow CRL to expand its toxology preclinical research sector. ^[15]
• NewLab BioQuality: acquired in September 2008 for an undisclosed amount. This acquisition will allow CRL to provide safety and quality control testing services to clients as part of its Preclinical Services division. ^[16]

Trends and Forces

Demand for CRL's Animal Models Intensely Linked to R&D Spending at Research Institutions

Nearly 50% of CRL's revenues come from sales of consumable genetically engineered mice and rat models used by researchers funded by the National Institute of Health (NIH). As a result, the company is dependent on federal funding of research, and a decision by the government to cut this research would hurt animal model sales and negatively impact CRL's performance in the short term. Although the NIH grant budget doubled from 1998-2003, its growth from 2003-2007 remained at 2-3%, which has restricted CRL's revenue growth. ^[17]. In the long term, research institutions may switch from using animal models as research tools to substitutes such as cultivated cell colonies, reducing the demand for CRL's products.

Preclinical Services Depends on New Product Testing by Pharmaceutical Companies

CRL's acquisition of Northwest Kinetics in 2006 expanded its toxicology testing capabilities, but demand for these products depends on whether pharmaceutical companies need to outsource toxicology studies on new drugs. The market for these services is projected to hit $1.52 Billion by 2010^[18]), but this number may shrink as pharmaceutical companies respond to the current economic downturn by cutting research and development of new products.

CRL's Profitability Depends on Success of Acquisitions

CRL has been making made a series of acquisitions since 2006 to expand its Preclinical Services division, including two in September 2008 (one company was bought for $12.5 million, the other for an undisclosed amount). Notably, CRL has not always integrated acquired companies successfully - its 2004 acquisition of Inveresk was a failed attempt to enter into the late-state development business that ended when CRL sold Inveresk to Kendle International (KNDL). In the same quarter, CRL posted profit losses of approximately $100 million. ^[19] Since, the company has stuck with providing research models for early-stage development, and serving as an outsourced testing laboratory when drugs are ready for FDA approval.

Competition and Market Share

• Research Models Division

CRL is the largest global provider of research animal models in the U.S. with just three small competitors. Of the three competitors, two are privately owned companies and the third is a non-profit governmental organization. ^[20] Due to the substantial initial investment and rigorous licensing procedures required to enter the research model supplier business, barriers to entry in this segment are significant. These barriers to entry shield the RMS division of CRL from potential competitors. ^[21]

• Preclinical Services Division

CRL is one of the two largest providers of preclinical services in the U.S., with Covance (CVD) its main competitor. These top two players in the outsourced preclinical services market (shown in the table below) make up 50% of overall market share, while the other 50% of the market is highly fragmented. ^[22]

Notes

1. ↑ CRL SEC 10-K 2007 Filing, Item 1, Pg 2
2. ↑ CRL SEC 10-K 2007 Filing, Item 1, Pg 5
3. ↑ CRL SEC 10-K 2007 Filing, Item 8, Pg 34
4. ↑ CRL SEC 10-K 2007 Filing, Item 1, Pg 11
5. ↑ CRL SEC 10-K 2007 Filing, Item 1, Pg 12
6. ↑ CRL SEC 10-K 2007 Filing, Item 1, Pg 5
7. ↑ CRL SEC 10-K 2007 Filing, Item 1, Pg 5
8. ↑ CRL 2007 10-K, Item 8, Page 30
9. ↑ CRL SEC 10-K 2007 Filing, Item 8, Pg 35
10. ↑ CRL SEC 10-K 2007 Filing, Item 8, Pg 34
11. ↑ CRL SEC 10-K 2007 Filing, Item 8, Pg 34
12. ↑ CRL SEC 10-K 2007 Filing, Item 1, Pg 3
13. ↑ CRL SEC 10-K 2007 Filing, Item 1, Pg 6
14. ↑ CRL acquires Northwest Kinetics
15. ↑ MIR Preclinical Services bought by Charles River Laboratories
16. ↑ Charles River acquires NewLab BioQuality
17. ↑ National Institute of Health FY08 Performance Detail, Pg. 4.
18. ↑ Toxicology Market to Reach $1.52 bln by 2010
19. ↑ Charles River Labs sells part of the former Inveresk
20. ↑ CRL SEC 10-K 2007 Filing, Item 1, Pg 11
21. ↑ CRL SEC 10-K 2007 Filing, Item 1, Pg 11
22. ↑ CRL SEC 10-K 2007 Filing, Item 1, Pg 11
23. ↑ Covance CVD Yahoo Finance Company Profile
24. ↑ PDX 2007 SEC Filing 10-K, Item 6, Pg. 36
25. ↑ MPI Research Company Information, Indeed.com
26. ↑ Harlan Sprague Dawle Company Profile, Yahoo Finance
27. ↑ Huntingdon Life Sciences Company Information, Indeed.com
28. ↑ CRL SEC 10-K 2007 Filing, Item 1, Pg 11