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Kendle feeds on Charles River restructure

By Kirsty Barnes , 23-May-2006

Kendle has seized a chance to expand and diversify its business, snapping up the Phase II-IV Clinical Services unit of Charles River Laboratories after it decided to get out of this area of clinical trial services and focus instead on its core drug discovery and development services.

The deal, expected to close in the third quarter of this year, is worth $215m (€168m) in cash.

The purchase gives Kendle new expertise in several lucrative therapeutic areas such as oncology, infectious disease, respiratory, cardiovascular and ophthalmology; a new and diverse customer base; and an increased capacity to deliver global clinical trials - elevating the company's competitive position to the world's fourth largest provider of Phase II-IV clinical services.

 

As the outsourcing boom continues, the global clinical trials arena is a lucrative space to be in, as such complex trials require a huge amount of infrastructure and capacity.

 

Because of this it is tough for many contract research organisations (CRO) to compete on this level, giving those that can some degree of price leverage.

 

Only the top three CROs, Quintiles, Covance and PPD have been really dominant in this space so far.

 

"This move is an important step in our overall growth strategy, designed to significantly enhance our global competitive position and accelerate Kendle to a $500m organisation," said Candace Kendle, chairman and CEO.

 

However, investors greeted the news with less enthusiasm, and the company's stock fell after the announcement. Buying part of a CRO is challenging, as the two cultures of the companies need to be assimilated effectively in order for the acquisition to start working in the company's favour. In addition, the workers and the backlog that come with the new company aren't necessarily guaranteed - technically they could leave at any time - so there is an element of risk involved with such an investment.

 

In fact, Charles River's Phase II-IV Clinical Services unit stemmed from its acquisition of Inveresk in 2004, and the company has since struggled to effectively manage all the parts of the merged business, prompting this latest sale, in addition to the announced sale of its Interventional and Surgical Services (ISS) facility in Massachusetts. The number of affected jobs has not been disclosed.

 

The Clinical Services segment only saw revenue growth of 1.9 per cent to $32.3m in Charles River's recently-announced first quarter results.

 

The Phase I clinic, however, had very strong sales in the quarter, as the effect of the European Clinical Trials Directive waned and targeted sales efforts brought new clients from Europe and Japan to the clinic, said the company.

 

In light of this, Charles River has decided to keep the Clinical Services segment's Phase I facility in Edinburgh, Scotland, and is also continuing to assess options for a Phase I presence in North America.

 

"We have determined that the Phase I Clinical Services business is an essential, strategic component of our service offerings, as it enables us to support customers' preclinical efforts through early-stage clinical trials," said chairman, president and CEO James Foster.

 

Meanwhile, the Preclinical services biz has continued to be a strong performer for the firm, with revenues growing 7.4 per cent in the first quarter, and this is where the company sees its future.

 

"The sale of the Phase II - IV portion of our Clinical Services business will allow us to improve internal processes and focus our financial and operating resources on our core Research Models and Services, Preclinical Services and Clinical Phase I businesses, which we believe offer significant long-term growth opportunities," said Foster.

 

"We believe that the market for outsourced preclinical services, particularly toxicology, continues to be strong, and we see emerging opportunities in invitro products, preconditioning services for research models, and early-stage clinical trials."

 

Turning the Research Models and Services (RMS) segment around will take some work, with the unit currently dragging its heels with revenue growth of only 1 per cent and operating earnings falling 4.4 per cent to $40.5m this last quarter.

 

The Clinical Services sale saw Charles River's profitability take a serious hit, causing the firm a goodwill impairment charge of $129.2m that contributed to the loss of $100.1m reported in the first quarter results.

 

The company also revised its sales growth from continuing operations for 2006 to only 6-8 per cent, due primarily to continuing softness in transgenic services, flat vaccine sales and preclinical services capacity constraints.

 

Moving forward, the company said it plans to introduce "strategic initiatives targeted at streamlining the business infrastructure and improving operating efficiency."

 

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