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GLP tox capacity constraining, but slowly, Charles River says

By Nick Taylor , 15-Feb-2012

GLP toxicology capacity is filling up after repeated cuts but it will be years until more space is needed, the CEO of Charles River said.

Toxicology capacity use at Charles River Laboratories grew in 2011 as its 20 per cent space reduction and closures by others began to take effect. However, while the trend is for capacity to become more constrained, the slow recovery of demand means the existing space will be enough for several years.

James Foster, CEO of Charles River, told investors the company has enough space for three years or more. The situation in the US across all CROs (contract research organisation) and biopharm companies is similar. Foster said it will be two to three years until more capacity is needed.

The prediction is based on a gradual recovery. “Charles River expects relatively stable GLP (good laboratory practice) demand in 2012, but may see early indicators of improvement as some large clients advanced more molecules into development”, Eric Coldwell, equity analyst at RW Baird, wrote.

After repeated false dawns Foster said it is too early to tell if demand is returning but there are signs the market is at least stabilising. With GLP a long way off historic levels Charles River is relying on its other units, such as discovery services, and strategic deals to drive growth.

Strategic deals are key to future growth”, David Windley, equity analyst at Jefferies & Company, wrote. Foster said strategic deal talks are continuing and some prospects are asking for references from the big client with which Charles River is already working.

Even if Charles River inks two or three strategic deals, like last year’s agreement with an unnamed pharmaceutical company, Foster said it will have enough space, although it would need to hire staff.

Stronger together

On the conference call Foster faced several questions that touched on the reported sale of Charles River. Most of these questions focused on the integration of research models and preclinical services, and in doing so gave an insight into the likelihood of Charles River being split into two businesses.

Like at the JP Morgan Healthcare Conference in January Foster repeatedly emphasised the benefits of closely integrating the units, which Charles River did when it restructured management last year. Foster said this breadth of services is particularly attractive to potential strategic clients.

Management believes Charles River’s broad portfolio of offerings and scientific expertise are the primary reasons clients are considering them for this. To us, these comments invalidate a break-up sale thesis”, Windley wrote.

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