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Trends reverse at Charles River Laboratories in Q2


Trends reversed at Charles River Laboratories in Q2 with preclinical services revenue (PCS) growing for the first time in 14 quarters while research models and services (RMS) sales fell for the first time in five.

The US contract research organisation (CRO) reported total net revenue of $284.7m (€m), down 1.2 per cent on Q2 last year, with PCS increasing 0.9 per cent to $111m and RMS unit revenues falling 2.6 per cent to $173.6.

Charles River attributed the preclinical growth to higher demand for non-GLP discovery, regulated safety assessment and biopharmaceutical services (BPS) and RMS decline to the negative impact of foreign currency translation. The firm will hold its earning call later today.

Preclinical positives

Most observers focused on the gains made by Charles River’s preclinical services business with some – like Wells Fargo senior analyst Tim Evans – suggesting that the improvement could indicate the CRO is regaining ground.

We think investors will focus mostly on the improved PCS business given the softness in our recent checks and general negativity around this market. If the improvement is broad-based not just a subset of large clients, we suggest CRL may be winning back some share.”

Others were more cautious about the longer term, pointing to the firm’s mention of a strategic partnership - signed with an unnamed global pharmaceutical company in Q4 2011 - as a driver for the preclinical gains.

John Kreger from William Blair wrote that: “The stronger top-line performance in PCS appears to have been driven primarily by the ramping strategic partnership announced in the fourth quarter of 2011, which we believe is mostly non-GLP toxicology work.”

He suggested that while this type of discovery work is likely to be the key driver for Charles River, the smaller scale and shorter term nature of this work compared with GLP toxicology may mean PCS margins will struggle to achieve levels seen a few year ago.

David Windley from Jefferies also had questions, suggesting that “Our channel checks during 2Q pointed to softening preclinical trends and CVD's results provided a similar read. Perhaps CRL gained some share in 2Q.

Below the segment profits, lower corporate overhead and tax rate contributed about 3c and 2.5c, respectively. Thus, corporate expense timing and PCS sustainability are key questions for Wednesday's (today’s) meeting.”