The merger broadens Charles River's portfolio at a time when pharmaceutical companies are starting to favour purchasing materials and contract services from a limited number of suppliers with a broad product range. This has the dual benefit of making purchasing and contracting easier to manage, and provides leverage for pricing negotiations.
Charles River is best known as a supplier of laboratory animals, but also offers a range of contract services to the biopharmaceutical industry, including biochemistry and toxicological testing. Adding Inveresk Research to its stable will increase Charles River's capabilities in contract research and take it into new territory, the conduct of early-stage clinical trials.
Inveresk specialises in product development, including toxicological and pharmacological evaluation, laboratory science services and clinical development. Importantly, the company has a strong presence in Europe, which should improve the geographic reach of Charles River and make it more of an international player, in common with many of its big pharma customers.
James Foster, chairman and chief executive of Charles River, said the deal "gives us greater diversification as we are participating in the entire drug-development pipeline." He also noted that the combined entity would have a pretax gross profit margin of 42 per cent and annual revenue growth of 16 per cent.
Upon closing of the transaction, Foster will become chairman, president and CEO of the combined company - to be called Charles River Laboratories - while Inveresk CEO Walter Nimmo will become vice chairman and chief scientific officer.
Analysts said the new company would be better placed to compete against other big companies in the contract research sector, such as Covance and BioReliance.
This is the largest deal to be announced in the contract research sector since Covance entered into an agreement to buy Parexel in 1999, a transaction that was ultimately abandoned once the parties concluded that earnings growth for the combined entity would not meet expectations.
In fact, there seems to be an element of pessimism creeping into the perception of 'mega mergers,' which have been a feature of the big pharma sector since the mid-1990s. For example, Sir Richard Sykes, former chief executive of GlaxoSmithKline expressed his fears last month as to whether the merger of Glaxo Wellcome with SmithKline Beecham, an on-off affair for two years before it finally completed at the end of 2000, will ever be value-enhancing for the combined firm's shareholders.
This may in part explain why investors reacted to the latest news by driving Charles River's share price down nearly 12 per cent yesterday, while Inveresk put in a 14 per cent gain in the opposite direction.
On the other hand, Charles River could be at the front of a trend in the contract research sector that has already taken hold amongst companies supplying laboratory and drug development tools and products.
The latter sector has been enjoying healthy increases in revenues and earnings so far this year, raising speculation that the biotechnology and pharmaceutical industries - which had been cutting back on R&D spend over the last couple of years - have returned to earlier spending levels.
This recovery - alongside the changing purchasing habits of the big pharma players - have prompted a series of M&A deals. For example, Fisher Scientific will shortly add Apogent to a list of acquired companies that already includes Oxoid and Perbio, while General Electric has snapped up Instrumentarium and Amersham of the UK.
Meanwhile, Thermo Electron recently acquired US Counseling Services (USCS) to expand its laboratory and informatics business, which focuses on asset management, inventory tracking and other elements of lab operations. And additional acquisitions are on the cards in the coming months, according to the firm.
Earlier this year, market research group Frost & Sullivan issued a report predicting that global drug discovery spending, which was $19.6 billion in 2002, is expected to reach $25.1 billion in 2006.
In a separate announcement, Charles River raised its second-quarter earnings forecast, citing an improved market for outsourced drug development services in the second quarter. With revenue growth now expected to reach 15 per cent rather than the previous guidance of 9 per cent, Charles River is predicting an earnings range of 50 cents to 51 cents per share, up from 46 cents to 48 cents per share.