CRL profits up in Q1 on tax benefits but sales drop on falling demand

By Gareth Macdonald

- Last updated on GMT

Related tags: Revenue, Income, Crl

Tax benefit from the sale of its US Phase I business helped CRO Charles Rivers Laboratories (CRL) to grow profits in the first quarter despite falling revenues and low demand.

The Phase I unit, in Tacoma, Washington, had been listed as a 'discontinued' operation since December ​last year, shortly after CRL began to "pursue strategic alternatives​” for it in a bid to reduce operating costs.

The subsequent divestiture, which was completed on March 28 and announced​ in an SEC filing last, provided CRL with an $11.1m (€7.5m) tax benefit which was included in the $35.4m of net income the firm posted for the first quarter. Net income for the year-earlier comparable period was $17.3m.

This income growth contrasts markedly with CRL’s net revenue for the three month period which, at $285.8m, was down 2.2 per cent thanks largely to a 6.3 per cent drop in the contribution from its preclinical services (PCS) business to $120.1m.

The US contract research organisation (CRO) said the​PCS revenue decline was due to continued soft demand from large pharmaceutical clients, as well as the impact of sales mix, which "continues to be more heavily weighted towards short-term studies​."

The comment echoes those CRL made in its Q4 2010 results presentation when it attributed a 6 per cent decline in PCS revenues to lower pharmaceutical industry demand for specialist toxicology analysis and testing services.

Research models

At first glance the performance of CRL’s other core division, research models and services (RMS), looked more positive with revenue 0.7 per cent higher at $173.4m. However, this figure included the favourable impact of exchange rates, without which the unit’s sales were effectively flat compared with the year-earlier quarter.

Nevertheless, flat RMS revenue is at least an improvement on the 0.6 per cent decline, to $168, that the unit saw in the final three months of 2010.

Additionally, Q1 2011 RMS operating margins improved in the quarter, climbing from 29 per cent to 29.8 per cent, due according to CRL “to leverage from higher sales of research model services and other products, as well as efficiencies derived from cost-saving actions​.”

Guidance

For the full year CRL maintained its guidance, with CEO James Foster explaining that the greater proportion of short-term studies in its PCS business, coupled with the impact of the recent earthquake and tsunami that struck Japan on key clients made demand difficult to predict.

The firm predicted that revenue for will be flat at around $1.13bn, while earnings per share will be in the $1/81 to $2.01 range thanks, again, to the tax benefit from the Phase I unit sale.

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