Charles River eyes global M&A opportunities, expects to double size in 5 years
James Foster, Charles River CEO, said the company’s growth is indicative of “an extremely healthy market environment,” citing biotech funding which is slated to reach the second highest level on record.
“Both large and small clients are intensifying investments in their pipelines – creating new business opportunities for Charles River,” he added on the company’s second quarter 2018 earnings call last week.
The Wilmington, MA-headquartered company reported a revenue of $585.3m, marking a 24.8% increase over last year. Foster said the growth was broad across the company’s spectrum of clients, “with both biotech and global biopharma clients contributing substantially to the increase as well as academic institutions.”
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Through the end of the year, Foster said revenue will have nearly doubled since 2013, including acquisitions. Additionally, its employee base has increased by approximately 75% over the last five years. The company is hiring significantly across multiple geographies, Foster added – and has increased hourly wages in certain businesses, predominantly in North America, the UK, and China.
“We expect these investments to continue as we anticipate doubling the size of the company again in the next five years,” explained Foster. As part of this, he noted that the business must be “flexibly scaled” to respond to the evolving market.
Subsequently, Charles River has adopted a new operating model to create a more “agile” organization; one that it says is more client-centric with fewer layers, “driving the decision-making to the point of impact.”
In line with the changes, the company eliminated the chief operating officer role. Davide Molho, who previously filled this position, has left the company “to pursue other interests.”
“The less top-down decisions are made, and the more, as I said before, closer to the decisions as possible, I think the better off we are,” explained Foster.
CFO David Smith said strategic acquisitions remain the company’s top priority for capital allocation, followed by debt repayment.
Regarding 2018 guidance, Charles River increased its revenue growth outlook to a range of 19% to 21% on a reported basis. Smith said this reflects strong demand trends and a slightly higher contribution from acquisitions, primarily MPI Research – which, after being acquired earlier this year, is on track to deliver $13m to $16m of operational synergies by the end of 2019.
MPI has available capacity and Foster said it will continue to bring “small tranches of capacity online” across its global safety assessment network “to accommodate robust client demand.”
Foster also noted that the pipeline of acquisition candidates across its portfolio remains robust. “Based on our second quarter performance and our outlook for the remainder of the year, we believe that the pace of demand will accelerate in 2018,” he added.
Research models and services
For the research models and research model services (RMS) segment, revenue was $130.4m. Foster said the growth rate improved for a second consecutive quarter, with China delivering “another outstanding performance,” for research models.
“Growth accelerated as the new Shanghai facility continued to ramp up to full capacity, and we won new business in China because of our expanded footprint and high-quality models,” said Foster.
“With year-to-date revenue of slightly less than 10% of our total RMS revenue, China is becoming a larger contributor to the RMS segment's growth rate,” he added.
Client use of technologies such as CRISPR also is driving increased demand for the company’s genetically engineered animals models and services (GEMS) business, Foster explained.
Models used by the discovery and safety assessment (DSA) segment represented more than 5% of its total global research model volume to date, “which was more than twice the volume of our largest RMS client,” said Foster. “This underscores the importance of our research model business.”
Looking to future growth, Foster said it will be continuous, with additional spaces in the Shanghai market potentially needed and currently being investigated.
“We, for sure, will need additional capacity west and south,” he said. “It's a gigantic country and – so, big research centers, and a lot of money being pumped into the Chinese life sciences arena by the government,” Foster said.
If Chinese companies want to “play on the international scene and sell their drugs internationally,” Foster said, “they're going to have to use higher-quality animals to do their basic research.”
“There's maybe some M&A opportunities there, which we'll obviously pursue if we can, if they make sense for us. But we are out and about literally right now looking for additional space, so stay tuned,” he added.
Manufacturing support
Revenue for the manufacturing support segment was $108.5m – with significant improvement from the biologics business at an organic revenue growth above 10%. Charles River divested its small-molecule CDMO business last year.
“The number of biologic and biosimilar drugs in development has been growing at double-digit rates, which continues to drive the demand for our services and the need for new capacity,” Foster explained, noting global expansions and plans to open a new facility in Pennsylvania.
Once open, the company intends to transition certain laboratory operations to the new Pennsylvania site “at a measured pace,” which will continue through most of 2019.
“There will be modest pressure on the manufacturing segment's operating margin through the transition process, but we believe capacity expansion is critical to accommodate client demand, which is expected to be robust for the foreseeable future,” Foster added.
Portfolio expansion
Foster said Charles River intends to stay in the non-clinical arena. “We have about a $15bn market,” he added, “So, it's a big market, one where we have leading market shares in virtually everything we do and opportunities to enhance those shares.”
Though also investing in organic growth Foster commented that the M&A pipeline “is quite diverse and quite robust … There's a lot of assets out there,” he said, noting that multiple conversations are ongoing.
“We have a vision and a view towards how we will continue to expand and enhance our portfolio, not just to be bigger, but to be more responsive partner,” Foster added. “So, I would say that fill in some very subtle areas where we are under scale and expand some areas where we have significant scale but need to be larger.”
