Charles River talks M&A on Q3 call: The ‘universe of possibilities is pretty robust’
Charles River reported organic revenue growth above 10% for the first time since 2008, said CEO Jim Foster on the company’s recent third quarter (Q3) earnings call. Revenue for the quarter clocked in at $585.3m.
The CEO cited fundamental changes in the biopharmaceutical industry over the last decade and internal company changes as driving “tremendous opportunity” for the contract research organization (CRO).
“The success of our strategy has been validated by the fact that we worked on 80% of the FDA-approved drugs in 2017,” said Foster on the call.
Of the growth drivers, Foster said biotechnology clients were the most significant factor, with sales to global biopharmaceutical clients also increasing “meaningfully.”
Third quarter revenue from discovery and safety assessment (DSA) was $352.3m, a 13.1% increase on our organic basis. The discovery services business was fueled by strong performances from its early discovery and in vivo discovery businesses. Foster said the long-term goal is to have at least half of its DSA clients working across both the DSA business and its in vivo discovery segment. It is currently at approximately 20%.
Bolstering its discovery capabilities in October, Charles River signed an exclusive partnership with Distributed Bio. The company also expanded its service offering at its San Francisco site, a location that Foster said will “enable us to generate new business opportunities by providing critical services proximate to the fast-growing biotech client base.”
Additionally, Charles River this week announced new additions to its Tumor Model Compendium, which now includes gastric and liver models, as well as new molecular data for leukemia, liver cancer, lymphoma, breast cancer, and ovarian cancer.
Strategic acquisitions: A ‘universe of possibilities’
Strategic acquisitions remain Charles River’s top priority for capital allocation – with M&A opportunities in every segment of the business, Foster said.
“We have conversations going on with multiple potential sellers, businesses that absolutely will be for sale,” he explained. Many of these companies private equity owned, a few privately.
However, Foster noted that it is taking the time to “properly digest” MPI, which Charles River acquired for $800m earlier this year. He also cited the company’s purchase of Agilux in 2016, adding, “we hope to do more of that [acquisitions].”
“So stay tuned, but we are doing it methodically and professionally,” Foster said. “We won't chase any deals, but the universe of possibilities is pretty robust.”
A cyclical business?
When asked about the cyclicality of the business, Foster said he fundamentally disagrees with the use of the word in the business. “I just don't think it's cyclical anymore. I don't think it was historically,” he explained.
Foster described that there has been a “fundamental shift in a very structured pharmaceutical industry,” as pharma does less work internally, sending more work to third-party contractors.
The deluge of biotech companies, many of which are virtual with no internal capacity, also has been driving the business.
“It's just a different marketplace,” said Foster, “So clients are externally focused and spending more money in discovery and they have more tools at their disposal.”
Insourcing solutions: A unique opportunity
Charles River’s insourcing solutions customers have historically been mainly government and academic. This has changed over the last decade with more business coming from biotech and pharma, Foster said.
“To be frank … we're somewhat surprised that this business hasn't grown faster and isn't larger given the dramatic outsourcing trend,” he added. Though it has “picked up as of the last few years.”
In line with this, Charles River secured a five-year, $95.7m insourcing contact last month – a deal that Foster called “particularly meaningful.”
The company expects the contract to generate annual revenue of approximately $18m.
And while its insourcing solutions business doesn’t generate the margins of its core business, Foster noted that it is “a way to literally live inside of your clients and provide an opportunity to talk to them about the other products and services that we provide and pull some of that work through.”
China: A high-growth business
Charles River began shipping models from its new Shanghai site in early 2018, and is continuing to expand its market presence “to take advantage of the growth opportunity.”
The facility opened earlier this year and is in the process of being finished.
“In China, we continue to add capacity in our new Shanghai facility to support robust market demand and win new business in this important geographic region,” added Foster, calling the China “a very high-growth business.”
Last year, the growth rate was a little slower than what was hoped for, as the CRO was “capacity constrained,” Foster said – but it is no longer.
“So it's growing as quickly as we can build the space,” he said, and a slowdown is not expected.
“We look at the world in five-year increments in our strategic plan. We certainly think it will continue to grow nicely as long as we accommodate the space.”
