Since 2013, Charles River has invested upward of $2bn (€1.8bn) in 13 acquisitions, transforming its business to the point that recent takeovers now account for around one-third of revenues.
The takeovers helped Charles River double its revenue over the past five years. With Charles River aiming to double sales again over the next five years, attention has turned to the deals the early-stage contract research organization (CRO) will strike to hit its target.
Speaking at the Jefferies London Healthcare Conference, David Smith, chief financial officer at Charles River, said the CRO has a $1bn M&A “war chest” and discussed how it plans to spend it.
Smith said, “You never say never, but we’re not looking for a $1bn acquisition alone. We’re looking for multiple. What you may see is the speed with which we do acquisitions increase.”
The pace of M&A at Charles River has historically been tied to the speed at which it can bring its leverage ratio down below three times.
Charles River aims to hit its leverage goal within 12 months of striking a deal but recently has been beating that target timeline. It took the CRO five months to bring its leverage ratio down from 3.5 to 2.96 after it paid $516m for Citoxlab, a complicated acquisition involving sites across nine countries.
In the past, Charles River has ceased dealmaking while working to bring leverage down. However, with Charles River now having a track record of quickly deleveraging, Jefferies analyst David Windley thinks the CRO may relax its rules.
Windley wrote, “Having shown a repeated ability to lower leverage quickly after acquisitions, [management] might not feel obligated to turn off the M&A spigot while deleveraging to <3x as it did with the WIL Research deal.”
While the identities of Charles River’s M&A targets are unknown, the company’s previous deals and Smith’s comments paint a picture of the type of business it will buy.
Charles River has already hoovered up the big targets in its core markets, meaning that, as Smith said, a string of smaller deals is likely. The targets need to have reached a level of maturity, though, with Smith looking for businesses that are accretive “out the gate.”
Smith said, “If the science is good, you can make money on it, so we’re not looking to get companies that need to be proven or turned around.”