Net revenue from the preclinical service unit fell year-on-year by nine per cent to $110.1m (€77.2m), a low point for Charles River in recent years, despite a boost from foreign currency exchange.
“We were surprised to note that this quarter's [preclinical service] revenue marked a new low since the full inclusion of the Inveresk acquisition [in the first quarter of 2005]”, David Windley, equity analyst at Jefferies & Company, said in a note to investors.
Sales in earlier quarters benefited from Phase I operations, which Charles River divested in March, and a larger preclinical footprint. Charles River made the cuts in response to lower demand.
Spotty and shallow
Recent quarters at Charles River and Covance, as well as reports from private labs, suggested the preclinical service sector was picking up, but the latest figures raise doubts. “Our conclusion is that any preclinical market improvement is still very spotty and shallow”, Windley said.
Charles River attributed the sequential and year-on-year dip to soft demand from large pharma clients and a sales mix weighted heavily towards short-term studies, as opposed to a fundamental shift in pricing or demand. In fact, Charles River raised reasons for optimism.
“Our continuing discussions with our large pharmaceutical clients suggest that they are increasingly comfortable with outsourcing, and in fact, are looking to outsource services which were previously considered core capabilities”, James Foster, CEO of Charles River, said in a press statement.
Reasons to be cheerful
The other part of Charles River’s business, research models and services, fared better. Demand for ‘other products’, such as in vitro and avian, drove a one per cent year-on-year uptick.
Favourable foreign exchange brought sales growth up above six per cent and prompted Charles River to revise its guidance to predict full year sales will be “slightly higher” than 2010.
“Charles River posted another substantial beat, due to gross margin improvement and research models strength, and raised guidance to new 20 to 25 per cent growth target”, Eric Coldwell, equity analyst at RW Baird, said in a note to investors.