John Kreger, an analyst from William Blair, said in a note LabCorp’s $6.1bn bid to buy contract research organisation (CRO) Covance “will create some period of distraction for Covance’s toxicology business as management focuses on integration,” and believes Charles River is poised to benefit.
“We suspect the focus of the [LabCorp-Covance] deal is to drive competitive differentiation through patient-level data in the areas of central lab and clinical research, rather than preclinical,” he said. “If Covance’s toxicology business does in fact become strategically less important to the combined entity, Charles River would be well positioned to benefit.”
Charles River is fully aware of the potential to gain from the deal, with CEO James Foster telling delegates at last week’s JP Morgan Conference that Covance is “being sold to a non-synergistic parent.” He added the deal “could concern or spook some of their clients and we’ll carefully an professionally look into some of [Covance’s] customers.”
The proposed acquisition could also be a boon for other CROs, with Quintiles’ CEO Tom Pike saying the uncertainty in the market could lead to opportunities for his firm to take on more market share.
Toxicology Recovery
Kreger’s upgrade to ‘outperform’ is also based on an improving demand environment for early-stage development and discovery services as pharma firms begin to allocate incremental R&D funds again.
“After several years of declining revenue and a number of false recoveries since 2009, recent results across the industry suggest that the demand improvement seen in the early part of drug development over the past year is sustainable.”
Furthermore, he said, with biotechs securing record levels of funding, demand for toxicology services should continue to grow which will bolster capacity utilisation and lead to price increases.
“Once capacity utilization industrywide reaches the optimal level of 85%, we believe we could begin to see more widespread price increases, which could accelerate the earnings improvement further.”
A few years back, capacity utilisation stood at as low as 50%, but improvement in the market has led to shuttered space reopening and levels better than 70%, with several North American facilities are already at 85%, Kreger added.
In August, Charles River claimed it was approaching this optimal capacity and already this year Charles River has said it is considering reopening a preclinical site in Shrewsbury, Massachusetts.