Charles River Blames Slowdown on Biopharmas' Need to Conserve Cash

| About: Charles River (CRL)

Charles River Labs (NYSE:CRL) reduced its 2008 profit guidance by 3% because its CRO clients are delaying scheduled tests until next year. The trend caused a small slowing of the company’s growth rate in Q3, but the effect in Q4 will be more pronounced, according to the company. Biopharmas are concentrating their spending on late-stage projects, Charles River said.

The warning came as Charles River released its Q3 results. The warning produced a 21% decline in the price of Charles River's stock, which ended the session down by $7.03 at $26.87. The news had a spillover effect, though more muted, on other large multinational CRO companies.

For big pharma, the problem is that revenues are declining as the blockbuster drugs of the past lose patent protection. For small biotechs, it’s a matter of funding, either from their VC backers or larger pharmaceutical companies that provide small biotech with their drug development funds, according to James C. Foster, Chairman, President and CEO of Charles River in a statement. In a conference call, Foster said normal delays of a quarter or two are part of the CRO business, as preparation of molecules can sometimes take longer than expected. But the current situation is clearly different. It is driven by a need to conserve cash or support earnings as costs are put off into the next fiscal year.

Charles River operates worldwide. It identified its Edinburgh facility as the site suffering the biggest downturn, indicating that Europe is leading the trend toward delaying drug development outlays, though the company considers the slowdown a worldwide phenomenon. 

Charles River opened a facility in Shanghai on October 15. In his remarks to analysts, Foster said he expected the China lab to “fill in” or gradually move up toward operating at full capacity over the course of 2009. Although the slowdown warning does not specifically target the China CRO scene, a worldwide decrease in CRO work would have an inevitable effect on China.

Foster alluded to that worldwide slowdown in his remarks. Because times have been good to the CRO industry, companies have increased their laboratory facilities. Charles River will continue expansion work that is already underway, but it will put on hold the company’s plans to expand its Ohio lab until 2010.

Even more remarkable, the company said it terminated secret negotiations with two potential acquisition targets because of the upcoming slowdown. Foster did not disclose the size or names of the companies involved.

Sensing that excess capacity exists in the industry, and driven by their own financial constraints, biopharma companies are more aggressively seeking price concessions, Foster said.

Ironically, a bigger than normal supply of molecules is waiting to be developed, according to Foster. In response to an analyst question, Forster also said that he could not predict how the slump would end. But he used the 2002-2003 slowdown as a possible model. He said the slump lasted about three quarters, then ended with a bolus-like spurt of growth, fueled by pent-up demand.

Disclosure: none.