Charles River Labs Looking for Second China Facility

| About: Charles River (CRL)

Charles River Laboratories (NYSE: CRL), in commenting on its first quarter financial results, said it is very pleased with its recently opened 50,000 square foot facility in China, and it is looking for a second location. Because so many of Charles River’s clients now are doing work in China, there is a need to have “in-country” facilities to provide services, according to James Foster, Chairman, President and CEO of the company, in a conference call with analysts and investors.

“China is an important topic with our clients,” said Foster. He maintained that Charles River is the leading CRO in China with a GLP facility. Foster expects significant growth in China, especially in the next three to five years.

On the other hand, Charles River will close a preclinical facility in Arkansas. There has been a decline in the company’s preclinical capacity utilization, and the Arkansas closure is Charles River’s way of dealing with the decline.

Wednesday, after the close of trading, Charles River reported Q1 revenues slipped during Q1, due in part to a continuing decline in demand for the company’s preclinical services business (PCS). Charles River said that revenue for the division dropped 17%, helped by a negative 7% currency translation charge.

Charles River said biopharmas continue to put off projects to save cash, and the unprecedented biopharma M&A transactions of early 2008 also hurt business. Companies are focusing on rationalizing their newly combined businesses, instead of signing new outsourcing contracts, he declared.

In the conference call, Foster said there is an excess of CRO facilities worldwide. This has caused some pressure on revenue, though prices seem to be stabilizing at this lower level. Foster believes clients are not as concerned at the moment about pricing, because the more important factor is the depth of experience and expertise that Charles River contributes to its clients.

Longer term, Foster believes the high levels of M&A activity will increase the virtualization of biopharma. He called the mergers a “catalyst” for outsourcing, once the newly merged companies complete the process of integrating. Cost cutting will remain a factor and companies are not going to invest in “brick and mortar,” he said.

Charles River expects a small increase in its business during the second half of 2009. It is encouraged by the number of talks it is having with clients and their depth, both of which seem reassuring. Nevertheless, it does not expect revenues to return immediately to the levels seen in 2007 and the first quarter of 2008.

Charles River opened its Shanghai preclinical facility in October 2008. Charles River and Shanghai BioExplorer formed a JV called Charles River Preclinical Services Greater China, which owns and runs the facility, with Charles River being the majority partner. Dr. Kewin Jin is General Manager.

Disclosure: none.