Charles River Laboratories International Inc. Q4 2009 Earnings Call Transcript

| About: Charles River (CRL)

Charles River Laboratories International Inc. (NYSE:CRL)

Q4 2009 Earnings Call

February 9, 2010 8:30 am ET


Susan Hardy - Corporate VP, IR

Jim Foster - Chairman, President & CEO

Tom Ackerman - EVP & CFO


Greg Bolan - Wells Fargo

Dave Windley - Jefferies & Company

Ross Muken - Deutsche Bank

Sandy Draper - Raymond James

Doug Schenkel - Cohen and Company

Isaac Ro - Leerink Swann

Douglas Tsao - Barclays Capital

Natalie Nadler - William Blair

Tycho Peterson - JPMorgan

Robert Jones - Goldman Sachs


Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2009 earnings and 2010 guidance conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a questions-and-answer session; instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Ms. Susan Hardy, Corporate Vice President of Investor Relations. Please go ahead.

Susan Hardy

Thank you. Good morning and welcome to Charles River Laboratories' 2009 earnings and 2010 guidance conference call and webcast. This morning, Jim Foster, Chairman, President and Chief Executive Officer and Tom Ackerman, Executive Vice President and Chief Financial Officer will comment on our fourth quarter and full year results and review guidance for 2010. Following the presentation, we will respond to questions.

There is a slide presentation associated with today's remarks which is posted on the Investor Relations section of our website at A taped replay of this call will be available beginning at noon today and can be accessed by calling 800-475-6701. The international access number is 320-365-3844. The access code in either case is 143476. The replay will be available through February 23rd; you may also access an archived version of the webcast on our Investor Relations website.

I’d like to remind you of our Safe Harbor. Any remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by any forward-looking statements as a result of various important factors including, but not limited to those discussed in our Annual Report on Form 10-K, which was filed on February 23rd, 2009, as well as other filings we make with the Securities and Exchange Commission.

During this call, we will be primarily discussing non-GAAP financial measures. We believe that these non-GAAP financial measures help investors to gain a meaningful understanding of our core operating results and future prospects consistent with the manner in which management measures and forecasts the company's performance. The non-GAAP financial measures are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP.

In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations to those GAAP measures on the Investor Relations section of our website through the financial reconciliations link.

Now, I will turn the call over to Jim Foster.

Jim Foster

Good morning. I’d like to begin by reviewing the ’09 results and will then discuss our outlook for 2010 with you. We reported of $295.4 million for the fourth quarter of ’09, a decrease of 5.2% over the fourth quarter of ’08, including a 3.8% positive impact from foreign exchange.

Research Models and Services or RMS reported a strong quarter increasing 10.9% to $169.4 million. Preclinical Services or PCS reported net sales of $125.9 million, which was down 20.6% from the fourth quarter of ’08 that came in slightly higher than anticipated. This better than expected performance improves our level of confidence that market has stabilized and based on strong preclinical bookings for the first quarter of 2010 and early positive indication for the second, we believe we are starting to see our clients reinvigorate their late discovery and early development efforts.

Operating income for the quarter was $48.9 million and the operating margin was 16.5% compared to 19% reported in the fourth quarter of ‘08. The operating margin decrease was primarily the result of lower sales mitigated in part by stringent control of operating costs.

Earnings per diluted share were $0.49 in the fourth quarter compared to $0.59 in the fourth quarter of’08. Fourth quarter of ’09 tapped a challenging year in which a confluence of events, including the economy significant consolidations from the Pharma and biotech space lack of availability of funding for biotech companies and uncertainty surrounding healthcare reform drove our clients to reduce their spending on our products and services and for toxicology in particular. This reduction led to excess capacity throughout the CRO industry, which in turn resulted in pricing pressure.

Recognizing that these issues would take some time to resolve and that the biopharmaceutical industry would be fundamentally changed as it emerged from this space we decide to use this spear to strengthen our infrastructure and keep our financial base strong.

Towards that end we implemented a number of cost savings and efficiency initiatives and made strategic acquisitions that we’re intended to enhance our operations and our ability to support clients more effectively. In terms of efficiency, we closed or disposed a smaller less efficient site, including PCS Arkansas and our Phase 1 facility in Scotland, as well as two RMS sites in Hungary and Belgium.

We reduced headcount by approximately a 1000 people primarily in the PCS segment, including our recent decision to suspend operations at our PCS Massachusetts site. We expect this leaner infrastructure to improve our operating margins without compromising our ability to accommodate future demand for preclinical services.

While evaluating our preclinical infrastructure we considered a number of asset transfer opportunities, but chose not to pursue any of them. Given the availability of capacity for outsourced preclinical services and fact that those assets were older and less efficient than our purpose-built facility, we believe it’s a better choice for our clients to close or repurpose those facilities and outsource the work.

The decisions remain to seen, but our discussions with senior managements of our clients on this subject suggest that the outcome will be an increase in outsource. Second, we implemented an organizational restructuring our PCS business to create a dual accountability structure with both global functional teams and site level management. This new structure centralizes and integrates our global PCS portfolio and unites expertise from various facility to support our client program.

Regardless of the specific site at which the program was initiated. The structure allows the PCS organization to easily share information index best practices globally, standardized operations and improve efficiencies. Most importantly, it facilitates our customers’ ability to take advantage of the exceptional and consistent service at all level and across all Charles River sites worldwide.

Third, we realigned our enterprise wide sales team, fully implementing the changes at the beginning of 2010. Our goal is to enhance our client center culture to the establishment of three-pronged sales organization, which provides more comprehensive coverage of all market segments.

We’ve created sales teams dedicated to each of the following key client constituencies, global pharmaceutical companies, small and mid-sized bio pharmaceutical companies, and academic and government customers. This structure enhances our ability to meet customer need by offering customized, tailored solution across our entire portfolio.

In addition, our mid-market pharmaceutical and biotechnology clients will benefit by additional support from a combination of account managers with broad portfolio knowledge and specialist with specific scientific expertise. The new structure also provides additional coverage of the academic and government and sector, one which offers us growth opportunities both from market share gains, as well as stimulus funds.

We just completed our international sales meeting in late January at which we provided extensive training and strategy session. Attended 200 sales and marketed professionals from 20 countries, our sales force is now very well prepared to sell the totality of our portfolio.

Fourth, we focused on internal process improvement initiatives. We’ve continued to invest in our information technology system in order to better serve our customers, harmonize our data and streamline our processes.

I’m very pleased to report that we have successfully completed the rollout of our ERP system in the United States at the beginning of this fiscal year. This achievement was due to the outstanding efforts of our ERP team and all of the domestic business units who worked long hours to ensure that the implementation would be a success.

Our lean Six Sigma program has continued to ramp up with more than 100 projects currently underway and more in the pipeline. We're looking at this program as the method by which to drive operating efficiencies, which we believe will position us to offer our client’s enhanced services at a lower cost.

In the absence of significant pricing power, we will rely on improved operating efficiency in order to drive profitability. We achieved modest cost reductions in ‘09 and expect more significant benefits in 2010.

Finally, we have continued to make strategic acquisitions that expand the breadth of services we can offer our client’s. Specifically, the acquisition of Piedmont made us a leading provider of discovery services for oncology and with the addition of Cerebricon; we established a strong foothold in this therapeutic area with CNS.

We also acquired Systems Pathology Company of SPC. As you know, SPC is developing unique software technology designed to increase the efficiency of pathologists by automated sample processing. We believe this software is highly innovated technology, which will reinforce our position as a market leader in toxicological pathology.

As the results of all of these initiatives, we are emerging from this period as the leaner, stronger company with a broader portfolio aimed at supporting our client’s drug development efforts from discovery to first-in-human testing. Before reviewing our outlook for 2010, I'd like to briefly summarize this business segment performance.

Sales for our RMS segment rose 10.9% in the fourth quarter to $169.4 million. This better than expected result was driven primarily by higher sales of research models. We saw growth in all geographic locales; North America, Europe and Japan.

As you know, the fourth quarter is usually seasonally weak, as researches temporarily reduce or suspend orders during the holidays. Although we did see this pattern, it was less pronounced than usual.

Sales-to-academic client’s rose the growth and this was without the benefit of stimulus funds, which we believe will have more impact for us in 2010. Sales for the service businesses increased in the quarter driven by the acquisitions of Piedmont and Cerebricon.

On an organic basis, sales were relatively consistent with the fourth quarter of ’08. In fact throughout ’09 demand for Research Models and Services has been relatively stable. We believe this was the case because early research was less affected by market factors and was the case for toxicology services. This promises was supported by the fact that sale of (inaudible) which we use more heavily in early research was stronger than out-bred rats which was the model of choice for toxicology.

Our In Vitro business derived strong growth in the quarter due primarily to sales of the PCS product and the new multi-cartridge reader or MCS. This business continues to perform exceptionally well with an increasing number of PCS units deployed in the field and sales of the cartridges increasing. We continue to take market share with this exceptional product line largely because of the competitive differentiation between this product and other company’s endotoxin testing methods currently on the market.

This leading edge product is portable, produces accurate results in a fraction of the time required by other methods and is ideally suited for both and small drug manufacturers. We believe that PCS will continue to deliver strong growth for some time to come.

The RMS operating margin increased 280 basis points to 30.1% compared to 27.3% in the fourth quarter of ’08. The improvement was due primarily to high sales of Research Models and improved margins with Services businesses as well as effective cost controls. Our RMS franchise is the market leading provider to Research Models and Services which support their user in research. Research Models are essentially for the drug discovery development process. A stability of demand is evident in the performance of the RMS segment in ’09.

Although our client significantly reduced the use of outsourced Preclinical Services as they grappled with the challenges from patent expirations to the economy, they continued to o purchase Research Models and to utilize our scientific expertise and capacity for the early development needs. Importance of this business that it establishes our relations with the client’s early in the drug development cycle and stays with them through post approval.

With exceptional operating margins and strong free cash flow generation, the RMS business provides a stable base to Charles River. We intend to continue to expand our RMS portfolio strategically with acquisitions such as Piedmont and Cerebricon, adding products and services which enhanced our ability to support our clients’ drug discovery and development efforts.

The PCS segment reported sales of $125.9 million in the fourth quarter a decline of 20.6%, including a positive effect of foreign exchange and a revenue loss from the divestiture of the Phase I clinic in Scotland. PCS trends did not change significantly over the last half of the year, when inquiry increased and pricing stabilized, there were less specialty toxicology in the mix and clients were hesitant to commit.

Pricing has continued to be a significant factor in the sales decline, as studies initiated at ’08 prices were completed and replaced by studies at significantly lower prices. However, in selected instances we have been able to increase prices to general toxicology. Capacity utilization continued well below optimal levels and combined with pricing and sales mix translated to a margin of 10.5% compared to 18.2% in the fourth of ’08 and 13.8% in the third quarter of ’09.

With the suspension of operations at PCS Massachusetts, and a transition of the majority of the clients to other facility, we are already experiencing improvement in capacity utilization. We expect that the actions we have taken to streamline the PCS business, including a reorganization, infrastructure rationalization and lean Six Sigma initiatives will position us to support our clients to the current market environment and improve the profitability of this segment as demand improve.

Although visibility remains somewhat limited, there are a number of factors, which reinforce our belief that there will be a pickup in demand in Preclinical Services beginning in the second quarter of 2010, the stability of the fourth quarter of ’09 and our expectation for comparable first quarter of 2010.

Stronger inquiry levels coming in the first quarter, attaches the majority of our first quarter sales were already booked to backlog as our substantial portion of second quarter sales. And inputs from senior research executive at most of the major pharmaceutical companies indicate an improving environment.

We expect demand will ramp slowly as our clients refocus their attention on the early development portion of the drug development pipeline. Ultimately the limited growth in R&D dollars and pressure to improve their productively we believe that biopharmaceutical companies will continue to embrace strategic outsourcing as a means by which to improve the efficiency and effectiveness of the drug development efforts preferring to use our infrastructure rather than invest in their own.

Increased outsourcing will benefit both RMS and PCS so in the long term we believe our consolidated sales growth rate will reach low double digit levels. At this point however, we view 2010 as the year of slow but steady recovery. We expect sales growth for Charles River to be in the low single digit, reflecting growth in RMS and flat sales for PCS.

The majority of the business units within RMS expects higher sales for 2010 in part due to an average 2% price increase and the slight to negative impact we are anticipating from pharma mergers. We expect that PCS operating margin to improve as a result of operating leverage from the many initiatives we implemented and from improved capacity utilization. We also expect that RMS margin will hold at the ’09 level which as you know was nearly 31%.

Corporate accounts will increase to a range of 5.5% to 6% of sales resulting in a consolidated margins flat to moderately lower than ’09. Taking all of these factors into account we estimate 2010 earnings per share in the range of $2.20 to $2.40. Tom will give you more detail about this guidance in a moment.

We are anticipating free cash flow in the range of $130 million to $150 million in 2010, reflecting higher operating cash flow and lower capital spending. We expect capital expenditures to be in the range of $50 million to $70 million, which will be primarily for maintenance project. Our scheduled debt repayment obligations are limited so we are likely to deploy cash for strategic acquisition and are considering stock repurchases.

In summary, while we were not satisfied with the results we posted in ’09, taking as a whole and considering the difficult operating environment, we believe we’ll weather the storm well. We know we are entering 2010 as a stronger and leaner company and one that is well positioned for leverage improving demand. We continue to believe that as the efforts of major pharma mergers, the economy, and uncertainties surrounding the administrations healthcare policy (inaudible), we will experience renewed demand for our broad portfolio of essential products and services.

We are confident in this belief because our clients are challenging themselves to improve the productivity of their pipeline at the same time they improve their operating efficiency with the goal of reducing the cost of drug development. We believe that recent reductions in force accounted by many of the big pharmas will promote outsourcing. Having forgone the cost associated with maintaining in-house capabilities, they will opt to use our extensive scientific expertise and efficient facility.

Our discussions with clients continue to reinforce their desire to increase strategic outsourcing and based on our deep expertise in in vivo biology, global network of facilities and focus clients support to do so with Charles River.

During this complex and challenging economic times, I particularly want to thank our employees for their exceptional work and commitment and our shareholders for their continuing support. Now I’ll turn the call over to Tom Ackerman.

Tom Ackerman

First, let me remind you that I will speak primarily to non-GAAP results, which exclude acquisition related amortization, charges related to cost savings, actions, convertible debt accounting and other items. This morning I will focus my discussion primarily on our 2010 financial guidance.

For 2010, we expect sales to grow in the low single digits and non-GAAP EPS to be in range of $2.20 to $2.40. The increase in sales and the benefits from cost savings actions and efficiency programs will be offset by cost headwinds associated with the implementation of our new ERP systems and incentive compensations.

In total, these two items are expected to increase cost by approximately $0.35 per share in 2010. Minor changes to below the line items in 2010 such as the expected tax rate, interest expense and other income arte not expected to have a meaningful impact. We also do not expect any significant changes in our share count for 2010. I’ll discuss many of these items in more details shortly.

Foreign exchange reduced sales growth by 2.3% in 2009 which generated a 3.8% benefit during the fourth quarter as we anniversary the strengthening of the U.S. dollar. As we look ahead to 2010, foreign exchange is expected to have a less meaningful impact based on current rates.

Foreign exchange is expected to benefit first quarter sales by a similar rate as the fourth quarter, but we expect foreign exchange to average just the 1% benefit to sales growth for full year.

However, foreign exchange is expected to reduce operating income by $1 million to $2 million in 2010 due to the effect of the Canadian dollar exchange rates on our PCS Montréal facility. You may recall that approximately half of PCS Montréal sales are invoiced in U.S. dollars, while nearly all of the costs are incurred in Canadian dollars.

Unallocated corporate cost totaled $57.3 million or 4.8% sales in 2009, which was inline with the level indicated on our third quarter call. For 2010, we expect unallocated corporate cost in the range of 5.5% to 6% of sales.

The anticipated increase over 2009 as primarily related to ERP cost and incentive compensation expenses. Our new ERP system was rolled out to all U.S. sites in late December to begin the new fiscal year.

The implementation has been successful today and I would like to thank the many employees across the U.S. for their hard work particularly around the holidays to help ensure a smooth transition to the new ERP system.

We plan to move ahead with the second phase of our ERP rollout plan and go live with the system in Canada and Scotland at mid-year.

Total ERP cost we’re expected to be $17 million to $18 million in 2010 which approximately $12 million to $13 million would be in incremental over 2009. Approximately $2 million to $3 million of the 2010 cost relates to the implementation and remediation cost, that will be weighted towards the first half of the year. While we expect some operational benefits from the ERP system in 2010; we do not expect more substantial savings until 2011.

Net interest expense of $9 million in 2009 was inline with expectations. We don’t anticipate any significant changes in average debt levels or interest rates for 2010 and therefore, I expect non-GAAP net interest expense to be in range of $9 million to $10 million in 2010.

We continue to exclude non-cash in credit expense related to the convertible debt accounting change from our non-GAAP results. Other income was $2.1 million in 2009. This was primarily driven by investment games associated with our deferred compensation plan.

Consistent with our historical practice, we have not budgeted for other income in 2010, since gains or losses on these investments correlated with market returns and are unpredictable.

Non-GAAP tax rate was 29.2% in 2009; in 2010 we expect the tax rate to decrease to a range of 28% to 29% as a result of more favorable range mix and lower and benefited tax losses. As you know, in January we announce plans to suspend at our operations at our PCS-Massachusetts. The action is expected to reduce our PCS cost structure by $20 million in 2010 and $25 million on an annualized basis.

We expect to complete all contracted studies surely by mid-year and transition the majority of clients to other PCS locations. As a result of the PCS-Massachusetts action, we expect to incur several charges that will be excluded from non-GAAP results.

In the fourth quarter of 2009, we required a $700,000 charge related to the anticipated reduction in certain tax benefits associated with the PCS Massachusetts.

In 2010, we expect to incur a severance cost and other charges or approximately $6 million predominately in the first half of the year. We also plan to exclude operating losses at PCS-Massachusetts, in the first half of 2010 as we wind down our operations as well as strained cost thereafter associated with holding the higher facility. Most of which is non-cash depreciation expense. These items are expected to total approximately $13 million to $14 million in 2010.

We have also completed the asset impairment test in the PCS-Massachusetts facility and do not expect to incur any charges at this time.

I’ll now provide an update on our cash flow and capital structure. In 2009, we generated free cash flow of $39 million including a strong fourth quarter performance of approximately $47 million. In 2010, we expect free cash flow to be in a range of $130 million to $150 million. Capital expenditures were $80 million in 2009 and are anticipated to be $60 million to $70 million in 2010 almost entirely for maintenance projects.

Depreciation is expected to increase to approximately 73 million in 2010, during depreciation from PCS-Massachusetts. This represents an increase from 65 million in 2009 primarily related to the new ERP system. This year’s amortization expense is forecast to remain essentially flat from the 2009 level of 28.4 million.

We expect our capital requirements to remain low for at least the next two years given the availability of capacity within our PCS network and future expansion options that require little capital investment. As a result, our capital priorities for the significant free cash flow generated within 2010 remain consistent with our historical objectives.

As Jim noted, we intend to use our excess funds to enhance shareholder value and are likely to avoid cash for strategic acquisitions and will consider resuming start repurchases.

Given our strong cash flow generation and relatively low debt balances, we have maintained a solid, yet conservative capital structure that allows us to weather the difficult economical environment over the last 18 months.

Our total capitalization stood at approximately 1.9 billion at the end of 2009. Total debt outstanding was 541 million or 1.9 times non-GAAP EBITDA. In January, we were able to extend the exploration of our $50 million term loan facility to coincide with the maturity of our larger facility in July 2011.

The term loan facility which has an outstanding balance of $44 million would have expired in June 2010. Cash and equivalence including short and long term marketable securities were $255 million at the end of 2009, which represents a $40 million increase in the third quarter.

DSO remains relatively stable and within our target range of 43 days compared to 45 days at the end of the third quarter and 40 days at the end of 2008. In 2010, RMS sales were expected to benefit from a 2% average price increase, as well as a modest volume improvement driven in part, by NIH stimulus funding and increased demands for models used in toxicology.

We have [factored] there is some disruption in RMS sales from anticipated R&D facility closures in the pharmaceutical industry. Our guidance also assumes a gradual improvement in preclinical demand beginning in the second quarter of 2010, as projects move forward once clients finalize their budgets and merger integrations near completion.

We have taken significant action in 2009 and in January of this year to better align our cost structure with current demand levels. These actions were focused on our preclinical business and are expected to contribute to the PCS margin improvement in 2010.

Benefit from these anticipated sales improvements and cost savings is expected to be further supplemented by more meaningful savings from lean Six Sigma and other efficiency programs as these initiatives gain momentum throughout the year.

However, these EPS contributions will be offset by meaningful cost headwinds, the most significant of which the $0.35 related to the ERP project incentive compensation cost. The range will also be pressured by dilution from the acquisitions of SPC, which is currently in the development phase, as well as the small operating loss from FX and normal unit cost increases, including the resumption of merit based pay increases.

Based on the timing of these factors we expect first quarter sales and second margins to be relatively stable compared to fourth quarter levels and EPS to be approximately 10% below fourth quarter EPS of $0.49 due to the ERP and incentive compensation cost headwinds.

We have emerged from a very challenging year in 2009 with a leaner more efficient infrastructure through implementation of initiates that were structured to enhance our operational efficiency and deliver benefits for years to come. While we view 2010 as a year of recovery, we are pleased to have built a solid foundation that is poised to generate even greater profitability as demand returns to growth levels.

Susan Hardy

That concludes our comments, operator, would you please take questions now?

Question-and-answer session


(Operator Instructions). Our first question is from Greg Bolan with Wells Fargo.

Greg Bolan - Wells Fargo

Jim or Tom, assuming the PCS cost structure has been right sized and obviously incremental resources would need to be added to facilitate a substantial improvement in study volumes, but what is your goal for sustainable PCS operating margins in the future?

Jim Foster

Our goal for many years was 25% and aspirationally that’s still the goal that we have. Obviously we've operated below that, but we have operations that are performing above 20%. So I'd say as for the short-to-medium term goal is to get back to above 20% level and we certainly think that given the rightsizing of our infrastructure, add capacity sales and to get more pricing capability that will be able to achieve those goals.

Greg Bolan - Wells Fargo

Tom, for the fourth quarter we were modeling about 4% revenue contribution from Piedmont and Cerebricon, does that sound about right?

Tom Ackerman

That’s a little bit on the higher side, I would say Greg.


Thank you. Our next question is from Dave Windley with Jefferies & Company.

Dave Windley - Jefferies & Company

Little twist on Greg’s question, if we think about a trajectory of revenue in PCS and your staffing changes there, I guess what I’m looking for is, how much revenue your PCS business can add before you need to start adding staff to execute those studies, I presume you have some slack capacity including staffing?

Jim Foster

Obviously, we can’t quantify that exactly for you Dave, but sufficed to say that we have some slack capability now, so we will be able to take on some additional business at the current staffing levels. Obviously we have a significant amount of capacity, so stake is not a problem. At a certain point we’ll have to add technical staff at technician level, so some of them I think will be prior employees and others would be new ones. We are confident that given our employment levels and the markets that we work in and the timeframe that it takes to get people up to speed the previously trained and to train new ones that we will be able to do that and instead of measured fashion given the growth rate that we anticipate for this business over the next three to four quarters.

Dave Windley - Jefferies & Company

And Jim you mentioned in some cases, you will expect to able to hire back some of our former employees, are any of those on some type of small retention of some sort or is there no financial tied to those types of folks?

Jim Foster

There was no specific financial tied, we retained virtually all the scientific staff and most of the study directors. There are probably a few of those people that are still available and that we will have some good terms and this simply was insufficient works so we would be helpful that the very good one that, which we had a long term relationship would be pleased to come back, but it’s not economically feasible to be holding that in anticipation of a timeframe that would not entirely [show out].


Thank you. Our next question is from Ross Muken with Deutsche Bank.

Ross Muken - Deutsche Bank

As you’ve sort of done the work to sort of get deeper into what’s going on in the end markets and you’ve had conversations with executives and the like that you noted, as they talked about the increased outsourcing that they are likely to do, what was driving, was it them both trying to get productivity and cost cuts, was it not having the right staffing levels internally, was it purely savings and price based? I’m just trying to get the sense for now that the budget cycle has been reset, what is sort of on the top of mind of most of the executives in terms of why now versus waiting until later in the year or ’11?

Jim Foster

On top of mind is the fact that they have a limited number of resources and they have come up with priorities and other ones stand them and that’s going to be some very early discovery either internally or licensing end products from large molecule companies and/or driving things for the clinical and those tend to be the same what they are holding on to. Also we’ve had some assets that transfer conversations, which means that the clients have literally been not just resisting infrastructure and headcount, but actually trying to [jet] us in this as well and we indicated in our remarks that’s not something that we think makes any sense so either our clients or ourselves and we told them that and we actually think some of our clients will close those sites.

So we’ve come into a new calendar year having seen the Pfizer and Merck deals finish and those businesses go through the beginnings of pretty dramatic infrastructure realignments in terms of reducing space and people and focusing on specific therapeutic areas. I think other companies have been waiting to see what that looks like so to realign their own infrastructures, we’ve seen in the last month several large other drug companies were also making large announcements. It’s really about as the patent [flip] continues to loom and there tends to be maybe a short term abeyance in healthcare legislation being enacted. It’s a period for them to I think more aggressively utilize their internal resources.

So that sort of combined with the anticipation on that capacity will get tied (inaudible) and that just a fact we all in the CRO industry have excess capacity at the moment, but that’s obviously no one is building anymore. We suspended operations in mass, our clients to take their space out. So space will get tied, clients will think increasing about getting in line and how long they’ll have to wait. They haven’t had to wait very long for the last years or 18 months.

And I think there is beginning to the greater thought about where they stand in the queue and also what they have been getting from a quality point of view from players that they have been forcing to provide services at much lower price points. So we think that the pricing dramatic reductions has ceased and actually has for some time and as I said, earlier we have seen some limited very early ability to push back on prices and not just for the part of it, but because we really need to be paid better to perform these exceptional services, and I think the clients will recognize that and are willing to try to buy the best services possible at a CRO price going forward. Are recognizing the fact that they no longer have the capacity to capably to do it themselves.

Ross Muken - Deutsche Bank

And just a sort of follow-up on that, Jim. It seems like in general for this industry, price is obviously fairly key to profitability and that’s no surprise, but as we think about sort of the recovery in that level, I know you sort of talked about some of the different factors on that. Obviously it’s heavily capacity utilization weighted, as you thought about the last time industry maybe went through a down turn even though it’s not necessarily as comparable. How should we think about the time period or sort of the sequence of events that need to happen to get to that from next incremental price being up versus flat and how did those sort of discussions start with the biopharma heads?

Jim Foster

It’s beginning to happen steadily and slowly right now. As you said, it is directly related to current available capacity to more importantly how much space to the clients here will be available to them when they need to move quickly? I think they will have less flexibility than they have for the last year or so, and they have been able to book studies in the mater of weeks and historically it has been for months.

While we do believe we are beginning to get some pricing capability and we’ll increasingly do so, we haven’t built our internal plan on it. Our plan is built upon filling capacity, being more efficient and improving our margins top line and our margins outlay. To some extent I think pricing will just sort of (Inaudible) there will be sort of an additional benefit, but right now we are driving efficiency gains through the restructuring of our preclinical organizations and our Six Sigma initiatives and our procurement initiatives as aggressively as possible to sort of fill in wherever lack of pricing has left us, but we’re certainly moving in a directional pricing, we’ll become something that will be available to us. We are sort of anticipating that it’s not going to be a lever that we’re going to be able to pull that to any significant degree in fiscal 2010.


Our next question is from Sandy Draper with Raymond James.

Sandy Draper - Raymond James

Longer-term question, you made the comments about eventually getting back to a double-digit growth number. When you look at that, is that really predicated on eventually getting back to some more normal growth around PCS, do think it sort of a balanced growth between the two and without trying too get specific 2011 guidance, would that even be a reasonable short in 2011 or are you really looking at more of a three to five year target to eventually get back there? Thanks.

Jim Foster

We have been talking directionally in longer-terms, so 2011 it’s difficult to comment on, we certainly wouldn't go so far right now to say that we’re in the hunt for double-digit in '011, but if anything possible. Look, RMS, we should continue to get price, the models business should continue to be a solid as a result of continuing to take market share across all geographic locals and the academic sector in particularly these days we do think our new sales force realignment will be extremely beneficial to see more rapid top line growth from the services part of our RMS business.

As infrastructure realignments continue to take price with the pharma companies and as capacity tightens and space is reduced inside of our client on the preclinical side that will begin to stimulate growth there. So it's difficult to call sort of when we get to that level, but we're sort of inherently thinking that RMS sort of gets back to high single-digit preclinical at low double-digit obviously it puts some pricing power again in the preclinical business that could be more easily realized. So it's a more mid-term goal obviously.


Our next question is from Doug Schenkel with Cohen and Company.

Doug Schenkel - Cohen and Company

What's been the early feedback from clients regarding transitioning studies from Shrewsbury to other facilities, it sounds like there haven't been any real problems yet, I just want to make sure there aren't any new concerns specific to not having a facility right in the neighborhood of east coast clients?

Jim Foster

We are very pleased with the client’s response; I think the testament to quality of the relationship we have with them, their belief in us as a company, actually their belief in being comfortable using multiple sites to get the work done. There were certainly some clients that integrated Box scenario that were preferred to use local supply source because they like being able to go there by car pretty much whenever they wanted to. But since that’s no longer available by us or anyone, and they have multiple high quality options at other facilities and some of our clients who use a single facility some will use several of our facility, that really holds us in good stand and continues to give us good flexibility and should continue to ensure capacity value well utilized.

The conversation have been extremely professional clients have been, I can't say that they are thrilled about this, but they are very comfortable with that, they are working with us, they are happy to stay with us and it’s gone, I would say, better than we had anticipated about concerns of the amount of work that’s moving and in clients openness and willingness to work closely with us and in some cases to get out and audit other facilities that they weren’t necessarily familiar with.

Doug Schenkel - Cohen and Company

Okay thanks, Jim, and one real quick follow-up. It was clearly very good to hear some encouraging words regarding the pharma; I guess the outlook for hopefully a pick up in PCS demands heading into Q1 and Q2. Any color you can provide regarding certain product areas or geographies within PCS that you think are going to pick up prior to other areas.

Jim Foster

Not really. We hope it will be the sort of usual balance we have between specialty work and also long and short-term work, I mean that would be a more normalized market. Obviously we have a bigger foot print in specialty work that tends to have margins and a healthy goals of that is obviously beneficial to our P&L, but I think supporting the clients across the whole range of tox studies in sort of a testament to them doing work both early and comment (inaudible) with the longer clinical trials. Given the foot print that we have with different of our facilities having different capability, the more we can keep space for across the entire portfolio the better the P&L will look for the better clients what we’ll be able to manifest by using our entire infrastructure, so hopefully it will role out pretty much across the board.


Your next question comes from Isaac Ro, Leerink Swann.

Isaac Ro - Leerink Swann

First off on RMS, just wondering if you could remind us what price increases you guys realized for 2009 and then maybe if you could comment on any further mixed trends that you might expect in 2010 that could help the business that would be helpful.

Tom Ackerman

Yes, 2009 was probably around 3ish percent, maybe a little bit better. So, we obviously expect it to be a little bit lower than that in 2010, but not significantly. The second one, could you follow up on the question. The mix in RMS or?

Isaac Ro - Leerink Swann

Yes, just I think you touched a little bit on the mice versus rats' data and then like I’m wondering if there is anything else in the animal mix that we should be thinking about?

Tom Ackerman

Not really, I mean the stimulus funding will primarily be beneficial to mice sales, variety of mice activity and as Jim referenced with the tox-rebound that would primarily be driven towards larger out-bred rats. I can’t say that that’s a significant profit driver in terms of those to, I mean our toxicology rats are probably bread and butter, but many of the inbred mice are also very favorably priced and have very good margins as well.

Isaac Ro - Leerink Swann

And just secondly, if you could touch on progress in China, maybe how that performed in the quarter and then your outlook for that region in 2010?

Jim Foster

China has generally gotten more slowly than we had anticipated initially, because of construction delays and secondarily because as the whole industry pullback. So, remember that of our clients of large international drug companies and not Chinese based. We do have Chinese based discovery organizations either they own or contracted out. They have been very careful about spending in China as they have everywhere else. They’ve also been reasonably price-sensitive even in China.

So, we’ve had a large number of audits, we’ve had a large amount of non-GLP work and we currently have several GLP studies going on at the same time with several large pharma clients. So, the work is beginning to get done in a more significant fashion, clients seem quite pleased with the facility and the quality of the work. The site continues to be a drag to the P&L; we are unwaveringly committed to China as having vital strategic deployments to our business and our industry going forward.

So, we’re out there working hard to bring in more clients. I think we have pretty healthy client roster lined up for 2010, both very large pharma clients and some slightly smaller ones. So, the client base is actually fine. It's going a little more slowly than we would have liked, but improving all the time.


Your next question comes from Douglas Tsao, Barclays Capital.

Douglas Tsao - Barclays Capital

Jim, how are you sort of managing the process in terms of negotiating potential asset trends per deal and the sort of balancing what you view sort of your near-term and perhaps even long-term sort of financial interest versus the risk in terms of sort of a competitor potentially coming in and making a deal on less favorable terms and what you’re willing to accept and sort of addressing, what I would almost characterize as “The Prisoner’s Dilemma” of some sort with some of your large competitors. And also largely, are most of the sites that you’ve been in these assets transfer negotiations, currently active talk sites or have these already largely had operations wound down, perhaps not all the way, but to a certain level, but already had some significant pullback in terms of their level of activity?

Jim Foster

Doug, this is really a classic example of how timing is everything in life. So, I would say that if went back five years ago, before we started are very aggressive less than CapEx to build and renovate and refurbish facilities. The face of these asset transfer deals, they would obviously look more attractive. You would get facilities and people and business in one fell swoop and we would have had a different orientation to them, so would the competition and I think we would be out there negotiating very aggressively for that.

They’re not sort of strategically something that we are interested in on their face, because of the obvious reason that there is too much space out there and all it does is exacerbate the problems for Charles River.

Frankly, for our competitors and actually for clients too doesn’t really solve an issue for them, except sort of transfer responsibility to manage their employee base instead of them doing it, that doesn't really feel like the proper thing for us to do.

Having said that, why we should have a general and negative predisposition, we’re obviously very respectful of our clients. We live to serve them and also every preclinical talk site is not created the same. So, some of them are better than others, some are newer than others, some are more efficient than others.

And to the last part of your question, some are more full than others, but in any event I would say they are all somewhat less than full and in the process of winding down, obviously they don’t need to stay. We have done thorough investigations including, run the numbers, visited the facility, met the people and thought very carefully about them and passed.

We are willing to take the risk that a competitor sees the situation differently although I can’t imagine why, even if they all have too much capacity, but we are willing to take that risk or pain as it were, because it doesn’t make good economic sense for us and we actually don’t think it is the best thing for the client. So, we pass them having thought it thoroughly and we are having no sort of - not a feeling that we would leave anything on the table as a result of that.


Your next question comes from Natalie Nadler, William Blair.

Natalie Nadler - William Blair

It’s Natalie Nadler in for John today. I was hoping you could expand on the demand dynamics that you are seeing in the market right now. And more specifically, what you are seeing from large pharma clients versus mid-size versus small biotech and how much of the improvement that you are currently seeing is being driven by the different segments?

Jim Foster

Well, we try very hard to service, in the way we restructured our sales force, we are looking at our client base and so three different constituencies, one is academic and government, two obviously falls mostly on the preclinical side and we have had a lot of traction and historically sales were up in 2009 and we anticipate a good 2010.

Specifically, because of the stimulus money and more sales force. There is a lot of mid-size companies' sort of small pharma and mid-size biotech companies; it’s a challenging client base to support, just because there is so many clients. We are very optimistic that our new structure with generalist and technical experts supporting them will allow us to infiltrate and support those clients more readily and we really have a much enhanced focus on the big pharma clients who we have dedicated very senior people at global account managers servicing them as well.

So, there will be a lot of businesses available for all three of those segments, there probably will be a disproportionate amount of money available relatively quickly. From big pharma companies, I only say that because their spend on an individual basis is so much more and their movements in terms of shrinking their own infrastructure and immediately having to look for us. So I think capabilities will be more dramatic and there probably will be opportunities to lock in clients for longer and lock out the competition and so we are very focused on that as well.

So, we’re trying our best to service the very large client base and take advantage of available business and all of them. Obviously biotech companies by definition do very little of what we do internally, at least smaller ones. For instance, they don’t do toxicology work at all and those that do we don’t see investing in infrastructure. We don’t see them investing in discovery services or in the RMS services sector at all. So, we’re really particularly well poised at the current time when clients really need, it’s really not optional they really need to invest aggressively in outsourcing and I think as the price points begin to soften somewhat, we will really see material benefits.

Natalie Nadler - William Blair

And then just given that the environment has improved for biotech funding, have you started to see an increase from that client segment?

Jim Foster

I think somewhat our biotech clients fell out somewhat, but some of that slack was picked up by direct investments for the pharmaceutical companies, particularly for those biotech companies that had compounds that they want to license or support in some way, but we’re probably just beginning to see an up-tick as a result of more money being available for the capital markets.


Your next question comes from Tycho Peterson, JPMorgan.

Tycho Peterson - JPMorgan

Just following up on actually Doug’s earlier question on kind of capacity transfer, you’ve been pretty clear that you don’t want to go down that pass, yet at the same time, I think you’ve talked about the increasingly strategic nature of your discussions with clients. So, are there other paths that you’re looking to go down or is it your view once the demand starts to firm and go back to kind of a normalized business as usual environment?

Jim Foster

I don’t know what a business as usual environment means anymore. I think what’s happens historically is not really relevant and it is not a particularly good predictor. We have a client base that has totally changed, totally morphed and continues to shrink. What we’re really trying to discipline ourselves to do is deal with every client on an individual basis and not try to force them into some specific paradigm that we worked out for all of our big drug companies for instance. So, some will continue to launch dedicated space, some may want to transfer assets, they may not transfer them to us.

Some will be lot longer-term preferred provider agreement with some sort of specialty ability to be in front of the line and return for large amounts of work and many will be comfortable just getting in inline and waiting, I do think that being comfortable getting inline and waiting will dissipate as space begins to shrink. So that's the only thing I do think as relevant what we’ve seen historically.

Right now if you can book a study in a few weeks you don't really have to think about it all that much or plan that carefully, if that hopefully gets to the point where it is a couple of quarters lets say and clients are vary impatient because they have a new compound, that will change the market dynamics significantly.

I do think that we continue to be on uncharted waters in terms of what the competition looks like, what our clients look like and what we look like. We’ve tried with all the changes that we made in fiscal ‘09 to be very creative and flexible and open to working with clients differently and we don't really think that's going to change any time soon. I don't think we're going to get back to any specific way to work with most of our clients.

Tycho Peterson - JPMorgan

And then on Shrewsbury, can you talk about what you would be looking for in terms of a sign that you’d consider reopening that and just talk mechanically about what would take to ramp that facility backup if and when the demand does return?

Jim Foster

I mean it's very straightforward, as you know while we haven't given the specific percentage, our capacity utilization is quite low, and we recognize quite low for all of our competitors as well. It will improve literally as a result of our Massachusetts off-line, but still won't get to the point that we’d like it to be probably by the end of fiscal 2010.

As we see our preclinical space beginning to get to the point where it’s approaching optimal levels around 85%, let's see, we see ourselves getting close to 80%. We will be looking to bring that facility back online, the facility of course only needs to be revalidated and it would take us relatively short period of time to get a small crew in there to do the validation and to open in a small period of time meaning about six months, it probably takes us a year to year and half to be fully at the level we were out when we closed it. So let's say, it takes us a year to get back at a reasonable capacity to take on additional work. We definitely will have additional time to do that.

We also have some work available and we know that just fully outfitted by they are dime and ready to go and we have some additional space in Ohio as well so we are very flexible from brining new space online, if we happen to call this long a business come back faster, not it’s problem they have. We certainly have sufficient space to do this and it’s entirely been a factor of how quickly we can bring on both old staff and train new staff to be able to do quality work.


Thank you and our last question is from Robert Jones with Goldman Sachs, please go ahead.

Robert Jones - Goldman Sachs

On the use of the cash, I know you mentioned strategic M&A and also share buybacks. On M&A can you discuss what types of deals you might be looking at, I wouldn’t imagine these would include taking on any additional toxicology capacity and then on share buybacks, Tom, I believe you mentioned that there is no change with the share count in 2010 guidance, if that’s right how should we think about the potential per share buybacks going forward?

Tom Ackerman

Yeah, I will take your last question first and then flip it to Jim, but we do have a 145 million remaining on prior authorizations or existing authorizations with our board. As we said, we will look at myriad of options as we move to the first quarter and to the extent that we do reinvigorate that potential will push down our share count during 2010.

Jim Foster

On the M&A side we continue to be interested in looking at mostly service businesses, mostly upstream to fill in our portfolio. The kind of optimal deal size for us has kind of been 50 plus million, from a purchase price point it doesn’t mean that we restrict ourselves to deal that size, I mean we would be certainly willing to taken a reasonable amount of debt to do a bigger deal to make sense for us strategically and it continue to distinguish us from our competitors and provide the services that our clients want so deal flow continues to be good we are always active in that space.


Thank you. And that conclude our last question.

Susan Hardy

Well, we know there were a few people left in the queue, we apologies that we didn’t get you but we’ll follow-up with you later today. Thank you all for joining us this morning that concludes the conference call.


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