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Charles River Laboratories (NYSE:CRL) is the leading provider of animal research models to the global biopharmaceutical industry. In other words, it breeds rats for drug research. Make no mistake, this is big business. Charles River is also a top two player in clinical research outsourcing [CRO] after its acquisition of Inveresk last year. This company now has annualized sales of more than $1.15 billion and sports a market cap of nearly $3 billion.

Charles River dominates the market for research models and seems to have an ideal position to leverage it across other clinical research areas. The rat business has fat profits. Prior to the Inveresk acquisition, Charles River posted net margins of 13.5% and operating margins of 23.7%.

CRO is by nature a lower-margin business and the company continues to make smaller acquisitions in this area, so the margins are going to be going in the wrong direction for a bit. Nonetheless, by most accounts Charles River picked up Inveresk for a reasonable price and eventually operating efficiencies ought to give it better leverage across a larger market.

The story is far from perfect. The company disappointed on earnings in May and missed again last quarter. The stock plunged from the $50 area to less than $35 in August. CRL has climbed back to $43 now and it seems like investors aren't giving up on this unique franchise. With the next earnings report due on November 6, perhaps it is worth waiting and watching.

This is one of those behind-the-scenes companies that most people never know about outside its industry. Charles River is a large and fast-growing company that merits attention from investors. The 8,000 employee firm boasts a customer base that, in its own words, "includes all of the major pharmaceutical companies, biotechnology companies, governments and many hospitals and academic institutions." The company is expected to post earnings per share (NYSEARCA:EPS) of $2.16 this year, $2.45 next year, and deliver a 5-year EPS growth rate of 15%.

Since the Inveresk acquisition, Charles River has reorganized into three business segments: Research Models and Services, Pre-Clinical Services, and Clinical Services. This reflects the end-to-end coverage of the drug development process that this company now provides. The company is investing $200 million this year in capital expenditures toward its pre-clinical business capacity. Pre-clinical services is Charles River's biggest source of growth, and also where the company dominates the competitive landscape.

The drug industry fell out of favor last year, but the push for safer and more effective drugs is as strong as ever and many of the big biotech companies are doing very well. Demand for research animals and the general trend toward outsourcing point to Charles River as a natural way to be invested in the biopharmaceutical business without the risks associated with specific products, as the Vioxx disaster and others remind us.

When a company misses on earnings for two straight quarters, that's enough for most investors to move on. With Charles River, though, many investors are hanging on to see if it can get back in the groove and tidy up it's efforts with the CRO business.

Even with the rough ride this year, the stock is hardly a value investor's dream at $43. CRL trades at 17.5 times 2007 earnings and roughly 2.6 times sales. This company is a picks-and-shovels play on the biopharmaceutical industry, though, with impressive profits and solid growth potential. If Charles River can win back some investor credibility in this upcoming earnings report, the rat race may attract renewed enthusiasm.

CRL 1-yr chart:

Charles river

Disclosure: Author has no position in CRL

Source: Charles River Laboratories: Driving The Rat Race