Quarterly Results Suggest Charles River May Have Missed Big With Wuxi

Includes: CRL, WX
by: ChinaBio Today

In the aftermath of the breakup of the Charles River Labs (NYSE: CRL) and WuXi PharmaTech (NYSE: WX) merger (see story), the two companies each reported final reports for their respective 2010 second quarter financial performances. The results? The rejected company, WuXi PharmaTech, increased its guidance for 2010 slightly. Charles River, after deciding WuXi wasn’t worth the money, announced its own revenues declined and trimmed its 2010 outlook.

Ultimately, the collapse of the transaction was about the price Charles River was paying for WuXi and not its financial fortunes (although part of the equation concerned WuXi’s growth). Still, Charles River had to admit last week it couldn’t convince its investors that the WuXi merger would add value. Now it has to tell the world its own results are declining.

WuXi, which was confirming preliminary numbers released two weeks ago (see story), said Q2 revenues were up 21% to $81 million. Its core laboratory services revenues climbed 18%, while the always volatile manufacturing business was up 55% at $8.4 million.

For Charles River, revenues declined 5% to $292 million. The company commented that demand for its later-stage CRO services remains soft.

On the earnings side, WuXi reported net income of $35 million on a non-GAAP basis, an increase of 23%. GAAP net income fell 6% to $13.8 million, a figure that was negatively impacted by $2.9 million of costs related to the Charles River transaction and $1.7 million from 2008’s acquisition of AppTec. The company also paid higher taxes.

WuXi said the $30 million breakup fee from Charles River will more than pay for its transaction-related costs. It will record the $30 million one-time payment in Q3.

Also, WuXi pointed out that its results are being hurt by the disproportionately large startup costs of its new Suzhou toxicology facility.

For Charles River, net income was down to $32.1 million (non-GAAP) in the quarter, a 26% drop from $43.1 million a year earlier. On a GAAP basis, the company’s profit registered a 58% decline. It fell to $14.5 million from $34.2 million in 2009.

Although Charles River’s revenues are almost four times WuXi’s sales, the net income figures (GAAP and non-GAAP) of the two companies are remarkably close.

Because of the patterns evident in the first half of 2010, Charles River lowered its earnings expectation to a $1.90-$2.00 per share range, while revenues may increase slightly.

WuXi, on the other hand, is calling for revenue growth of about 20%. It raised its expectations for revenue from $310-$320 million to $320-$325 million. The company predicts non-GAAP operating income will climb 15%-20%, up from an earlier call for growth in the 10%-15% range.

Our take on the demise of the transaction is that the conversation about the merger should have discussed more than numbers and ratios (see story): China is becoming a major center for pharmaceutical research, and WuXi would have valuable services to Charles River (and vice-versa), creating a powerhouse that takes advantage of powerful strategic changes in pharmaceutical development. But now, even the quarterly numbers suggest that Charles River may have missed something.

Disclosure: None