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Charles River (CRL) DSA Arm Prospers, Currency Headwind Stays

·5-min read

Charles River Laboratories' CRL strong organic revenue growth and robust demand from biotech as well as pharmaceutical clients demonstrate the power of the company’s advanced portfolio. A dull cell supply business however might dampen top-line growth. Charles River currently carries a Zacks Rank #3 (Hold).

Over the past year, Charles River has been outperforming its industry. The stock has declined 27.3% compared with the industry’s 61.4% plunge.

Charles River exited the first quarter of 2022 with better-than-expected earnings and revenues. Results highlight 9.4% organic revenue growth, driven by strength across all three segments. The performance was in line with the company’s February-announced outlook. Biotech clients continued to be the primary driver of revenue growth in the first quarter.

In the first quarter, RMS revenues increased 8.7% organically year over year, in line with the company’s high single-digit outlook for 2022. Organic revenue growth was driven by broad-based demand and meaningful price increases in the Research Model business, particularly in North America. China continued to perform well, but the growth rate was impacted by a very-strong year-over-year comparison.

The DSA segment reported 9.5% organic revenue growth in the first quarter of 2022. DSA organic growth rate improved by nearly 300 basis points from the fourth-quarter level, driven by the Safety Assessment business that continued to benefit from strong business trends such as higher pricing and increased demand. The company is on track to reach the target of low double-digit organic growth in the second quarter and 20% organic growth in the second half of 2022. DSA backlog at the end of the first quarter increased more than 75% from the first quarter of last year and over 15% since year-end.

Charles River Laboratories International, Inc. Price

Charles River Laboratories International, Inc. Price
Charles River Laboratories International, Inc. Price

Charles River Laboratories International, Inc. price | Charles River Laboratories International, Inc. Quote

Charles River broadens the scope of the products and services across the drug discovery and early-stage development continuum through focused acquisitions. Within DSA, Retrogenix (an early-stage contract research organization acquired in 2021), with its proprietary cell microarray technology and off-target screening services, is currently contributing strongly to the company’s top line. In June 2021, Charles River acquired Vigene Biosciences -- a premier, gene therapy contract development and manufacturing organization providing viral vector-based gene delivery solutions.

Within RMS, the company acquired Explora Biolabs in April 2022. San Diego-based Explora as a CRADL has a similar focus like Charles River. It currently operates more than 15 preclinical vivarium facilities with a greater presence on the West Coast.

On the flip side, during the first quarter, within Charles River’s DSA business, although revenues increased, the growth rate was below the company’s recent low double-digit trend. This was largely the result of a difficult comparison first-quarter 2021 results, which included milestone payments and some COVID-related work. The DSA operating margin decreased 90 basis points to 22.9% in the first quarter, primarily due to higher staffing costs. According to Charles River, this is largely due to a timing issue, given the significant number of new hires over the past six to 12 months.

The Manufacturing segment's operating margin declined 240 basis points to 33.1% in the first quarter, as a result of the inclusion of the Cognate and Vigene businesses, which have margins below the overall segment. For RMS, the divestiture of RMS Japan and a 1.2% impact of foreign currency translation resulted in a slowdown in reported revenues. The company expects operating margin expansion within RMS to be limited for the remainder of the year due to the Explora BioLabs acquisition.

Foreign exchange is a major headwind for Charles River due to a considerable percentage of its revenues coming from outside the United States. The strengthening of the Euro and some other developed market currencies has been constantly hampering the company’s performance in the international markets.

For 2022, the impact of foreign currency translation is expected to reduce revenues by 1.5%.

Key Picks

Some better-ranked stocks in the broader medical space are Alkermes plc ALKS, Medpace Holdings, Inc. MEDP and UnitedHealth Group Incorporated UNH.

Alkermes reported first-quarter 2022 adjusted EPS of 12 cents, which surpassed the Zacks Consensus Estimate of a penny. Revenues of $278.6 million outpaced the Zacks Consensus Estimate by 6.2%. It currently sports a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Alkermes has an estimated long-term growth rate of 25.1%. ALKS’ earnings surpassed estimates in the trailing four quarters, the average surprise being 350.5%.

Medpace reported first-quarter 2022 adjusted EPS of $1.69, which surpassed the Zacks Consensus Estimate by 34.1%. Revenues of $330.9 million outpaced the Zacks Consensus Estimate by 1.1%. It currently has a Zacks Rank #2.

Medpace has a historical growth rate of 27.3%. MEDP’s earnings surpassed estimates in the trailing four quarters, the average surprise being 17.1%.

UnitedHealth, having a Zacks Rank #2, reported first-quarter 2022 adjusted EPS of $5.49, which beat the Zacks Consensus Estimate by 1.7%. Revenues of $80.1 billion outpaced the consensus mark by 1.9%.

UnitedHealth has an estimated long-term growth rate of 14.8%. UNH’s earnings surpassed estimates in the trailing four quarters, the average surprise being 3.7%.


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