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Charles River Inches Forward

Stacked up against star performers in the drug development services sector like Covance (NYSE: CVD  ) and Pharmaceutical Product Development (Nasdaq: PPDI  ) , Charles River Laboratories (NYSE: CRL  ) has been decidedly lackluster. The Wilmington, Mass.-based firm continues to grapple with challenges in one of its business lines, but the ingredients for recovery may be in place.

Assessing Charles River's third-quarter results is a bit of a trial, due to charges and expenses related to the 2004 acquisition of Inveresk and Charles River's more recent sale of some of those Inveresk assets to Kendle (Nasdaq: KNDL  ) . Looking at results from continuing operations alone, however, Charles River racked up a 9% year-over-year increase in net sales, which hit $264.7 million.

Net income from continuing operations, meanwhile, rose by 7.4% to $32.1 million, even though this year's third quarter was hit by $2.4 million in charges from new stock-based compensation rules, while last year's third quarter included no such charges. As in recent quarters, the preclinical services segment drove results, as sales in the segment rose 10.6%.

The most interesting aspect of the quarter, though, was a sales recovery at Charles River's research models and services business. Year-over-year sales in this segment were up just 1% in the first quarter and flat in the second. This quarter, however, sales increased by a more respectable 7.3%, the highest growth rate since the second quarter of 2005.

Still, it's too early to celebrate the resurgence of the research models business. The company admitted that sales to "certain large pharmaceutical customers" -- namely, the big spenders in drug development -- have been slow. Apparently, business from these customers is higher-margin, since operating income for this segment actually fell somewhat vs. last year, despite this quarter's sales increase.

However, Charles River's cultivation of smaller clients in its research models is certainly a good thing. Eventually, spending from larger customers will recover, and when it does, Charles River will be a stronger player with a broader customer base. Unfortunately, waiting for the recovery may require some patience.

For more on Charles River:

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Fool contributor Brian Gorman does not own shares in any of the companies mentioned. The Fool has a healthy disclosure policy.

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