The demand for preclinical services remains robust, making the acquisition of Inveresk work to Charles RiverLaboratories'
The company reported that third-quarter revenue rose 55.6% to $273.9 million compared with the same period in 2004. Net income increased 24% to $32.1 million from $25.8 million, although on a per-share basis, earnings declined to $0.44 from $0.51. Excluding certain one-time charges, Charles River Labs did better, as income jumped 61.5% to $41.7 million, or $0.57 per share.
While these are impressive jumps, a lot of the gain was due to the purchase of Inveresk. It seems that the deal came at the right time. Charles River Labs' second-largest business in terms of revenue, research models, has stalled. Revenue in that segment, which provides genetically modified animals for drug testing, increased just 0.7% to $118.9 million. Because of higher fuel costs and other factors, operating margin declined to 30.9% from 32.2%.
As for the preclinical services business, Charles River Labs is enjoying "very strong" demand, and operating performance is improving. Adjusting for the effects of the Inveresk merger, operating margin increased to 24% versus 23.4% last quarter and 17% in the third quarter of 2004.
In response to the surging preclinical demand, Charles River Labs is set to open a new facility in Edinburgh, Scotland, in the first quarter next year and a new site in Massachusetts sometime in 2006. In addition, a new location in Nevada is being planned. For now, the capacity expansion is warranted because backlog for preclinical and clinical services was up 2.5% quarter over quarter to $431.2 million. Still, should the market weaken, Charles River Labs could be stuck with a capacity glut.
In the near term, the company is likely to continue to enjoy solid growth on the back of its preclinical business. But a wait-and-see attitude toward the stock may be appropriate due to weakness in research models and the company's ambitious expansion plans.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.