Charles River Laboratories (NYSE:CRL) posted respectable results for the fourth quarter and full-year 2005, thanks in part to the company's acquisition of Inveresk, and continued demand for preclinical services. The drug development products and services provider seems likely to continue to reap the rewards of a positive business environment.
For 2005, revenue was up 46.3% to $1.1 billion, while per-share earnings rose 16.7% to $1.96. Fourth-quarter revenue increased 22.3%, while EPS climbed 115.6% to $0.69. The gains in GAAP EPS were inflated, though, because of several charges; taking into account these items, non-GAAP full-year EPS increased 15.7% and fourth-quarter EPS increased 22.9%.
Charles River has three operating segments -- Research Models and Services, Preclinical Services, and Clinical Services. Preclinical Services has been the growth engine of late, as sales rose 40% year over year in the fourth quarter, although that performance had a lot to do with the company's acquisition of Inveresk in 2004.
Still, Charles River is expecting that preclinical demand will continue to be robust, and it's preparing to meet that demand. This is where the risk comes in. The firm plans to incur between $175 million and $200 million in capital expenditures in 2006 -- up from $96.7 million in 200 -- as it builds out its preclinical capacity.
Charles River is reportedly seeing more activity from biotech outfits, in addition to existing business from larger pharmaceutical names like Eli Lilly (NYSE:LLY) and Inside Value pick Pfizer (NYSE:PFE). At least some of that demand has come from what Charles River terms a large biotech client that has agreed to pay for dedicated capacity. While this sort of business is definitely a positive, the firm could run into problems if its client base includes little biotechs, since these smaller companies often lack the financial stability of their larger counterparts. Plus, a smaller company is generally less likely to be a source of repeat business, given that if its lead drug fails in preclinical trials, the firm may cease to exist.
Charles River is in no immediate danger; on the contrary, demand for its products appears reasonably strong. Backlog for its preclinical and clinical business reached $448.2 million in the fourth quarter, an increase of $17.1 million from the third quarter. Still, the company is embarking on a pretty big expansion. Investors would do well to closely monitor backlog and performance in the preclinical business in the coming quarters.
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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.
