Charles River Laboratories (NYSE:CRL) shares got pummeled in early morning trading, as the drug development product and services provider announced both its agreement to sell its late-stage clinical business, and its first-quarter results. After making a major acquisition in 2004, Charles River hasn't been able to effectively manage all of its parts, and so it's restructuring. In the near term, investors shouldn't expect too much from the company.
Charles River revealed that it will sell its phase 2-4 clinical trial services business to Kendle (NASDAQ:KNDL). Unfortunately, the sale involves a goodwill impairment charge of $129.2 million, or $1.81 per share, resulting in Charles River reporting a loss of $1.40 per share in the quarter versus EPS of $0.40 in the same period last year. Even non-GAAP results, though, were disappointing. Factoring out the effects of the asset sale charge and charges related to the 2004 purchase of Inveresk, EPS declined to $0.50 from $0.55.
The research model segment continued to be the major drag on Charles River's performance. Revenue in that business grew a scant 1%, while operating earnings declined 4.4% to $40.5 million. Meanwhile, the preclinical area, which has been the growth engine in recent quarters, turned in respectable top-line growth of 7.4%. However, operating earnings here were also down on stock-compensation expense, the closure of a facility, and study delays and the cost structure at the Montreal facility.
Charles River announced it will implement a variety of measures to bump up operating efficiency. Even though the firm asserts that demand for preclinical services remains strong, the restructuring plans call for a staff cut at its Montreal preclinical facility. This is an unsettling sign, since the company opened new space at the site just last year.
Demand for outsourcing services remains solid, which is clear from the performance of other companies in the segment like Covance (NYSE:CVD) and PPD (NASDAQ:PPDI). For now, though, Charles River can't be counted on to capitalize on this demand.
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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.
