Charles River looks to CGT growth to offset ‘bumpiness’ in CDMO biz

Stabilizing acquired CDMO businesses is proving “elusive and expensive” say analysts, but Charles River is confident cell and gene therapies entering the clinic will be the foundation of future growth.

For the second quarter 2022, Charles River Laboratories reported revenue from its manufacturing segment of $195 million, down 1.5% on the same quarter last year. Furthermore, the company is reducing its 2022 financial guidance from revenue growth of 13.5-15.5% to 9-11% in part due to “headwinds associated with the CDMO business,” though the strengthening US dollar and interest expense were also factors.

A challenging prior year comparison for Charles River’s Biologics Testing and Microbial Solutions (MS) businesses was also cited, with the segment offering 26.6% growth in the second quarter of last year.

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The headwinds were “mostly a function of integration bumpiness in the CDMO business (where CRL acquired a lot of assets quickly),” Evercore ISI analyst Elizabeth Anderson wrote in a note. Last year, the company acquired contract development and manufacturing organizations (CDMOs) Cognate for $875 million and Vigene for $300 million.

Although Vigene and Cognate only represent ~20% of MS and ~4% of total revenue, stabilizing these businesses is proving elusive and expensive,” Jefferies analyst David Windley wrote in a note. “Along with the lower P&L [profit and loss] outlook for the CDMO biz, capex plans were lowered $20 million for the year (~6%), suggesting protracted weakness and a rethinking of investment cadence.”

Jim Foster, Charles River’s CEO, told stakeholders that “tempered expectations for our CDMO business in the near term are the primary driver of the remainder of the earning shortfall and are a result of several factors.”

He continued: “First, following last year’s completion of a large COVID vaccine production contract at our Cognate UK site, we are retooling the production suites and retraining staff to return the capacity to its original purpose, producing plasmids, which is taking longer than expected.

“We have also invested time and resources in preparing for regulatory audits and upgrading other sites to cGMP production quality. These actions will generate new business opportunities in the future, but they have had a near term impact on the business. Furthermore, like the Early Discovery acquisition in 2014, the business development process for cell and gene therapy, CDMO services is highly technical and scientifically complex, requiring longer lead times for clients to place new projects and partner with us across our expanded offering.”

But beyond these operational tweaks, it will be burgeoning cell and gene therapy (CGT) sector that will drive the sector going forward, he explained, with the majority of candidates still in the preclinical phase.

“Today more than 3,000 cell and gene therapy programs are in the pipeline, a number which has grown at an average rate above 20% over the last three years. With approximately 70% of programs in a preclinical phase and less than 5% of programs in Phase III clinical trials or later we expect these advanced drug modalities will continue to fuel robust biologic testing growth and generate new business opportunities for the CDMO business particularly as additional therapies reach commercial approval.”

But even if the CGT sector takes longer to bear fruit than expected, the CDMO side still represents a small part of Charles River’s wider business.

“Let’s get real, Charles River grew CDO [contract development] revenue 9.5% in 2Q22,” Baird analyst Eric Coldwell wrote. And “this CDMO thing? It’s about 3% of firm revenue, so one could hope current valuation obliteration is more rearview than forward impact.”

For the quarter, total revenues across Charles River’s full business stood at $973 million, an increase of 6.4% on the same period last year.