EUR 850.00 For Business Accounts Only

Morningstar | Strength in Research Models and Preclinical Testing Supports Charles River's Narrow Moat

Animal research models have been the foundation of Charles River's business since 1947, and the company has since expanded to provide solutions encompassing research models and related services, drug discovery, preclinical testing, and manufacturing support. It services nearly all top- and mid-tier biopharma players. Even if a biotech isn't using Charles River's outsourcing or manufacturing services, it is probably using the company's leading research models. Charles River focuses on providing the most widely used research strains, allowing it to take about 50% market share in small research models. The complexities of breeding and transporting genetically modified animal models establish high barriers to entry. We also believe that Charles River's reputation for quality and the nature of preclinical research encourage clients to stick with their model supplier. Notably, the research model business has maintained healthy operating margins even through the economic downturn of the late 2000s. The segment is about one fourth of the company's revenue. Drug discovery and safety assessment makes up about half of the company's revenue. Drug discovery remains a small portion of revenue, but preclinical testing has provided strong growth for the company. With a solid positioning in the research model space, Charles River took advantage of its quality brand to pursue preclinical testing as the biopharma industry was increasing the level of outsourced research. Aggressive expansion in capacity hurt the segment in the late 2000s and early 2010s, when revenue saw double-digit declines during the economic downturn. However, since 2008, we estimate that preclinical outsourcing has increased from 25% penetration to over 55%, so the biopharma industry is now more reliant on contract research organizations for preclinical work, and Charles River leads with top market share. In manufacturing support, the company has seen recent success with its unique rapid microbial testing technology. In the near term, we expect double-digit growth and healthy margins to continue with this premium-priced product.