Charles River Laboratories International (NYSE: CRL) Is a high quality business that is crucial to the entire drug discovery lifecycle, which involves discovery, development and production. It serves as a pick and shovel in the healthcare industry and Acting as royalty on the growth of others. It operates relatively under the radar and consistently has revenue, earnings and free cash flow. The stock fell more than 50% from its peak in September 2021 but the underlying business continues to grind, giving investors a good chance to take stock at a fair price at a fair price.
Charles River Laboratories International was founded in 1947 and is a leading drug discovery, non-clinical development and development company (or non-clinical contract research organization – “CRO”). They provide the research models needed in R&D for new drugs, devices and treatments. They currently operate under three categories:
Research Models and Services (RMS): Supply research models for the drug development industry, the most widely used rodent research model breeders and global leader in the production and sale of purpose-bred mice and mice; ~ 19.5% of total revenue
Discovery and Safety Assessment (DSA): Provides services that enable customers to outsource their drug discovery research, related activities and regulatory-required safety testing of potential new drugs, vaccines, industrial / agrochemicals, consumer products, medical devices, etc. Clients can choose to outsource their pursuit, development and safety activities to reduce fixed costs and gain access to additional scientific expertise and capabilities; The largest provider of drug discovery, non-medical development and safety testing services worldwide; ~ 59.5% of total revenue
Manufacturing Solutions (Manufacturing): Works with consumers and the biopharmaceutical industry to ensure the safe production and release of products; Includes 3 businesses (microbial solutions, biological solutions and avian vaccine services); ~ 21% of revenue
In short, CRL has the ability to work with clients (global pharmaceutical companies, biotechnology companies, government agencies, hospitals and educational institutions) who want to outsource some (or all) of their research capabilities through a full cycle of drug development:
The quest: Initial stage, takes ~ 10-15 years and costs up to $ 2.5b; The goal is to identify, open and select the lead molecule with potential
Development: Follows the invention, which may take between 7-10 years; It aims to demonstrate the safety, tolerability and effectiveness of selected drug candidates
Preparation: Following development, companies need to scale up to market their products and services safely and efficiently
As the company says:
Our mission is to become a strategic partner global priority for our customers.
Our strategy is to deliver a comprehensive and comprehensive portfolio of drug discovery and non-clinical development products, services and solutions to support our clients’ discovery and early stage drug research, process development, scale-up and production efforts. New and improved treatments can market faster and more cost effectively.
Separately, through our various manufacturing division businesses, we aim to become the premier provider of products and services that ensure our customers produce and release their products safely.
To show just how integral the CRL is, the company has worked on 85% FDA-approved novel drugs in 2021, including 100% CNS drugs and> 90% oncology drugs. It is fair to say that it is impossible to have any clinical trials without companies like CRL.
The company has been growing at a fairly stable clip of ~ 12% (revenue) per year for the past 10 years, and is consistently increasing revenue, revenue, free cash flow and operating margins.
The company operates in more than 110 locations in 20 countries around the world and employs ~ 20,000 employees. Each commercial client made less than 4% of total revenue and the current backlog is ~ $ 2.8b.
With ~ 50m shares outstanding and currently priced at $ 208, the market cap is currently $ 10.5 billion.
At first glance, CRL doesn’t look terribly cheap:
P / E: Maybe earn $ 7-8 per share, which puts P / E at ~ 26-29x
P / B: ~ 3.9x
P / FCF: ~ 25x
P / S: ~ 3x (Total 2021 Revenues $ 3.5b)
Yield: No dividend
Leverage: Not terribly leveraged with debt / equity of 1.1x
But since CRL is a high quality company, I would argue that it makes more sense to evaluate it based on return on equity and to consider more “qualitative” factors such as the financial moat and the underlying business model (think Buffett’s Seas Candies). Keep in mind that ~ 10-12%). If you think that asset return will underestimate ROE, CRL is a clear high-quality deal to hold for the long term (even if you pay for it).
The underlying business model
Turning to the business model, it is difficult to formulate a good pick and shovel game in the healthcare field. CRL allows companies around the world to outsource their drug discovery and development efforts, which allows companies to hit the ground running without investing too much capital in equipment. In a sense, and feel free to correct me if I’m wrong, CRL is similar to Amazon’s AWS, which allows companies to launch apps / services without having to worry about buying their own servers / infrastructure. As a result, companies can proceed without initially investing too much in equipment, which dramatically reduces costs and speeds up the development lifecycle.
Healthcare industry growth coupled with continued execution and organic growth (which grows ~ 7-8% per year). While it is not surprising that the growth of CRL has somewhat outpaced the growth of the global healthcare industry, it is interesting to note. CRL expects low-double-digit organic growth until 2024.
CRL has steadily expanded its business through acquisitions (eg HemaCare, Cellero, Distributed Bio, Retrogenix, Cognate BioServices, Inc. (Cognate), and Vigene Biosciences, Inc. (Vigene). He has spent $ 4.5b on acquisitions (> 25 acquisitions) over the past 10 years.
Less internal ownership: Insiders own ~ 1.1% of outstanding shares. Normally I would like to see a higher percentage, but I think the quality of the business model outweighs the low internal ownership.
Global slowdown in health spending / development: With an ever-increasing global population (and with Kovid-19 fresh in our memories), it is difficult to see that governments and companies are not willing to spend more money on better treatments and innovative medicines.
A good deal requires royalty, less capital on the growth of others. – Warren Buffett
CRL is uniquely positioned to benefit from the growth of the healthcare industry without taking on binary risks, such as biotechnology companies, whose future depends mainly on yes or no from the FDA. In other words, CRL benefits royalty over the growth of others (such as health and biotech companies, governments, etc.) and meets Buffett’s criteria for “best business.”
Frankly I have never heard of Charles River Laboratories and I would say most people have never heard of it. Still, it works quietly in the background with little need for advertising and is integral to the entire drug discovery lifecycle. They are high-quality businesses that one should crave to own.
Based on the above analysis, I recommend a long position in CRL with a holding period of a few years (maybe even forever). I have no idea what the stock price could do in the short term, but if it continues to decline I will look to add more, as I see the company has the potential for a combination for many years to come.