Charles River: Dominant Pre-Clinical Research Services Outsourcer

Sahm Adrangi of Kerrisdale Capital Management presented his in-depth investment thesis on Charles River Laboratories (US: CRL) at Best Ideas 2020. Jordon Giancoli joined Sahm for this session.

Thesis summary:

Charles River Laboratories is the dominant pre-clinical research services outsourcer, with almost 20% market share in a $15bn+ end-market growing in the high-single digits. Charles River’s animal testing models, toxicity testing, and pharmacokinetics — techniques required by the FDA and global regulatory agencies before a drug can proceed to human trial — were used in 85% of the drugs approved last year. CRL’s closest pre-clinical peer, Covance/LabCorp, has just 7% preclinical share with no other domestic competitor above 5% share, making CRL the clear choice for full-suite preclinical projects.

Several recent initiatives should supercharge earnings in 2020 and 2021: 1) cross-selling discovery services to a large list of safety clients (just 1 in 5 safety clients use CRL for discovery today); 2) ability to layer on emerging growth opportunities, like the December 2019 acquisition of a cell therapy asset growing at 30%/year (HemaCare); 3) commitment to surpass 20% Adjusted EBIT margins by the end of 2020 (vs. 18.8% in 2019E); and 4) a supportive industry backdrop. Biopharma R&D spend should grow 10% in 2020, with even faster growth in the early-stage animal trials where CRL makes its living.

Assuming CRL reaches its target margin in 2021 and adds another $600m of acquisitions (consistent with management targets), Sahm thinks CRL can earn over $9/share in 2021. Well-owned clinical-stage CROs like IQV and ICLR trade for 22-24x forward earnings, and CRL has historically traded at a 2-5x premium to the S&P 500. Using Kerrisdale’s $9 earnings estimate and a 22x 2021E P/E, Sahm thinks CRL shares can approach $200/share by the end of the year.

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About the instructor:

Sahm Adrangi is the chief investment officer of Kerrisdale Capital Management, a private investment manager that focuses on value and special situations investments. Prior to founding Kerrisdale Capital Management, Sahm was an investment analyst at Longacre Fund Management, a distressed debt credit fund. Prior to Longacre, Sahm worked in the bankruptcy restructuring group at Chanin Capital Partners and the leveraged finance group of Deutsche Bank Securities. Sahm holds a Bachelor of Arts in Economics from Yale University.