On Thursday morning, Charles River announced the acquisition of Galapagos NV’s CRO services businesses: Argenta and BioFocus. These are European-based CROs focused on discovery services, including medicinal chemistry and other in-vitro solutions. The deal significantly expands Charles River’s presence in discovery services in terms of overall size and scope.
This is consistent with management’s strategy to expand further into discovery services, where it sees a favorable demand environment and opportunity to solidify a leadership position. The acquisition is expected to add $0.10 to non-GAAP EPS (excluding the impact of deal cost and amortization of intangible items) in 2014, after the deal closes early in the second quarter. As such, we are not making any changes to our model at this point, but expect to increase our 2014 EPS estimate by $0.10, to $3.15 (up 7%), and our 2015 target by about $0.15, due to a full year’s contribution from the deal, to $3.48 (up 10%), once the transaction is completed.
Our thesis on the stock remains that CRL is the logical pick for patient investors looking to play a rebound in early-stage outsourcing demand, given its entire focus on discovery and early-development activities. Thursday’s deal broadens CRL’s footprint in discovery services and solidifies the company’s position as one of few partners that offer a complete suite of services in early-stage drug development.
Going forward, we are encouraged by the building evidence of a turn in toxicology demand, but are maintaining our Market Perform rating on the stock as we wait for stability in the core model business. The stock’s relatively high valuation by historical standards also gives us pause.
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