Charles River Laboratories Pricing Spineometer: 1 of 5 Vertebrae
Charles River Laboratories, a research and development support services company to pharmaceutical and gene therapy biotech companies, had a positive Q1 2023. Revenue rose 12.6% to $1,029 million while earnings before interest and taxes rose 12.1% to $167 million over the same period last year.
Their May 11th earnings call spoke to the underlying demand growth for Charles River Laboratories services and provided an example of an executive team mitigating a potential legal and public relations crisis.
James Foster, CEO of Charles River Laboratories, spoke to the strong demand for their Discovery and Safety Assessment (DSA) and Research Model and Services (RMS) divisions. (Please forgive me if I failed to accurately translate their acronyms into English. Jargon is always challenging for outsiders.) This demand led to strong sales and price capture. Price increases were made in the RMS and DSA lines of business.
James Foster and Flavia Pease, CFO of Charles River Laboratories, spent much of the call addressing questions regarding a challenge in the supply of non-human primates from Cambodia. In November 2022, the U.S. Department of Justice announced investigations into the Cambodian supply of non-human primates regarding the potential illegal smuggling of a protected species. This investigation has resulted in the stoppage of supply for Charles River Laboratories of non-human primates from Cambodia and a short-term global shortage of non-human primates. The use of non-human primates is a regulatory required step in testing biologic drugs prior to commercial use. From an operational perspective, the supply shortage in non-human primates driven by challenges in the Cambodian supply chain is anticipated to impact financial performance over the balance of 2023. From a public relations and legal perspective, Foster and Pease made it clear that Charles River Laboratories is cooperating with legal authorities and is taking steps to ensure a legal supply chain.
Executives at Charles River Laboratories have had some experience with legal and public relations challenges. In January 2022, the Southern Environmental Law Center filed a lawsuit against both the South Carolina Department of Natural Resources and Charles River Laboratories, over the use of horseshoe crabs. Horseshoe crab blood is routinely harvested to test for endotoxins and is globally considered the “gold standard” safety test.
Outside of mentioning some pricing gains, executives nodded to their investment in Apollo, a self-service tool that provides, among other things, customer price estimates; but otherwise gave little insights into the management of pricing at Charles River Laboratories.
Based on this research, we can set expectations regarding the needed pricing capability at Charles River Laboratories.
Revenue to pricing professional benchmarks suggest Charles River Laboratories should have 8 to 20 people dedicated to pricing. Geographically, Charles River Laboratories has most of its major customers in North America and Europe, thus we would expect them to be concentrated across these geographies with perhaps one or two people handling other regions.
Customers book limited capacity in advance at Charles River Laboratories. This raises the possibility of using yield management techniques in pricing some aspects of their business such as their CRADL vivarium rental space. Projects can last for a long time at Charles River Laboratories which raises the possibility of using indices in their pricing formula to address inflationary pressure in critical supply chains for other aspects of their business. And customer relationships at Charles River Laboratories are sticky and lengthy implying a need for price planning at the account level examining both margin capture and mix separately as well as the potential “long-tails” for purchasing behavior.
Margins at Charles River Laboratories are relatively high.
The pricing complexity, customer geographic dispersion, and margin targets at Charles River Laboratories would argue for having a pricing team at the upper end of the benchmark expectations, if not above it, and a significant investment in pricing technology and continual team training.
Does Charles River Laboratories have the appropriate pricing capability to address its commercial goals and strategic challenges?
Research into the quality of Charles River Laboratories’ pricing team yielded challenging results. The number of pricing professionals at Charles River Laboratories was much lower than expected and their rank, analyst to manager, implies inadequate influence over pricing decisions. It appears as though Charles River Laboratories has insufficient resources to address the wide variety of pricing challenges with the proper research and analysis.
Given the importance and capability of pricing at Charles River Laboratories as indicated in financial reports, management statements, and our pricing capability research, and given their performance, we have come to the following conclusion as of July ‘23.
Charles River Laboratories Pricing Spineometer: 1 out of 5 Vertebrae.
CRL (Charles River Laboratories International Inc.) rose from 186 on the day prior to their earnings call to 199 one week later. FY 2022 revenue of $4.0 B with a 16.4% operating margin and P/E ratio near 49.
Currently, a 1% improvement in price would yield a 12.3% improvement in EBIT holding all else constant for Charles River.
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