One of the drug industry’s biggest service providers shared a chilling message for the industry on Wednesday: Expect early pipelines to shrink and research work to decrease as big pharma companies cut costs.
The warning by Charles River Laboratories, which offers services from research and discovery through to commercial manufacturing, came as part of its quarterly earnings report, in which it said that demand fell for its discovery and safety assessment offerings. That trend is likely to continue next year, CEO James Foster told investors.
James Foster“This is a pretty, pretty unexpected and rapid deterioration of the large pharma companies’ business,” Foster added. “This is an unusual activity for our pharma clients.”
The Wilmington, MA-headquartered company significantly cut its forecast for the rest of the year and expects revenue to decline by 2.5% to 4.5%. Analysts viewed Foster’s warning as a “chilling” message to the state of the pharma industry and were “shocked” at the company’s guidance reduction.
The company’s stock $CRL plunged by as much as 17% Wednesday morning.
With the exception of the companies making GLP-1 drugs, Foster predicts the industry will continue to see large pharma companies grappling to cut costs through pipeline cuts, layoffs and downsizing facilities. This has already begun, with the likes of Bristol Myers Squibb laying off workers as it restructures and Bayer slashing 3,200 jobs since the beginning of the year.
The pharma industry is going through volatile shifts — a post-Covid pullback, warnings of a slowdown in US economic growth, tension with China, patent expirations on the horizon and the Inflation Reduction Act — all of which have triggered pharma companies to keep a closer eye on spending. Charles River could be a litmus test of things to come, with its hands on key pharma needs with major clients such as Sanofi and Vertex Pharmaceuticals.
Foster expects pharma companies to keep buying their biotech partners to sidestep early discovery and avoid outsourcing R&D work. But this could potentially bring in discovery business for Charles River if the biotech or pharma company is a pre-existing client, Foster said.
The Biosecure Act also continues to shake the industry. While the bill has not yet passed through Congress, it’s already affecting how companies — and VCs — are thinking about supply chains, Foster said.
Big VC firms who work with Charles River are advising companies in their portfolio to not work in China, Foster said. “These are VCs that are creating new companies from scratch, and the fact that they don’t even want to start with China, is quite interesting,” he added.
While Foster was careful not to “overstate the potential,” he believes the Biosecure Act will be an overall net positive for Charles River, who can be an alternative to Chinese service providers.
Charles River saw a 3.2% decline in its overall revenue to $1.03 billion for the second quarter of 2024, compared to the same period last year. In particular, its discovery and safety assessment tools business dropped by 5.4%, with $627.4 million compared to the $663.5 million reported in the same quarter the previous year.