Charles River

Charles River reported second-quarter revenue of $1 billion, a decline of 2.7% from the prior year. Management now anticipates 2026 revenue will decline 3% at the midpoint, an improvement from its previous outlook of negative 4.75%.

Why it matters: The quarter strengthened confidence that underlying demand is improving, evidenced by Charles River achieving organic revenue growth of 0.1%, marking the first time revenue has improved organically since the third quarter of 2023, and a net book/bill ratio of 1.19, the highest in nearly four years. Charles River's recent divestments, internalization of nonhuman primate supply, and cost-saving initiatives should improve margin durability and reduce volatility, leading to a low-teens operating margin for 2026. The shift in bookings mix toward more pre-Investigational New Drug work is encouraging, as it suggests clients are replenishing their early-stage pipelines, which can eventually translate to future later-stage, more specialty post-IND work.

The bottom line: We are raising our fair value estimate to $145 per share from $135 for no-moat Charles River to reflect an improved near-term outlook. However, we view shares as overvalued and think the market is overestimating the speed and magnitude of Charles River's recovery. While bookings and demand trends are improving, the current share price implies a much stronger growth and margin trajectory than is supported by our long-term assumptions, leaving limited room for execution missteps or a slower-than-expected normalization in biopharma spending. Our High Morningstar Uncertainty Rating reflects elevated risk from the US Food and Drug Administration's plan to reduce animal toxicity testing requirements, too. This could intensify competition and pricing pressure in the later years of our 10‑year forecast, constraining long‑term revenue growth for its largest segment, discovery and safety assessment, to the low‑single‑digit range.

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We are raising our fair value estimate to $145 per share from $135 for no-moat Charles River to reflect an improved near-term outlook.

The second quarter strengthened confidence that underlying demand is improving, evidenced by Charles River achieving organic revenue growth of 0.1%, marking the first time revenue has improved organically since the third quarter of 2023, and a net book/bill ratio of 1.19, the highest in nearly four years.

The shift in bookings mix toward more pre-Investigational New Drug work is encouraging, as it suggests clients are replenishing their early-stage pipelines, which can eventually translate to future later-stage, more specialty post-IND work.

The FDA’s shift away from animal toxicity testing has been decades in the making, but the current FDA is placing greater emphasis on the effort. We think the FDA's road map to reduce animal testing in preclinical safety assessments could undermine Charles River's core animal models business, as nonanimal alternatives using AI models, cell-based assays, and organoids reduce the need for traditional animal-based studies.

To its credit, Charles River has not waited idly. In April 2024, Charles River launched a strategic initiative to develop next-generation, nonanimal testing solutions. Though still in early stages, this positions the company to address evolving regulations. We do not expect animal use to completely disappear soon. Rather, data from alternative methods will play an increasingly prominent role in investigational new drug applications as companies and the FDA work to validate their capabilities and understand their limitations.

We anticipate Charles River will leverage its customer relationships as it expands into nonanimal testing solutions to align with evolving regulations, but we expect the shift away from traditional animal testing could create greater competition and reduce pricing power, leading to market share erosion and weaker returns over the long run.

Guided by activist involvement from Elliott Investment Management, Charles River's recent divestments of its CDMO and cell solutions businesses, as well as certain European discovery assets, will reduce reported revenue by more than $200 million in 2026. We forecast $3.9 billion in 2026 revenue, representing a nearly 3% year-over-year decrease.

During our explicit forecast, we anticipate Charles River will experience some operating margin improvement, driven by a combination of cost savings and efficiency initiatives, increased automation, and lower costs for running safety assessments due to technological advancements.

Biotech funding was weak in the first half of 2025 relative to historical levels, curbing spending among small and midsize clients and driving higher cancellations. However, the funding environment has improved, and Charles River reached a net book/bill ratio of 1.19 in the second quarter, the highest in nearly four years. While the improved book/bill ratio suggests a rebound in client demand, there are typical lags between bookings and revenue recognition.

We forecast more normalized biotech funding levels and client spending between 2027 and 2029, but in the longer term, we anticipate the shift away from traditional animal testing could create greater competition and reduce pricing power for Charles River. We think this could constrain long‑term revenue growth for its largest segment, discovery and safety assessment, to the low‑single‑digit range by the end of our 10-year forecast.

While Charles River’s portfolio optimization, cost savings, and reinvestment in higher-growth areas should support near-term improvement in returns on invested capital, we expect these gains to prove temporary, with intensifying competition and pricing pressure driving ROIC declines over the latter years of our 10-year forecast and supporting our downgrade to a no-moat rating.

We assign Charles River Laboratories a no-moat rating, reflecting our view that the firm lacks durable competitive advantages over the next decade. While Charles River has historically been a leading provider of outsourced preclinical safety assessment services and research models, structural shifts in drug development, particularly the advancement of nonanimal testing technologies and evolving regulatory standards, are eroding the maintainability of its historical strengths.

In April 2025, the US Food and Drug Administration announced a plan to reduce animal testing requirements for monoclonal antibodies. The FDA’s shift away from animal toxicity testing has been decades in the making, but the current FDA is placing greater emphasis on the effort. The FDA’s road map encourages drug developers to use AI models and lab-grown organoids to predict drug behavior for monoclonal antibodies.

Monoclonal antibodies are proteins genetically engineered to bind to specific targets in the body, such as antigens on the surface of cancer cells. The first mAb was approved in 1986 to reduce acute organ rejection in transplant patients, and today, more than 140 are on the US or European Union markets. Monoclonal antibodies make up a steadily increasing proportion of new medicines, comprising roughly a third of new FDA drug approvals in recent years.

The FDA selected monoclonal antibodies when announcing its plan to phase out animal testing requirements because mAbs are generally considered less toxic than small molecules and other drug modalities. Nonhuman primates have long been considered the optimal model for mAb testing because they are the most biologically similar to humans. However, not all human antigens are conserved in primates, and binding affinity can be different, so immunogenicity can be a challenge. Additionally, there are ethical concerns over the use of nonhuman primates, supply limitations, and the very high costs.

According to the FDA’s plan, if no safety issues arise at one month during testing of monoclonal antibodies and alternative methods support the data, the study duration can be cut from its typical six months to three months. This phased adoption of new alternative methods is anticipated over the next three to five years. Data from alternative methods will play an increasingly prominent role in new drug applications as companies and the FDA work to validate the capabilities and understand the limitations of alternative methods.

Prior to the FDA’s 2025 announcement, management anticipated the evolution of drug testing supported by computerized models and had already begun preparing the business for the future. In April 2024, Charles River launched the Alternative Methods Advancement Project, a strategic initiative to develop next-generation, nonanimal testing solutions, which positions the company to address evolving regulations.

In May 2025, Charles River reached a cooperation agreement with activist investor Elliott Investment Management, which included adding new directors to the board and initiating a comprehensive strategic review of the company’s operations. Elliott’s involvement underscores investor recognition of Charles River’s long-term value and creates an opportunity to sharpen the company’s focus on operational efficiency, capital allocation, and innovation. While activist engagement can sometimes signal short-term pressures, in this case, the collaboration aims to strengthen operations in a crowded space, driven by Charles River’s long-term strategic execution amid a changing regulatory environment, by investing in high-growth areas such as AI, alternative testing methods, and preclinical service expansion. Guided by Elliott Investment Management, the board's strategic review is focused on cutting costs, divesting underperforming or noncore assets, and investing in alternative animal-testing methods. We think this strategy will help improve ROICs over our 10-year forecast period, but historically they have been mostly below WACC, and we ultimately anticipate ROICs will decline in the latter years of our forecast.

In 2026, management made the strategic decision to expand its nonanimal testing capabilities by exercising its option to acquire the remaining 79% equity stake it did not already own of PathoQuest, a provider of next-generation sequencing solutions for biologics testing capabilities. While Charles River will leverage its strong relationships with biopharma, academic, and research clients to sell alternative animal testing methods, the shift away from traditional animal testing will likely intensify competition and pressure market share and pricing over the next decade.

Charles River’s other segment, Manufacturing Solutions, has expanded and added margin to the business, driven by the rising complexity of drug manufacturing. However, we do not think it contributes to a moat rating because it is in a crowded space with other larger life sciences manufacturing companies and smaller niche providers, leaving limited structural advantages for Charles River.

Charles River can leverage its scientific expertise and customer relationships as it rolls out non‑animal testing modalities as regulatory standards evolve.

Recent activist-driven divestitures, portfolio optimization efforts, and cost savings should enhance the firm's focus and simplify operations.

Charles River's high-margin manufacturing support segment should boost earnings for the company as it grows.

The FDA’s roadmap to reduce animal testing, combined with advances in AI models, organoids, and cell-based assays, threatens the long-term demand and pricing power of Charles River’s core animal-models business.

Charles River remains exposed to swings in early-stage biotech funding, and prolonged capital scarcity could pressure demand for discovery and preclinical services.

Charles River has a significant fixed-cost base, and program cancellations or delays could lead to volume declines that are difficult to offset, contributing to earnings volatility.