On Thursday, JPMorgan (NYSE:JPM) adjusted its stance on shares of Charles River Laboratories International Inc. (NYSE: CRL), shifting from an "Overweight" rating to a "Neutral" one and reducing the price target to $205 from the previous $270.
The downgrade follows the company's recent earnings report, which included a second-quarter top and bottom-line beat but also a significant reduction in guidance due to weaker demand in its Discovery (NASDAQ:WBD) and Safety Assessment (DSA) segment.
Charles River Labs (NYSE:CRL) reported adjusted earnings per share (EPS) guidance for 2024 between $9.90 and $10.20, a decrease from the earlier forecast of $10.90 to $11.40. This revision is a response to an unexpected slowdown in large pharmaceutical orders and the anticipation of continued demand declines in the second half of 2024. The company also projected organic revenue to fall between -5.0% and -3.0%, contrasting with the prior guidance of +0.0 to +3.0% growth.
The company's management pointed to a significant shift in large pharma's prioritization towards clinical assets rather than preclinical, a trend that was not anticipated by Charles River Labs.
The drug development spending cuts by large pharma are seen as a move towards clinical versus preclinical assets, with little clarity on when this trend might reverse. Furthermore, the company expects this weakening demand trend in large pharma and muted recovery expectations in biotech to continue into 2025.
In response to these challenges, Charles River Labs has initiated restructuring activities to adjust its cost base and protect its bottom line. Despite stable expectations for its RMS and Manufacturing segments, the DSA segment is anticipated to decline in the high single digits for the year, with a 10% drop expected in the second half of 2024 compared to previous projections of a mid-single-digit increase.
The revised price target by JPMorgan reflects the lowered financial forecast and updated discounted cash flow (DCF) assumptions. After the update, which resulted in a 13% pullback in Charles River Labs' stock versus a 1% decline in the Health Care Select Sector SPDR Fund (XLV), the risk/reward balance for the company's shares is now perceived as fairly balanced. JPMorgan also expressed a preference for ICON plc (NASDAQ: ICLR) on the clinical side, given the current underlying demand shift.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.