| CHARLES RIVER LABORATORIES INTERNATIONAL INC Item 1A Risk Factors Risks Related to Our Business and Industry Set forth below and elsewhere in this Form 10-K and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Form 10-K The outsourcing trend in the preclinical and clinical stages of drug discovery and development may decrease, which could slow our growth |
| Over the past several years, some areas of our businesses have grown significantly as a result of the increase in pharmaceutical and biotechnology companies outsourcing their preclinical and clinical research support activities |
| We believe that due to the significant investment in facilities and personnel required to support drug development, pharmaceutical and biotechnology companies look to outsource some or all of those services |
| By doing so, they can focus their resources on their core competency of drug discovery, while obtaining the outsourced services from a full-service provider like Charles River |
| While industry analysts expect the outsourcing trend to continue for the next several years, a decrease in preclinical and/or clinical outsourcing activity could result in a diminished growth rate in the sales of one or more of our expected higher-growth areas and adversely affect our financial condition and results of operations |
| Furthermore, our customer contracts are generally terminable on little or no notice |
| Termination of a large contract or multiple contracts could adversely affect our sales and profitability |
| Our operations and financial results could be significantly affected by the above-mentioned risks |
| A reduction in research and development budgets at pharmaceutical and biotechnology companies may adversely affect our business |
| Our customers include researchers at pharmaceutical and biotechnology companies |
| Our ability to continue to grow and win new business is dependent in large part upon the ability and willingness of the pharmaceutical and biotechnology industries to continue to spend on research and development and to outsource the products and services we provide |
| Fluctuations in the research and development budgets of these researchers and their organizations could have a significant effect on the demand for our products and services |
| Research and development budgets fluctuate due to changes in available resources, mergers 13 ______________________________________________________________________ of pharmaceutical and biotechnology companies, spending priorities and institutional budgetary policies |
| Our business could be adversely affected by any significant decrease in life sciences research and development expenditures by pharmaceutical and biotechnology companies, as well as by academic institutions, government laboratories or private foundations |
| Similarly, economic factors and industry trends that affect our clients in these industries also affect our business |
| A reduction or delay in government funding of research and development may adversely affect our business |
| A portion of net sales in our RMS segment is derived from customers at academic institutions and research laboratories whose funding is partially dependent on both the level and timing of funding from government sources, such as the US National Institutes of Health (NIH) and similar domestic and international agencies |
| Although the level of government research funding has increased during the past several years the size of budgetary increases has recently declined |
| Government funding of research and development is subject to the political process, which is inherently unpredictable |
| Our sales may be adversely affected if our customers delay purchases as a result of uncertainties surrounding the approval of government budget proposals |
| Also, government proposals to reduce or eliminate budgetary deficits have sometimes included reduced allocations to the NIH and other government agencies that fund research and development activities |
| A reduction in government funding for the NIH or other government research agencies could adversely affect our business and our financial results |
| Changes in government regulation or in practices relating to the pharmaceutical or biotechnological industries, including potential health care reform could decrease the need for the services we provide |
| Governmental agencies throughout the world, but particularly in the United States, strictly regulate the drug development process |
| Our business involves helping pharmaceutical and biotechnology companies, among others, navigate the regulatory drug approval process |
| Changes in regulations, such as a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, or an increase in regulatory requirements that we have difficulty satisfying or that make our services less competitive, could eliminate or substantially reduce the demand for our services |
| In recent years the United States Congress and state legislatures have considered various types of health care reform in order to control growing health care costs |
| We are unable to predict what legislative proposals will be adopted in the future, if any |
| Similar reform movements have occurred in Europe and Asia |
| Implementation of health care reform legislation that contains costs could limit the profits that can be made from the development of new drugs |
| This could adversely affect research and development expenditures by pharmaceutical and biotechnology companies, which could in turn decrease the business opportunities available to us both in the united States and abroad |
| In addition, new laws or regulations may create a risk of liability, increase our costs or limit our service offerings |
| Our standard customer agreements contain liberal termination and service reduction provisions, which may result in less contract revenue than we anticipate |
| Generally, our agreements with our customers provide that the customers can terminate the agreements or reduce the scope of services under the agreements with little or no notice |
| Customers may elect to terminate their agreements with us for various reasons, including: the products being tested fails to satisfy safety requirements; unexpected or undesired study results; production problems resulting in shortages of the drug being tested; the customer’s decision to forego or terminate a particular study; or the loss of funding for the particular research study |
| If a customer terminates a contract with us, we are entitled under the terms of the contract to receive revenue earned to date as well as certain other costs and, in some cases, penalties |
| Cancellation of a large contract or proximate cancellation of multiple 14 ______________________________________________________________________ contracts could materially adversely affect the Preclinical or Clinical segments’ business and, therefore, may adversely affect our operating results |
| Contaminations in our animal populations can damage our inventory, harm our reputation for contaminant-free production and result in decreased sales |
| Our research models and fertile chicken eggs must be free of certain adventious, infectious agents such as certain viruses and bacteria because the presence of these contaminants can distort or compromise the quality of research results and could adversely impact human or animal health |
| The presence of these infectious agents in our animal production facilities and certain service operations could disrupt our contaminant-free research model and fertile egg production as well as our animal services businesses including transgenic services, harm our reputation for contaminant-free production and result in decreased sales |
| Contaminations typically require cleaning up, renovating, disinfecting and restarting production in the contaminated barrier room or poultry house |
| This clean-up results in inventory loss, clean-up and start-up costs, and reduced sales as a result of lost customer orders and credits for prior shipments |
| In addition, contaminations expose us to risks that customers will request compensation for damages in excess of our contractual indemnification requirements |
| These contaminations are unanticipated and difficult to predict and could adversely impact our financial results |
| We have made significant capital expenditures designed to strengthen our biosecurity and have significantly improved our operating procedures to protect against such contaminations, however, contaminations may still occur |
| Our business is subject to risks relating to operating internationally |
| A significant part of our net sales is derived from operations outside the United States |
| Our international revenues, which include revenues from our non-US subsidiaries, represented 48dtta5prca of our total net sales in 2005, 36dtta3prca of our total net sales in 2004, and 30dtta8prca in 2003 |
| We expect that international revenues will continue to account for a significant percentage of our revenues for the foreseeable future |
| There are a number of risks associated with our international business, including: · foreign currencies we receive for sales outside the United States could be subject to unfavorable exchange rates with the US dollar and reduce the amount of revenue that we recognize; · general economic and political conditions in the markets in which we operate; · potential international conflicts, including terrorist acts; · potential increased costs associated with overlapping tax structures; · potential trade restrictions and exchange controls; · difficulties and costs associated with staffing and managing foreign operations, including risks of violations of local laws or the US Foreign Corrupt Practices Act by employees oversees; · unexpected changes in regulatory requirements; · the difficulties of compliance with a wide variety of foreign laws and regulations; · unfavorable labor regulations, including specifically those applicable to our European operations; · longer accounts receivable cycles in certain foreign countries; and · import and export licensing requirements |
| 15 ______________________________________________________________________ Negative attention from special interest groups may impair our business |
| The products and services which we provide our customers are essential to the drug discovery and development process, and are almost universally mandated by law |
| Notwithstanding, certain special interests groups categorically object to the use of animals for valid research purposes |
| Historically, our core research model activities with rats, mice and other rodents have not been the subject of animal rights media attention |
| However, research activities with animals have been the subject of adverse attention, impacting our industry |
| This has included occasional, but infrequent, on-site demonstrations at facilities operated by us |
| Any negative attention or threats directed against our animal research activities in the future could impair our ability to operate our business efficiently |
| In addition, if regulatory authorities were to mandate a significant reduction in safety testing procedures which utilize laboratory animals (as has been advocated by certain groups), our business could be materially adversely effected |
| Several of our product and service offerings are dependent on a limited source of supply, which if interrupted could adversely affect our business |
| We depend on a limited international source of supply of large animal models required in our product and service offerings |
| Disruptions to their continued supply may arise from colony fertility and health problems, export or import restrictions or embargoes, foreign government or economic instability, severe weather conditions, disruptions to the air travel system or contract disputes or disruptions |
| Any disruption of supply could harm our business if we cannot remove the disruption or are unable to secure an alternative or secondary supply source on comparable commercial terms |
| We may be unable to build out our facilities as anticipated |
| To take advantage of our customers’ continued growing demand for drug discovery and development services, including increased strategic focus on outsourcing services and programs, we are engaged in a substantial capacity expansion program, with approximately dlra175-dlra200 million allocated for capital expenditures for 2006 |
| Included in this build-out are two US Preclinical Services facilities—one in Massachusetts scheduled to be online by the end of 2006 and one in Nevada scheduled for 2007—and an expansion of our RMS California capabilities scheduled to partially open in the fourth quarter of 2006 |
| We cannot assure you that any or all of these facilities will be constructed on the anticipated timetable or on budget |
| Any material delay in bringing these facilities on-line, or substantial increase in costs to complete these facilities, could materially and adversely affect us |
| Any failure by us to comply with existing regulations could harm our reputation and operating results |
| Any failure on our part to comply with existing regulations could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities |
| This could harm our reputation, our prospects for future work and our operating results |
| For example, if we were to fail to verify that informed consent is obtained from patient participants in connection with a particular Phase I clinical trial, the data collected from that trial could be disqualified and we might be required to redo the trial at no further cost to our customer, but at substantial cost to us |
| Furthermore, the issuance of a notice from the FDA based on a finding of a material violation by us of good clinical practice, good laboratory practice or good manufacturing practice requirements could materially and adversely affect us |
| The drug discovery and development services industry is highly competitive |
| We often compete for business not only with other drug discovery and development companies, but also with internal discovery and development departments within our clients, who are often large pharmaceutical and biotechnology companies with greater resources than ours |
| We also compete with universities and teaching hospitals |
| If 16 ______________________________________________________________________ we do not compete successfully, our business will suffer |
| Increased competition might lead to price and other forms of competition that might adversely affect our operating results |
| As a result of competitive pressures, the drug discovery and development services industry has been consolidating |
| This trend is likely to produce more competition among the larger companies for both clients and acquisition candidates |
| In addition, for some of our business segments, there are few barriers to entry for smaller specialized companies considering entering the industry |
| Because of their size and focus, these companies might compete effectively against larger companies such as us, which could have a material adverse impact on our business |
| Tax benefits we expect to be available in the future may be subject to challenge |
| In connection with our 1999 recapitalization, our then current shareholders, CRL Acquisition LLC (CRL Acquisition) and Bausch & Lomb Incorporated (B&L), made a joint election intended to permit us to increase the depreciable and amortizable tax basis in our assets for federal income tax purposes, thereby providing us with expected future tax benefits |
| In connection with our initial public offering in 2000, CRL Acquisition reorganized, terminated its existence as a corporation for tax purposes and distributed a substantial portion of its stock to its members |
| We believe that the reorganization and liquidating distribution should not have any impact on the election for federal income tax purposes |
| However, it is possible that the Internal Revenue Service (IRS) may contend that this reorganization and liquidating distribution should be integrated with our original recapitalization |
| If the IRS were to be successful with this contention, the expected future tax benefits at the time of the recapitalization would not be available and we would be required to write off the related deferred tax asset |
| We could be adversely affected by tax law changes in the United Kingdom or Canada |
| We have substantial operations in the United Kingdom and Canada which currently benefit from favorable corporate tax arrangements |
| We receive substantial tax credits in Canada from both the Canadian federal and Quebec governments and it benefits from tax credits and accelerated tax depreciation allowances in the United Kingdom |
| Any reduction in the availability or amount of these tax credits or allowances would be likely to have a material adverse effect on profits and cash flow from either or both of our Canadian and United Kingdom operations, and on our effective tax rate |
| Impairment of goodwill arising from the acquisition of Inveresk may adversely impact future results of operations |
| We accounted for our acquisition of Inveresk as a purchase under accounting principles generally accepted in the United States |
| Under the purchase method of accounting, the assets and liabilities of Inveresk, including identifiable intangible assets, have been recorded at their respective fair values as of the date the acquisition was completed |
| The excess of the purchase price over the fair value of acquired net assets and liabilities was recorded as goodwill |
| As a result of the combination, we have recorded dlra1dtta3 billion of additional goodwill and dlra0dtta2 billion of other intangible assets, which are material to us |
| The goodwill will not be amortized, but will be reviewed for impairment by us at least annually |
| If the future growth and operating results of the acquired businesses are not as strong as anticipated, goodwill may be impaired |
| Such an impairment charge could materially and adversely affect our operating results and financial condition |
| Our exposure to exchange rate fluctuations could adversely affect our results of operations |
| We derive a significant portion of our revenue from operations outside of the United States, primarily from our operations in Canada and the United Kingdom, where significant amounts of revenues and expenses are recorded in local (non-US) currency |
| Our financial statements are presented in US dollars |
| Accordingly, changes in currency exchange rates, particularly between the pound sterling, the Canadian 17 ______________________________________________________________________ dollar, the European Euro and the US dollar, will cause fluctuations in our reported financial results, which could be material |
| In addition, our contracts with foreign customers are frequently denominated in currencies other than the currency in which we incur expenses related to those contracts |
| This is particularly the case with respect to the Canadian operations we acquired from Inveresk, where contracts generally provide for invoicing clients in US dollars but its expenses are generally incurred in Canadian dollars |
| Where expenses are incurred in currencies other than those in which contracts are priced, fluctuations in the relative value of those currencies could have a material adverse effect on our results of operations |
| Contract research services create a risk of liability |
| In contracting to work on drug development trials, as a contract research organization we face a range of potential liabilities, for example: · errors or omissions that create harm during a trial to study volunteers or after a trial to consumers of the drug after regulatory approval of the drug; · general risks associated with Phase I facilities, including negative consequences from the administration of drugs to clinical trial participants or the professional malpractice of Phase I medical care providers; · errors or omissions from tests conducted for the agrochemical and food industries; · risks that animals in our breeding facilities may be infected with diseases that may be harmful and even lethal to themselves and humans despite preventive measures contained in our company policies for the quarantine and handling of imported animals; and · errors and omissions during a trial that may undermine the usefulness of a trial or data from the trial |
| We mitigate these risks to the best of our abilities through our regiment of animal testing, quarantine, and veterinary staff vigilance, through which we seek to control the exposure of animal related disease or infections |
| Nonetheless, it is impossible to completely eradicate such risks |
| We also contract with physicians, also referred to as investigators, to conduct the clinical trials to test new drugs on human volunteers |
| These tests can create a risk of liability for personal injury or death to volunteers, resulting from negative reactions to the drugs administered or from professional malpractice by third party investigators, particularly to volunteers with life-threatening illnesses |
| We believe that our risks in this area are generally reduced by the contract provisions entitling us to be indemnified or entitling us to a limitation of liability; insurance maintained by our clients, investigators, and by us; and various regulatory requirements we must follow in connection with our business |
| Contractual indemnifications generally do not protect us against liability arising from certain of our own actions, such as negligence or misconduct |
| We could be materially and adversely affected if we were required to pay damages or bear the costs of defending any claim which is not covered by a contractual indemnification provision or in the event that a party who must indemnify us does not fulfill its indemnification obligations or which is beyond the level of our insurance coverage |
| Furthermore, there can be no assurance that we will be able to maintain such insurance coverage on terms acceptable to us |
| If we are unable to attract suitable investigators and volunteers for our clinical trials, our business might suffer |
| The clinical research studies we run rely upon the ready accessibility and willing participation of physician investigators and volunteer subjects |
| Investigators are typically located at hospitals, clinics or other sites and supervise administration of the study drug to patients during the course of a clinical trial |
| Volunteer subjects generally include people from the communities in which the studies are conducted, 18 ______________________________________________________________________ including our Phase I clinic in Edinburgh, Scotland, which to date has provided a substantial pool of potential subjects for research studies |
| Our clinical research development business could be adversely affected if we were unable to attract suitable and willing investigators or volunteers on a consistent basis |
| New technologies may be developed, validated and increasingly used in biomedical research that could reduce demand for some of our products and services |
| For many years, groups within the scientific and research communities have attempted to develop models, methods and systems that would replace or supplement the use of living animals as test subjects in biomedical research |
| Companies have developed several techniques that have scientific merit |
| It is our strategy to participate in some fashion with any non-animal test method as it becomes validated as a research model alternative or adjunct in our markets |
| However, we may not be successful in commercializing these methods if developed, and sales or profits from these methods may not offset reduced sales or profits from research models |
| Alternative research methods could decrease the need for research models, and we may not be able to develop new products effectively or in a timely manner to replace any lost sales |
| If we are not successful in selecting and integrating the businesses and technologies we acquire, our business may suffer |
| During the past five years, we have expanded our business through several acquisitions |
| We plan to continue acquire businesses and technologies and form alliances |
| However, businesses and technologies may not be available on terms and conditions we find acceptable |
| We risk spending time and money investigating and negotiating with potential acquisition or alliance partners, but not completing the transaction |
| Even if completed, acquisitions and alliances involve numerous risks which may include: · difficulties and expenses incurred in assimilating operations, services, products or technologies; · difficulties in developing and operating new businesses, including diversion of management’s attention from other business concerns; · potential losses resulting from undiscovered liabilities of acquired companies are not covered by the indemnification we may obtain from the seller; · risks of not being able to overcome differences in foreign business practices, language and other cultural barriers in connection with the acquisition of foreign companies; · the presence or absence of adequate internal controls and/or significant fraud in the financial systems of acquired companies; and · difficulties in achieving business and financial success |
| In the event that an acquired business or technology or an alliance does not meet expectations, our results of operations may be adversely affected |
| We depend on key personnel and may not be able to retain these employees or recruit additional qualified personnel, which would harm our business |
| Our success depends to a significant extent on the continued services of our senior management and other members of management |
| James C Foster, our Chief Executive Officer since 1992 and Chairman since 2000, has held various positions with us for 29 years |
| We have no employment agreement with Mr |
| Foster or other members of our management |
| Foster or other members of management do not continue in their present positions, our business may suffer |
| 19 ______________________________________________________________________ Because of the specialized scientific nature of our business, we are highly dependent upon qualified scientific, technical and managerial personnel |
| While we have an excellent record of employee retention, there is still strong competition for qualified personnel in the pharmaceutical and biotechnology fields |
| Therefore, we may not be able to attract and retain the qualified personnel necessary for the development of our business |
| The loss of the services of existing personnel, as well as the failure to recruit additional key scientific, technical and managerial personnel in a timely manner, could harm our business |
| Our quarterly operating results may vary, which could negatively affect the market price of our common stock |
| Our results of operations in any quarter may vary from quarter to quarter and are influenced by such factors as the number and scope of ongoing customer engagements, the commencement, postponement, completion or cancellation of customer contracts in the quarter, changes in the mix of our products and services, the extent of cost overruns, holiday patterns of our customers, budget cycles of our customers, and exchange rate fluctuations |
| We believe that operating results for any particular quarter are not necessarily a meaningful indication of future results |
| Nonetheless, fluctuations in our quarterly operating results could negatively affect the market price of our common stock |