“We’re working with a lot of start-up biotechs that are virtual – hundreds of biotech companies, primarily domestic, some Europe, some Japan and a lot more in China coming down the pipeline,” Foster said. “I would be surprised if Big Pharma doesn’t continue to pour more money into biotech.”
Although the deals with biotech companies are typically less valuable than deals with larger pharma clients, biotech clients are “not very price sensitive” and venture capital firms are continuing to pour billions into start-ups, Foster said.
Echoing what many other CROs have said before him, Foster said there seems to be an inevitability around the potential for more pharma M&A activity as “competition tends to get nervous when there’s a big deal.”
Foster added that Charles River’s core animal business will take a hit from any future mergers as it did when Pfizer bought Wyeth and Merck bough Schering Plough. About 20% of Charles River’s revenue is tied up in strategic partnerships, which has not stopped the company from re-upping its future guidance to 9-11% in top line revenue growth.
And despite the trend right now toward prospective mega-mergers, Foster said he believes “drug companies will have to get smaller again,” especially as CROs continue to grow and “do everything as well, and faster, and less expensively” than the largest pharma companies.
“If you look at our toxicology business, even after reducing our business 20%, we still have 4,000 employees in this space, while probably the largest drug company has one-tenth of that,” Foster said.
China also represents a big growth opportunity for Charles River as the country plans to invest about $2 trillion into its life sciences businesses. However, that money may be strictly for the local market, Foster said, noting “most of the money is going to be spent in China for China…[so] if you want to play, have to have a Chinese partner.”
Charles River acquired microbiology subcontractor BRASS in China in October, and Foster said he’s “looking to grow services businesses there as a lot of our competitors are not going to play in China.”
“We’re looking at several small acquisitions over there right now,” he added.