Charles River to initiate a review amid Elliott stake - Is a sale next?

Investing.com -- Charles River Laboratories (NYSE:CRL) announced Wednesday it will appoint four new directors to its board and launch a comprehensive strategic review following a cooperation agreement with activist hedge fund Elliott Investment Management, the company’s largest shareholder. The changes will be overseen by a newly formed Strategic Planning and Capital Allocation Committee aimed at enhancing long-term shareholder value.

The move comes amid increased pressure on Charles River following a steep decline in its stock price and an FDA announcement of the “phasing-out” of animal testing requirements in preclinical research. Sources familiar with the agreement told Investing.com that Elliott and management have maintained a friendly, constructive engagement, with both parties aligned on unlocking value from the company’s globally dominant position in outsourced drug discovery.

Based in Wilmington, Massachusetts, Charles River is a $6 billion preclinical contract research organization (CRO) that supplies lab services and is a leader in animal testing alternatives, and has supported over 80% of drugs approved by the FDA in the past five years. The company has long been led by James Foster, the son of founder Henry Foster, although Foster’s modest ownership makes it less of a traditional family business.

Investors have speculated that a sale of Charles River could follow, particularly in light of the take-private deal of family-controlled Skechers by 3G Capital announced earlier this week. Foster, now 74, could consider a similar move. Elliott does maintain a private equity arm, and its involvement raises expectations about potential buyers that could include healthcare giants, such as Thermo Fisher (NYSE:TMO) or other strategic buyers.

Sources told Investing.com that Elliott sees Charles River as significantly undervalued, a view echoed by Baird analyst Eric Coldwell, who wrote Monday that investors have overreacted to FDA comments on reducing animal testing. “We are convinced that little (if any) discernible change comes from FDA’s plan… for at least several years,” Coldwell said in a note, calling current CRL valuation levels unjustified.

Elliott has a track record of operational involvement in the healthcare sector. It helped take Syneos Health (NASDAQ:SYNH) private in 2023 and has seen investments in Cardinal Health (NYSE:CAH) and Catalent (NYSE:CTLT) pay off through stock recoveries and M&A. Notably, Elliott’s Steve Barg, who is also joining Charles River’s board, served as a director at both Catalent and Cardinal during their strategic shifts.

In April, Coldwell reiterated a bullish stance on Charles River, designated it a “Fresh Pick” and raised his price target to $118. He argued that current valuations imply a 50% fall in value versus a 20% downgrade in earnings expectations, describing the stock’s fundamentals as distorted by headline noise and recommending covering shorts and trading long into earnings.

With the board shake-up, a strategic committee in place, and Elliott actively involved, the next phase could bring a significant shift in the company’s direction. While no timeline has been provided, sources emphasized that “no stone will be left unturned” in evaluating options, leaving open the question of whether Charles River’s future remains in public markets.