Charles River Laboratories International, Inc. Business Information, Profile, and History

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History of Charles River Laboratories International, Inc.

Charles River Laboratories International, Inc. is the holding company for Charles River Laboratories, Inc., which is a leading provider of laboratory animals used in preclinical experiments by the pharmaceutical and biotech industries. Animal sales still account for approximately 62 percent of revenues, although the company, in operation for more than 50 years, has made significant strides in diversifying its business. It offers such biomedical products as hamster ova and mouse embryos, pathogen-free chicken eggs, and an antibody test kit. Services now include drug safety assessment and testing, biotech safety testing, and medical device testing. The company also supports researchers by developing and maintaining laboratory animal colonies, as well as providing staffing services on a contract basis. With its headquarters located in Wilmington, Massachusetts, Charles River Laboratories operates more than 50 facilities in 15 countries, selling to a customer base in 50 countries. After operating as a subsidiary of Bausch & Lomb for 15 years, the company is now independently run, the result of a 1999 management buyout arranged by the investment firm of Donaldson, Lufkin & Jenrette (now Credit Suisse First Boston), which owns more than 45 percent of the company's stock.

Birth of Charles River Breeding: 1947

The ancestor of today's holding company was Charles River Breeding Laboratories. Its founder, Dr. Henry L. Foster, was the son of a Boston garment manufacturer. He studied piano as a child and almost attended the Juilliard School of Music. Instead he opted for a more practical education and attended Middlesex Veterinary College. After graduating in 1946, he saved up money to start his own business by working as a vet on ships transporting horses to Poland. While searching for a place to establish a practice he visited the Sunny Hill Rat Farm in Clinton, Maryland, whose owner convinced him to buy out the business. Foster paid $12,000 for the cages and animals, which he then moved to Boston. After some difficulty in finding a landlord willing to rent to an aspiring rat breeder, he was able to secure a second-story loft in the West End of Boston, a seedy part of the city at the time.

In 1947 when he began Charles River Breeding, Foster was the only employee of the company. He cared for the animals, called on customers, and completed his own paperwork. He did not have a secretary until he married Lois Bronstein, who not only had to overcome her family's doubts about her husband's profession, she also had to overcome her own aversion to rats in order to reach her desk. Over the next few years, as Foster expanded his rat colonies, the criticism of his neighbors also grew. They especially disliked the smells that his exhaust fans, particularly in the summer, blew into their apartments.

In 1952 Foster moved his business to the country, setting up his cages in Wilmington, some 20 miles north of Boston. That was also when he established himself as a pioneer in the breeding of laboratory animals. At the time, researchers were severely handicapped by a lack of control over the microorganisms that each rat might carry. They simply could not be certain that a subject was reacting to a test substance or that the symptoms were actually caused by an infection acquired at the rat farm. The obvious need was for a germfree rat, one that provided researchers with a reasonable chance to control their experiments. A technique had already been developed, but it was confined to university laboratories. Mother rats were "sacrificed" by breaking their necks just before they were to give birth. The pups were then delivered by caesarean section and immediately placed in a sterile, germfree environment. It was Foster who turned the technique into a commercial venture. Once produced on a large scale, Foster's disease-free rats would be kept in barrier rooms, the integrity of which were maintained by a number of precautions. Workers fastidiously showered and wore sterile coveralls, plastic gloves, surgical masks, and caps. Violating rules against bringing in unsterilized items was grounds for immediate dismissal. Moreover, as employees entered a barrier room, the air would be automatically sprayed to kill any flying insects that might happen in. Over the years, the company would also build a fleet of climate-controlled trucks to deliver the animals and eventually build facilities within trucking distance of all the major pharmaceutical houses. Expansion overseas would then follow.

Germfree laboratory animals proved to be a good business for Foster. He could charge more for them because the models were worth the extra expense to researchers. The cost of laboratory animals accounted for just 15 percent of an experiment's cost. Therefore, it made little sense to risk the reliability of the resulting data by pinching pennies on rats and mice. Foster was able to charge a sliding scale, depending on weight. The top of the line animal, in effect, cost several hundred dollars per pound.

In 1959 Foster's younger brother, Sumner, joined the company and took over marketing. Charles River was well regarded by its customers and became the market leader. Testing that required the use of laboratory animals picked up significantly after the 1960 passage of the Federal Hazardous Substances Act and other legislation that followed. Seeing how lucrative was the business, a number of major companies tried to enter the field, but they enjoyed little success. Becton Dickson, makers of medical supplies, set up operations in 1964, but ten years later would sell its animal business to Charles River. Giant corporation Ralston Purina bought out a small breeder in 1966 to jump start operations and also failed to dislodge Charles River from its dominant position.

Going Public: 1968

In 1968 Foster made an initial public offering of stock for Charles River Breeding Laboratories, selling 80,000 shares at $16 each. Another 110,000 shares were sold by stockholders. Proceeds were earmarked for the purchase of real estate and equipment to fuel company growth. By 1970, Charles River generated $5.5 million in revenues, resulting in net income of $564,100. In January 1971 the company sold another 55,000 shares of stock to finance further construction of facilities. Foster and his brother sold an additional 55,000 shares for their own benefit, although between them they still retained 58 percent of the common stock. By now, the company had subsidiaries in Canada, Britain, France, and Italy. In addition to laboratory rats and mice, Charles River was also offering disease-free hamsters and guinea pigs, and working on rabbits. It would not be until 1977, after much expense, that the company would be able to ship rabbits in large quantities. Revenues continued their steady growth, approaching $10 million in 1973, with a net profit exceeding $1 million for the first time. By 1980 the company would be selling 18 million animals a year, its revenues would top $35 million, and net income would reach $3.85 million.

In 1972 Charles River became involved in breeding germfree Rhesus monkeys. Foster took part in the trapping expedition in the foothills of the Himalayas that procured the first animals, from which the company was then able to create a disease-free stock of 800 that were transported to two isolated islands in the Florida Keys that Foster bought and named Key Lois and Key Raccoon. The monkey population quickly grew to 3,000. The animals received monkey chow each day from workers who visited the islands and periodically trapped young subjects, some 400 to 500 each year, that were then sold to laboratories at premium prices, ranging from $1,500 to $4,500 each. The demand for the monkeys increased after India banned the export of Rhesus monkeys in 1978, following the revelation that the U.S. military was testing the effects of neutron radiation on the animals. The Indian prime minister considered that research to violate a 1955 agreement, which restricted the use of Indian monkeys to medical purposes only. By 1981, however, Florida conservationists were beginning efforts to force Charles River to remove its monkey colonies, an issue that would heat up considerably 15 years later.

Breeders such as Charles River and the researchers that used their animals as test subjects were coming under increased scrutiny. Critics maintained that many experiments were so poorly conceived that animals were subjected to painful procedures in exchange for little useful data. In actuality, use of laboratory animals declined sharply between 1968 and 1978, dipping from 33 million to 20 million, according to a study conducted by the National Academy of Sciences. Charles River, however, actually benefited from this change in climate. Researchers turned to the company and its uniform animal stock to ensure they got the most from each test subject. Charles River was a consistent money maker in the early 1980s and soon found a large corporate suitor, Bausch & Lomb, who was in the market for an acquisition that could provide steady cash flow as it transformed itself from a troubled optical company to a diversified healthcare and medical services company.

Acquisition by Bausch & Lomb: 1984

In 1980 Bausch & Lomb was highly dependent on the sale of contact lenses and, to a lesser degree, sunglasses, but management had failed to keep up with changes in eye care. As a result, profits fell and Daniel Gill was named the chief executive and charged with reversing the company's fortunes. He originally came to Bausch & Lomb in 1978 to run the contact lens division, after gaining 23 years of experience in the medical field at Abbott Laboratories, where he rose to become the president of the hospital products division. Once in charge at Bausch & Lomb in 1981, Gill reorganized the company, in the process selling off the industrial instruments and eyeglass units. He then added new businesses, such as German drug manufacturer Dr. Mann Pharma and Dental Research Corp., which sold the Interplak electric toothbrush. In a move that surprised a number of observers, Gill also acquired Charles River Laboratories in 1984 in an exchange of stock worth approximately $130 million. For Bausch & Lomb, Charles River served as a stabilizing effect on the bottom line during a period of volatility. It could be counted on to generate consistent cash flow and grow at a steady rate. By 1992 it was estimated that Charles River added $200 million to the annual revenues of Bausch & Lomb.

Charles River now had a corporate parent, but little changed in the day-to-day operations, although the company began to diversify into other areas: offering cell culture products and testing services. Generally Gill believed in delegating a great deal of responsibility to his managers, allowing Foster to essentially continue to run the business as he saw fit. In 1992 Foster would step down as chief operating officer in favor of his son, James C. Foster, although he would continue to serve as chairman of the board. James had joined the company in 1976 as counsel and held a number of management positions as he prepared to succeed his father, who at the age of 67 had other interests to occupy his time. He and his wife had become contemporary art collectors, and in 1991 he was named as chairman of the board for Boston's Museum of Fine Arts, which was gearing up for a major funding campaign.

In the 1990s breeders and users of laboratory animals received even more criticism from animal rights activists. For Charles River much of that bad publicity emanated from the company's monkey colonies in the Florida Keys, where community leaders and conservationists combined their voices. The monkeys ravaged state-protected red mangrove trees, the leaves of which had proven to be irresistibly tasty. Environmentalists claimed that the water surrounding the keys were tainted by untreated fecal matter. Several monkeys managed to escape the colonies, mostly wandering off during low tide, which prompted residents of nearby islands to join the protests, fearful that a hurricane could spread monkeys in all directions. Even though the monkeys were well monitored to ensure they were disease free, locals worried about marauding monkeys with rabies. The rhetoric became even more heated from animal rights activists. When the company attempted to move some monkeys to a Houston facility, the director of the Houston Animal Rights Team maintained that "Charles River is nothing more than an animal slave trader." After several more years of court hearings, the company's monkey colonies would be evicted from the Florida Keys.

The ethical questions underlying his business were not lost on Dr. Foster, a man with artistic leanings who had been trained as a veterinarian. Not only were his animals sold to be subjected to experimentation, the nature of running a commercial enterprise reduced living creatures to the status of inventory. To make sure researchers had animals available with the necessary features, the company had to overproduce, and in the case of rats, researchers required 70 percent males. The result was an excess of animals, ones that ate up resources, both in terms of food and labor. They had to be humanely destroyed, which in truth meant they were suffocated by carbon dioxide. As Dr. Foster explained to an interviewer, "Every animal we raise will ultimately die. It's being raised for the benefit of mankind. If you don't use animals, you don't do research. People see a cat or a dog exposed to experimentation and they become emotionally involved. I become more emotionally involved if I have a loved one in a hospital and there is no medical cure." Critics, on the other hand, questioned the benefit to mankind of testing cosmetics by dropping them in the eyes of rabbits to see how much they burn. Many researchers began to turn to computer simulation techniques, in other words virtual lab animals. In 1999 Charles River began to offer CaseTox software to mimic animal research.

In the mid-1990s Bausch & Lomb suffered a downturn in business, which eventually forced Gill to step down as CEO. The company underwent a restructuring effort and by 1999 decided to focus on its core eye-care business. In conjunction with Charles River management, the Global Health Care Partners unit of Donaldson, Lufkin & Jenrette paid Bausch & Lomb $400 million in cash and a $43 million promissory note for an 87.5 percent stake in Charles River. According to the last numbers made available by Bausch & Lomb, Charles River was generating some $230 million a year in revenues. Global Health announced that it hoped to grow the business to $500 million a year and then take it public. Because of the success of the initial public offerings of biotechnology companies, Global Health decided to take Charles River public before meeting that sales threshold. Although not a bio-tech firm itself, it serviced the segment and in many ways was a safer bet. No one could be sure which of the bio-techs would emerge as major players, but investors could be relatively certain they would be customers of Charles River. Despite the earlier belief that lab animals would be replaced by computer software, the need of bio-techs for animal subjects served to boost the prospects of Charles River.

The holding company for Charles River was renamed Charles River Laboratories International in late 1999. In June 2000 the company raised $224 million in an initial public offering of stock. The company continued the diversification efforts that began under Bausch & Lomb. In 1999 it acquired Sierra Biomedical, a drug testing business, for $23.3 million. In 2001 Charles River paid $51.9 million for Primedica Corp., a preclinical research subsidiary. Nevertheless, over 60 percent of the company's revenues were derived from its traditional business of selling laboratory animals. It was the mouse—given that animal's physiological and genetic similarities to humans—that was becoming a major source of income. So important were mice to new genetic research that they were scheduled as the only other mammal for complete genetic sequencing. Because of Charles River's predominant position in its field and the broadening of its business, despite taking on some debt, it appeared well positioned to maintain steady growth for many years to come.

Principal Subsidiaries: Charles River Laboratories, Inc.; Primedica Corporation.

Principal Competitors: ClinTrials Research Inc.; Harlan Sprague Dawley; Huntingdon Life Sciences Group plc; The Jackson Laboratory; MDS; Taconic Farms.

Chronology

• Key Dates:
• 1947: Dr. Henry L. Foster establishes Charles River Breeding Laboratories.
• 1952: Foster begins breeding germfree animals for laboratory research.
• 1968: Charles River Breeding goes public.
• 1984: Bausch & Lomb acquires company.
• 1992: James C. Foster takes over as CEO.
• 1999: Bausch & Lomb sells business in management-led leveraged buyout.
• 2000: Charles River Laboratories International goes public on the New York Stock Exchange.