3 ways to create value

Company: Charles River Laboratories (CRL)

Business: Charles River Laboratories is an early-stage contract research company. The company engages in laboratory animal medicine and science (research model technologies), and it has developed a portfolio of discovery and safety assessment services. The company operates in three segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support (Manufacturing).

Stock Market Value: $6.82B ($138.79 per share)

Activist: Elliott Investment Management

Ownership: 12.5%+

Average Cost: n/a

Activist Commentary: Elliott is a very successful and astute activist investor. The firm’s team includes analysts from leading tech private equity firms, engineers, operating partners – former technology CEOs and COOs. When evaluating an investment, Elliott also hires specialty and general management consultants, expert cost analysts and industry specialists. The firm often watches companies for many years before investing and has an extensive stable of impressive board candidates. Elliott has historically focused on strategic activism in the technology sector and has been very successful with that strategy. However, over the past several years Elliott’s activism group has grown, and the firm has been doing a lot more governance-oriented activism and creating value from a board level at a much larger breadth of companies.

What’s happening

On May 6, Elliott and Charles River Laboratories entered into a cooperation agreement in which four incumbent directors won’t seek re-election and the following four individuals will be appointed as directors: Steven Barg (global head of engagement at Elliott) and Mark Enyedy (former president and CEO of ImmunoGen) (both are known as the “investor designated directors”), along with Paul Graves (CEO of Rio Tinto Lithium) and Abraham Ceesay (CEO of Rapport Therapeutics). Additionally, Charles River agreed to appoint at least one investor designated director to each of the strategic committee, the compensation committee, and the corporate governance and nominating committee. Finally, Charles River agreed that the strategic committee will conduct a strategic review, during which the investor designated directors will be appointed to the strategic committee.

Behind the scenes

Charles River is involved in supporting early-stage drug research and development. The company discovers its own drug candidates, determines whether they have potential to be effective and whether they’re safe enough for human trials. Charles River operates through three segments: Research Models and Services (20.48% of revenue), Discovery and Safety Assessment (60.52%), and Manufacturing Solutions (19.00%). Charles River is by far the leader in pre-clinical development, with each segment of its business occupying 35% to upward of 40% market share, which is generally twice the size of the No. 2 player. The business has grown organically for years while they have simultaneously consolidated the industry through accretive and smart mergers and acquisitions. These major growth trends continued through Covid-19, which, like it did for many peers, supercharged the business as funding flooded in fueled by a growing interest in investing in new and novel science. As a result, Charles River traded as high as $460 per share in the fall of 2021.

Since then, challenges have begun to emerge. Post-pandemic, there was a pullback in pre-clinical research demand. While this pullback was more of a normalization, it still decreased the amount of funding flowing in and caused large pharma companies to reevaluate and reprioritize their pipelines, which weighed on Charles River and the sector broadly. The second challenge has been the current headlines coming out of the U.S. Food and Drug Administration and the current administration regarding the future of animal testing. Charles River’s business in part relies on animal testing and this momentum away from that has weighed on the share price. Because of these factors, the company’s shares have slumped, down 50.95%, 52.30% and 19.66% over the past 1-,3- and 5-year periods, respectively.

Amid these headwinds, Elliott Investment Management has entered into a cooperation agreement with Charles River pursuant to which the company agreed to appoint four directors following the 2025 annual meeting on May 20, including Steven Barg, the global head of engagement at Elliott. Additionally, the company agreed to initiate a strategic review. This is an exceptionally high-quality business and, as a result, there are numerous paths to shareholder value. The first does not involve operations, capital allocation, governance or any other direct function of Charles River: It is a simple reconciliation of value. The market has likely…