Regulatory Shifts Will Erode Traditional Animal Testing Demand

Key Takeaways

• The rise of alternative testing methods and regulatory pressures is expected to erode demand for Charles River’s core animal-based research services and shrink its market.
  
• Client consolidation, automation, and technological disruption threaten margins and revenue growth, while geopolitical risks further challenge global operations and profitability.
  
• Growing investment in innovative research platforms, solid cost controls, stable core revenues, and proactive governance changes position the company for resilient performance and long-term value creation.

Catalysts

Charles River Laboratories International, Inc.

• The accelerating move by global regulators and pharmaceutical companies toward alternative testing methods such as New Approach Methods, organ-on-a-chip, and in silico models is expected to gradually erode demand for traditional animal-based research models, a core revenue stream for Charles River. Although management argues these methods are not yet fully validated, the long-term trajectory is clear and could lead to sustained revenue declines as these alternatives gain traction and regulatory acceptance.
  
• Widespread societal, scientific, and regulatory pressure to reduce or eliminate animal testing is fueling investment and adoption of non-animal-based platforms, likely decreasing Charles River’s pricing power and shrinking its addressable market, significantly impacting top-line growth over the coming decade.
  
• Increasing client consolidation within the pharmaceutical industry is expected to concentrate purchasing power among a smaller set of large customers, intensifying price competition for contract research services. This dynamic places sustained pressure on net margins, as Charles River may be forced into aggressive discounting and less favorable contract terms.
  
• Ongoing industry investment in automation, AI/ML-driven drug discovery, and virtual clinical trials is intensifying competition from innovative CROs and technology players, threatening to make large segments of Charles River’s operational infrastructure obsolete and potentially driving structural declines in both revenue and earnings.
  
• Rising geopolitical risk and protectionist measures may complicate global collaboration in drug development and research, while increasing compliance and operational risks. These factors could create unpredictable interruptions to revenue streams from international markets and increase overhead costs, impairing both earnings and long-term margin stability.

Charles River Laboratories International Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Charles River Laboratories International compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Charles River Laboratories International's revenue will decrease by 11.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.8% today to 6.3% in 3 years time.
• The bearish analysts expect earnings to reach $174.3 million (and earnings per share of $3.41) by about May 2028, up from $-31.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 23.8x on those 2028 earnings, up from -213.1x today. This future PE is lower than the current PE for the US Life Sciences industry at 36.1x.
• Analysts expect the number of shares outstanding to decline by 4.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.71%, as per the Simply Wall St company report.

Charles River Laboratories International Future Earnings Per Share Growth

Risks

• The ongoing adoption of New Approach Methods (NAMs) and alternative testing technologies is expected to be gradual, with significant scientific and regulatory barriers remaining, meaning animal-based preclinical testing will continue to play an essential role for many years; this supports a resilient revenue stream from Charles River’s core offerings.
  
• Charles River is proactively investing in NAMs, digital and AI-driven research platforms, and in vitro technologies, expanding its portfolio and positioning itself as a leading scientific partner for both traditional and emerging drug development approaches, potentially leading to revenue and margin growth as these markets expand.
  
• The company reported stabilization and improvement in its key DSA (Discovery and Safety Assessment) segment, with first quarter bookings surpassing expectations and cancellations declining, which could drive improved near-term and possibly sustained revenue and earnings performance if the trend continues.
  
• Charles River’s strong track record of cost control, including a restructuring program yielding over $175 million in 2025 and expected $225 million in 2026 in annualized savings, has led to expanding operating margins and increased free cash flow, which can offset near-term revenue headwinds and support earnings stability and margin improvement.
  
• Strategic shareholder involvement (Elliott Investment Management), board refreshment, active capital allocation, ongoing share buybacks, and a forthcoming strategic review could unlock significant shareholder value and enhance long-term earnings and share price potential.

Valuation

• The assumed bearish price target for Charles River Laboratories International is $79.1, which represents two standard deviations below the consensus price target of $151.39. This valuation is based on what can be assumed as the expectations of Charles River Laboratories International's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $215.0, and the most bearish reporting a price target of just $70.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $174.3 million, and it would be trading on a PE ratio of 23.8x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $136.97, the bearish analyst price target of $79.1 is 73.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.