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In a move to advance its position in the fast-growing outsourced discovery services market, Charles River Laboratories International, Inc. (CRL - Snapshot Report) entered into a definitive agreement to acquire the contract research organization (CRO) services division of Galapagos NV.

The CRO division of Galapagos NV includes the businesses of Argenta and BioFocus. Located in the U.K and the Netherlands, both these businesses specialize in integrated drug discovery services from target discovery through the delivery of clinic-ready candidates to a broad range of pharmaceutical and biotechnology companies. This will enable Charles River to engage its clients earlier in the drug discovery process.

Both these businesses have a deep in vitro expertise which includes medicinal chemistry and target discovery. In addition, their expertise in invitro biology along with therapeutic area expertise in respiratory, inflammation, oncology diseases will also benefit Charles River.

Charles River will pay $179 million (based on current exchange rates) for the acquisition. The purchase price also includes future performance payments of up to $7 million.

Charles River expects to merge these businesses with its Research Models & Services (RMS) segment. Both Argenta and BioFocus generated combined sales of $87 million in 2013. Sales are expected to grow by 10% in 2014.

Charles River expects to close the acquisition early in the second quarter of 2014. The acquisition is expected to add approximately 6% to the top line and 10 cents to the bottom line in 2014. With the addition of these businesses, the RMS segment will account for 24% of total company sales compared to 18% on a standalone basis. The company also expects synergies from the acquisitions in 2015 and beyond.

We are positive on the acquisition. The acquisition will place Charles River as an early-stage CRO with a full range of services from target discovery to Investigational New Drug (IND) filing, including significant capabilities in medicinal chemistry and in vitro discovery.

The client base for both these businesses include global biopharma companies, mid tier, biotech and emerging companies as well.  As a result, the acquisition will also advance the company’s position as a market leader in the growing market for out-sourced discovery services.

Currently, Charles River carries a Zacks Rank #3 (Hold). Others stocks that look attractive include Envision Healthcare Holdings, Inc. (EVHC - Snapshot Report), Parexel International Corp. (PRXL - Snapshot Report) and ICON plc (ICLR - Snapshot Report). While ICON plc and Envision Healthcare carry a Zacks Rank #1 (Strong Buy), Parexel holds a Zacks Rank #2 (Buy).

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