From molecule to market

Charles River Laboratories acquires WuXi PharmaTech for $1.6 billion, creating a CRO with services from early-stage drug development to clinical trials

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SHANGHAI, China—In a deal the companies say "revolutionizes the contract research landscape"—and one thought to be among the largest inbound M&A transactions in China—Charles River Laboratories International Inc. (CRL) will combine with WuXi PharmaTech in a cash-and-stock transaction valued at nearly $1.6 billion.

By bringing CRL, a leading global provider of preclinical drug development services, and WuXi, an outsourcing company with expertise in discovery chemistry, under one roof, the companies say they are creating "the only global contract research organization (CRO) to offer fully integrated research and drug development services from molecule creation to first-in-human testing."

Under the terms of the agreement, which was announced last month after unanimous approval by both companies' boards of directors, CRL will pay a total of $21.25 for each American depositary share of WuXi, of which $10 will be in CRL common stock and $11.25 will be in cash. CRL says it will finance the cash portion of the transaction through balance sheet cash on hand and one or more sources of new debt financing. The Wilmington, Mass.-based company has received a financing commitment for a $1.25 billion credit facility from J.P. Morgan Chase and Bank of America Merrill Lynch.

CRL says it expects to see approximately $20 million in pre-tax cost and consolidation savings on an annualized basis, beginning in 2011, and the transaction is expected to be neutral to slightly accretive to 2011 earnings-per-share on a non-GAAP basis and increasingly accretive thereafter. CRL also expects revenue growth to increase as a result of a broader portfolio of essential products and services, a larger global footprint and the opportunity to sell upstream and downstream to its client base.

That base is comprised of the world's leading pharmaceutical, biotechnology, government and academic organizations that seek basic research, compound identification, safety and efficacy, early- and late-phase clinical support and process manufacturing from CRL, which, after 60 years in the business, has 70 facilities in 18 countries and 8,500 employees worldwide.

No stranger to acquisitions—the company has made more than 30 deals since its founding in 1947—CRL felt that it was time to take the company to a new, transformational level: Creating one company that is capable of serving its existing and potential clients from early-stage drug development to clinical trials, says Nancy Gillett, the group's executive vice president of global preclinical services. Doing so allows CRL to offer its clients both upstream and downstream support for their efforts to bring new drugs to market, Gillett adds.

"If you think about the drug development continuum, which spans early molecular creation to full testing in humans, we have been focused on the animal component in the middle of that continuum," she says. "We felt the need to expand our portfolio to provide a greater range of our products and services to our clients, allowing them to do upstream into the clinical space, or downstream into the early discovery phase."

Enter WuXi, which offers a full range of discovery and development services for pharmaceuticals; development and testing services for biotherapeutics and medical devices; and comprehensive toxicology services. The firm also offers manufacturing services for advanced intermediates and active pharmaceutical ingredients; cell banking services; and cGMP manufacturing for cellular therapeutics and combination/tissue-based products.

Founded in 2000, WuXi has always focused on early drug discovery, but has also kept its eye on the possibility of providing integrated research services to its clients, which are comprised of the world's top 20 large pharmas and biotechs as well as smaller, virtual companies, says company Chairman and CEO Dr. Ge Li. After being listed on the New York Stock Exchange (NYSE) in 2007, the company was subsequently acquired by St. Paul, Minn.-based AppTec Laboratory Services Inc. Today, the company has nearly 4,200 employees, most of whom are based in China, and some based in the United States.

"During the last eight or nine years, WuXi has been focused on building its capabilities and capacities to be able to provide integrated services to our clients," Li says. "For me, the concept of a fully integrated service has almost become a religion. This is a real value-add to the industry, because as we all know, the drug discovery process takes 12 to 15 years and costs billions of dollars, not counting potential failures. If the combination of Charles River and WuXi can help our partners in the industry to introduce products to the market even one year earlier, we will have benefited the industry by saving it time and several hundred billion dollars, and benefited patients by bringing much-needed products to market sooner."

The transaction is expected to close by the end of the fourth quarter, after which the companies will operate under the name Charles River. A joint integration team will decide how best to merge the two companies, but their geographic reach will allow the combined company's employees to serve clients in almost any location, Gillett points out.
Gillett adds that while CRL "digests" this sizable transaction, the company is open to other acquisitions.

"We're always hoping to gain strategic add-ons, but they would be smaller company acquisitions—nothing of this scale," she says.

Following the news, shares of CRL fell $6.22, or 15.6 percent, to $33.55 on the NYSE, while WuXi shares climbed $2.84 to $19.41, a 17.1 percent gain. Some investors have interpreted this disparity to mean that WuXi stockholders may have gotten the better end of the deal.

MorningStar Inc., an investment research firm in North America, Europe, Australia and Asia, says although the addition of WuXi to CRL's operations should help accelerate growth and bring down costs, the steep offer price "destroyed" roughly $5 per share of value for CRL shareholders. The firm raised its fair-value estimate for WuXi to $22.50 to reflect the estimated acquisition price.

"Although the companies expect to see $20 million in cost synergies as soon as next year, we think Charles River's shareholders will have a tough time getting their money's worth out of the firm's offer price of $1.6 billion—or about 6 times trailing sales and 30 times trailing earnings," MorningStar says. "We found little overlap between the company's businesses and expect the bulk of the cost savings to come from selling, general and administrative expenses, namely through corporate overhead and enhanced purchasing power."

Noting that the deal has had a negative impact on the shares of other CROs, MorningStar and other analysts have speculated that it may pressure CRL's competitors to seek similar acquisitions to gain a stronger foothold in Asia, considered the epicenter for growth for the sector. By bringing the largest CRO in China under its roof, CRL has gained a competitive advantage in the region, but has also made the M&A pickings slim for other companies, the Wall Street Journal noted. Susquehanna analyst Ding Ding told the newspaper that other than CRL, PPD is the only global CRO with a meaningful preclinical footprint in China, thanks to its November 2009 acquisition of drug discovery company BioDuro LLC.

"The leading contract research organizations are rushing into Asia Pacific to gain access a plethora of highly skilled labor and new patient databases at a fraction of the cost in developed markets," MorningStar says. "As the world's largest drugmakers increasingly set up shop in Asia Pacific, the acquisition of China's largest early-stage provider skyrockets Charles River to a leading spot in this booming region."

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