Leaping into China, Charles River Buys WuXi

In a deal that seems to be taking everybody by surprise, Charles River Laboratories is shelling out $1.6 billion for WuXi PharmaTech, a Shanghai-based contract research organization. See here for the nitty-gritty details, but basically the deal turns Charles River, which previously focused on animal models and clinical services, into a one-stop shop--or in the PR speak of the CRO world, “a fully integrated research and drug development services” firm. That means a customer can walk in with a drug target and walk out many months later with a drug candidate that has been tested through Phase I. WuXi is the leading CRO in China, with over 3,200 scientists with advanced degrees (a whopping 2,000 of those are chemists). The company has quickly blossomed in the last five years, with sales growing from $20 million in 2004, to an anticipated $310-320 million this year. WuXi continued to add to its headcount last year, “at a time when the CRO industry declined as a confluence of factors from economic recession to biopharma M&A and pipeline rationalization hurt the industry,” Deutsche Bank analyst Ross Mulken said in a note to investors today. Much of that success can be attributed to the drive of Ge Li, WuXi’s founder and CEO, who under the new regime will become president of global discovery and China services. Li, an organic chemist with a doctorate from Columbia University, was one of the founding scientists of Pharmacopeia, the N.J.-based drug discovery firm that was bought by Ligand Pharmaceuticals in late 2008. Li returned to China to form WuXi in 2000. Though WuXi has a strong chemistry base, the company has also been building up a biology capacity in China since 2008, which some think is the real motive behind Charles River’s bid. The company recently built what it says is the largest toxicology lab in Suzhou, about 30 minutes outside of Shanghai, essentially enabling it, on a small scale, to do just the kind of integrated “molecules to man” work that Charles Rivers is hoping to perform.  Wuxi recently sealed a toxicology and preclinical services contract with Johnson & Johnson, which is going to train WuXi scientists in the art of good laboratory practices. J&J, by the way, had already hired WuXi to do discovery chemistry work (as has AstraZeneca, Merck, Eli Lilly...). So does that make WuXi a good fit with Charles River? The acquisition certainly feels like a bold (or at least intriguing) move, though it has not been an entirely well received addition to its portfolio: Charles River’s stock was down nearly 16% to close at $33.55 today. Why the negative reaction to the deal? Although most analysts seem to think the move makes sense in the long-term—after all, big pharma has been swiftly shifting more and more work to China—many are worried about the ease with which the two companies can integrate. Further, there is an increasing sense that it won’t be long before China can no longer compete on cost. Will WuXi still seem like a great asset then? Feel free to air your thoughts in the comments.

Author: Lisa Jarvis

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