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Business

Charles River Drops Bid To Buy WuXi

Contract Research: Drug discovery services firm responds to criticism from shareholders

by Michael McCoy
July 30, 2010 | A version of this story appeared in Volume 88, Issue 31

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Credit: WuXi PharmaTech
WuXi operates labs and manufacturing facilities in the Chinese cities of Shanghai (shown), Suzhou, and Tianjin.

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Visit C&ENtral Science to read Lisa's blog entry related to this story

» Leaping into China, Charles River Buys WuXi

Credit: WuXi PharmaTech
WuXi operates labs and manufacturing facilities in the Chinese cities of Shanghai (shown), Suzhou, and Tianjin.

MORE COVERAGE

Visit C&ENtral Science to read Lisa's blog entry related to this story

» Leaping into China, Charles River Buys WuXi

Bowing to pressure from shareholders, the drug research firm Charles River Laboratories has ended its plan to acquire WuXi PharmaTech, a Chinese provider of chemistry and other drug discovery services. Announced in April, the $1.6 billion deal was intended to create a one-stop-shop for pharmaceutical industry customers (C&EN, May 3, page 9).

The two companies will go their separate ways after Charles River pays WuXi a $30 million breakup fee. Charles River simultaneously launched a $500 million stock repurchase plan.

When they announced the deal, Charles River executives sold it as a way to provide drug industry customers with services ranging from "chemistry to man." It was also a means for the Massachusetts-based contract research organization (CRO) to establish an immediate presence in China. But shareholders complained that the price was too high and that the potential risks of integrating the two companies were too great.

Jana Partners, an investment firm that owns more than 7% of Charles River's shares, was a particularly vocal opponent of the deal. In letters sent during June and July to James C. Foster, Charles River's CEO, Jana Managing Director Barry Rosenstein wrote that the proposed price—16 times WuXi's annual earnings before taxes, depreciation, and amortization—"cannot be justified."

Furthermore, Rosenstein noted that WuXi's profit margins have fallen each year since 2003, a decline he attributed to the commoditization of the Chinese firm's core discovery chemistry business.

Charles River responded to shareholder criticism with the prediction that combining the two firms would yield up to $100 million in annual synergies. But Jana's Rosenstein questioned how much synergy can be created by combining two companies active at different points in the drug discovery process.

"Our recent discussions with industry operators also confirm that such synergy claims cannot be reconciled with practical industry dynamics," he wrote. "These discussions have verified that WuXi's discovery chemistry offering is too early in the process to lead to significant cross-selling with Charles River's toxicology."

In announcing the cancellation of the deal, Foster acknowledged the shareholder concerns. "Although we are disappointed in the outcome of the proposed transaction, our overall strategy remains unchanged," he said. "We intend to be the premier early-stage CRO."

Ge Li, founder and CEO of WuXi, also said his strategy won't change. "We believe that strong trends for greater outsourcing and offshoring of R&D services will continue, and that WuXi, as the leading China-based contract research organization, is well positioned to benefit from this powerful outsourcing trend for many years to come," he said.

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