Charles River Laboratories International Inc. agreed to buy WuXi PharmaTech (Cayman) Inc. for about $1.6 billion to expand in China, where revenue from drug-testing services is growing as much as 30 percent a year.
Charles River will pay $21.25 a share, comprising $11.25 in cash and $10 in stock, for each WuXi American depositary share, the companies said in a statement today. The offer is 28 percent more than WuXi’s closing price of $16.57 in New York Stock Exchange trading on April 23.
The deal would be the largest foreign takeover of a Chinese company. It would give Charles River testing facilities in Shanghai, Suzhou and Tianjin in China, where cheaper labor and laboratory costs are luring the world’s biggest drugmakers in search of new blockbuster medicines.
“This is a vote of confidence that China will be the main location for drug R&D outsourcing in the future,” said Jinsong Du, an analyst in Hong Kong at Credit Suisse Group AG. Charles River would eliminate a potential competitor and gain a “very large state-of-the-art animal-testing facility” by buying the Chinese company, he said.
Earnings Miss Estimates
Charles River dropped $6.22, or 16 percent, to $33.55 at 4 p.m. in New York Stock Exchange composite trading, the biggest decline since November 2008. The shares are little changed this year.
The company also reported first-quarter earnings today of $17.4 million, or 26 cents a share, down 32 percent from the previous year’s period. Adjusted for some items, profit was 45 cents a share, missing by two cents the average estimate of 12 analysts surveyed by Bloomberg.
“Unquestionably most of the international drug companies intend to have major operations in China,” Charles River Chief Executive Officer James Foster said today in a telephone interview, citing lower costs and a large number of trained scientists in the country. “It will certainly, in the next three to five years, be a meaningful portion of our work.”
Charles River received a $1.25 billion credit-facility commitment from JP Morgan Chase and Bank of America Merrill Lynch, according to the statement.
The U.S. company had $182.6 million in cash and equivalents as of December, according to data compiled by Bloomberg. It has $634 million of debt due by 2013, the data show.
“This is a very significant transaction for China’s health-care industry,” said Brian Gu, head of Greater China corporate finance and mergers and acquisitions at JPMorgan in Hong Kong. “2010 is shaping to be an active M&A year for China, and health care is a sector we are starting to see significant strategic and investor interest.”
The biggest announced takeover in China by an overseas company was Diageo Plc’s 610 million pound ($942 million) purchase of Sichuan Swellfun Co., one of China’s four premium liquor makers, in February this year, according to data compiled by Bloomberg.
The market for contract research in China is growing as much as 30 percent a year, compared with less than 10 percent worldwide, Credit Suisse’s Du said.
Charles River would also gain easier access to animals including monkeys than it has in the U.S., where there is greater scrutiny of animal testing, he said.
Credit Suisse, JPMorgan
Credit Suisse and JPMorgan Securities Inc. are advising WuXi and Charles River. The companies expect to complete the transaction by year-end.
“Large animals -- non-human primates -- are increasingly and principally sourced in China,” Foster said. “Some large animal work will eventually go there, just because of the proximity to the source and to cut down the expense of shipments.”
New York-based Pfizer said in November it signed a memorandum of understanding with the Wuhan National Bioindustry Base Construction and Management Office to set up a research and development center in Wuhan, China. Novartis AG, of Basel, Switzerland, said Nov. 3 it will invest $1 billion over the next five years to build China’s largest pharmaceutical research and development institute.
Foster said Charles River may next look to India for expansion, where it could consider moving into later stages of clinical trial work.
“We would do that as a secondary market,” he said. “The extent to which we’d entertain making a more significant move in clinical work is entirely dependent on client demand.”
The company will “be pleased with this for awhile,” Foster said, speaking of its acquisition and presence in China.
Charles River was founded in 1847 by Henry Foster, seeking to supply researchers with a new standard of laboratory animal models, according to the company’s website. Foster bought several thousand rat cages for $1,200 in Virginia and set up a lab in a loft overlooking Boston’s Charles River. The company moved to Wilmington in 1955 as the business expanded.
WuXi PharmaTech is the parent of WuXi AppTec Co. in China and WuXi AppTec Inc. in the U.S., the company said on its website. Besides China, it has facilities in Minnesota and Atlanta, according to the website. Its customers include Pfizer, Merck & Co., Novartis and AstraZeneca Plc.