In what would be one of the largest foreign takeovers of a Chinese company, Charles River Laboratories International, a US pharmaceutical research company, has agreed to buy its Shanghai rival, WuXi PharmaTech, for about US$1.6 billion.
The deal, which would allow Charles River to expand its presence in China and gain greater access to the country’s scientists and research and development facilities, comes as Western pharmaceutical companies increase outsourcing of their R&D services to China and India, lured by lower labour and laboratory costs.
Based in Wilmington, Massachusetts in the US, Charles River is one of the world’s largest drug research contractors, which provide research and development services to pharmaceutical companies. WuXi PharmaTech, founded in 2000, is the biggest such company in China.
By buying WuXi, Charles River will eliminate a potential competitor and gain state-of-the art animal testing facilities in Shanghai, Suzhou and Tianjin. The company will take the Charles River name, and WuXi will be delisted.
Davis Polk & Wardwell is acting as legal adviser to the US company on the deal, while Cravath Swaine & Moore and O’Melveny & Myers are acting as legal advisers to WuXi PharmaTech.
“This is a vote of confidence that China will be the main location for drug R&D outsourcing in the future,” Du Jinsong, an analyst at Credit Suisse, reportedly said. “It’s an ongoing trend as a result of the change in dynamic in the R&D world. China is attractive because of the availability of scientists and better value for money.”
Du believes that the kind of R&D work provided by WuXi could cost just one-fifth of what would be charged in the US. While pharmaceutical companies have long outsourced work such as preclinical testing, clinical trials and manufacturing to third parties like Charles River and WuXi, increasingly they are asking outsiders to take part in the drug discovery process, which is a fundamental part of their business.
According to Credit Suisse, R&D work in the discovery of drugs was done entirely in-house in 1997. Last year, about one-fifth of that was outsourced.
The transaction is among the top three foreign takeovers of a Chinese company and the largest in the pharmaceutical industry, according to Dealogic. In November 2009 New York-based pharmaceutical company Pfizer said it had signed a memorandum of understanding with the Wuhan National Bioindustry Base Construction and Management Office to set up an R&D centre in Wuhan, central China. Novartis, based in Basel, Switzerland, said on 3 November it would invest US$1 billion over the next five years to build China’s biggest pharmaceutical R&D institute.
Brian Gu, head of greater China corporate finance and mergers and acquisitions at JPMorgan, said the Charles River-WuXi transaction was likely to be followed by further similar deals in China’s healthcare sector.
