Charles River CEO Defends WuXi PharmaTech Purchase

Includes: CRL, WX
by: ChinaBio Today

Charles River Laboratories (NYSE: CRL) defended its $1.6 billion purchase of much-smaller WuXi PharmaTech (NYSE: WX) Monday, even though the transaction will bring only incremental profit growth in the near term. According to CEO James C. Foster, WuXi gives Charles River a major foothold in China, a significant market for CRO services. Plus, the purchase takes Charles River into a new business sector: early-stage drug discovery.

Foster’s comments were carried in a Boston Globe article that gave background to the purchase in Charles River’s home base of Boston (see story).

Foster said further that China labor offers a cost advantage, though that may diminish over time. More importantly, it “pained” him to say that the China workforce is better trained than its US equivalent. The two long-term advantages have moved much of the world’s drug discovery business to China, he added.

Until now, Charles River has been primarily known as a company that breeds mice and rats for laboratory experiments, and it has also offered animal testing services. WuXi PharmaTech, on the other hand, is best known for its drug discovery services, even though it has moved into animal testing.

However, the acquisition was not greeted warmly by all investors. Charles River is a company that reported $1.2 billion in 2009 revenues. WuXi PharmaTech booked just $220 million. Charles River’s net income was $114 million, more than twice the $53 million of WuXi PharmaTech.

In itself, there is nothing wrong with these figures, and it shows that WuXi’s profit margin is much higher than Charles River’s. But Charles River has a market capitalization of $2 billion, and it paid $1.6 billion for WuXi PharmaTech, an acquisition that will yield only “incremental” increases to Charles River’s finances.

It’s not surprising, in view of these numbers, that Charles River’s stock dropped 15% after it announced the transaction, falling $6.12 from $39.67 to $33.55. The general decline in stock prices in the last month has pushed the company’s shares down further to $30.94.

Before combining with WuXi PharmaTech, Charles River announced a major collaboration with Shanghai BioExplorer that formed a preclinical services CRO in Shanghai. The goal was to supply a venue for Charles River’s existing clients who wanted to have work done in China. At the time, Charles River expected to follow up quickly with a second laboratory. But the company slowed that initiative when global financial conditions curtailed pharma’s spending on CRO services. Instead, it announced an acquisition that takes it into a new business area.

Disclosure: none.