* Charles River to offer $21.25 per WuXi ADS
* Says received financing commitment for $1.25 bln
* Charles River CEO James Foster to lead the combined co
* Charles River posts lower Q1 results
* WuXi stock rises 19 pct, Charles River falls 14 pct
(Adds details, analyst comments; updates stock movement)
By Esha Dey
BANGALORE, April 26 U.S. clinical research
company Charles River Laboratories International (CRL.N) agreed
to buy Chinese rival WuXi PharmaTech WX.N for $1.6 billion to
expand its presence in China and deepen its expertise in
Charles River is focused on pre-clinical and early-stage
research, while Shanghai-based WuXi -- one of the biggest
Chinese clinical research organizations (CRO) -- is active in
drug chemistry, such as making molecules to synthesize a drug.
Charles River will offer $21.25 per WuXi American
Depositary Share in cash and stock, representing a premium of
28 percent to WuXi's Friday closing price.
Each WuXi ADS will get $11.25 in cash and $10 of Charles
River common stock, the companies said in a joint statement.
However, WuXi shares were trading up only 19 percent at
$19.70 in morning trade Monday on the New York Stock Exchange,
indicating investor skepticism about the deal.
Charles River shares fell 14 percent to $34.09 on the New
York Stock Exchange on concerns of the U.S.-based company's
ability to execute and integrate such a big deal.
Robert W. Baird analyst Eric Coldwell said the deal value
was "a bit aggressive," adding that given the disparate
geographies, cultures and services, he sees more than a modest
risk in integration.
"We expect some, if not majority of WuXi shareholders, will
sell their positions on WuXi post merger given the likely
slower growth of the combined entity versus WuXi standalone,"
said Susquehanna Financial Group analyst Ding Ding in a note.
Analysts broadly agree that the deal made sense
thematically due to WuXi's exposure in the fast-growing Chinese
market and limited overlap between the service offerings of the
two firms. Even though short-term risks remain, the deal can
prove to be beneficial in the long term.
"We are increasingly convinced China is becoming a very
important market for pharma and therefore view the combination
as a long-term positive for Charles River, given we believe
WuXi is the leading player and brand name in China," William
Blair and Co analyst John Kreger said.
Large, concentrated populations, access to patients where
certain diseases -- like malaria -- are widespread and an
opportunity to run trials in markets with a rising demand for
medicines are what make markets like China attractive
destinations for the outsourced drug research industry.
"Outsourcing is going global and China is increasingly
important, though Chinese firms still face headwinds, which
Charles River's global brand and image could mitigate," Baird's
Research service providers to drugmakers have seen their
growth rate slow over the past one year, pushing them to look
for newer strategies like increased specialization in specific
areas and tap faster growth areas like the emerging markets.
Monday's deal is a proof of a growing trend within the CRO
industry that is seeing bigger U.S. players specialize more to
offer high-end services to their clients, with pre-clinical and
early-stage focused Charles River and Covance Inc CVD.N
investing heavily in drug discovery services.
Thus Shanghai-based WuXi is a strategic fit for Charles
River that is trying to expand into more upstream services in
the drug research pathway.
"(The deal would) give Charles River medicinal development
capabilities, which is currently outside of Charles River's
core competency," Deutsche Bank analyst Ross Muken said.
DEAL TO BOOST MARGINS
Charles River expects the deal to improve its margins, it
said on a conference call with analysts.
For 2009, WuXi had an adjusted gross margin of 42.3
percent, while Charles River had a gross margin of 35.7
Charles River has received a financing commitment for a
$1.25 billion credit facility from JP Morgan Chase and Bank of
The combined company will be led by Charles River Chief
Executive James Foster, while WuXi PharmaTech's Ge Li will
become corporate executive vice president. Li will also be the
president of global discovery and China services, a new
Q1 PROFIT FALLS
Separately, Charles River reported a lower first-quarter
profit, impacted by weak sales volume and higher costs related
to the company's enterprise resource planning initiative.
On a non-GAAP basis, net income was $29.3 million, or 45
cents a share, compared with $38.2 million for the same period
in 2009, a fall of 23.2 percent.
Quarterly net sales fell 1.4 percent to $297.3 million.
Analysts on average expected first-quarter earnings of 47
cents a share, excluding special items, on sales of $296.8
million, according to Thomson Reuters I/B/E/S.
Charles River was one of the worst affected among its peers
and had a tough run in 2009 as drug developers tended to halt
early-stage research to conserve cash rather than stopping the
development of late-stage drugs that could reach the market
However, the company is finally seeing early signs of
demand stabilizing and Baird's Coldwell said he expects to see
modest improvement in bookings and significant decreases in
cancellations through 2010.
On the call, the company said it sees 2010 sales of $1.51
billion to $1.56 billion for the combined company and expects a
2 percent to 3 percent rise in second-quarter sales from the
(Additional reporting by Sakthi Prasad; Editing by Muralikumar
Anantharaman, Sharon Lindores, Unnikrishnan Nair, Gopakumar