Charles River, WuXi PharmaTech CEOs Issue Joint Appeal For Shareholder Support For Deal

BEIJING - The heads of the Massachusetts-based Charles River Laboratories and the Shanghai-headquartered WuXi PharmaTech issued a joint appeal calling for shareholders to rally in support of the proposed union of the two contract research organizations during near-simultaneous votes four weeks from now.

A shade of suspense is expanding during the countdown to the dual shareholder meetings since a New York-based money management firm that holds 7 percent of Charles River stock called for the abandonment of the merger plan weeks after it was unveiled in April. Yet even while warning that fellow holders of equity in Charles River would dump their stock after the $1.6 billion acquisition of WuXi PharmaTech was proposed, New York's Jana Partners was in fact steadily and sharply increasing its purchases of CRL shares (Also see "Impromptu Objections Filed With SEC Could Threaten Charles River's Proposed Merger With China's Leading CRO" - Scrip, 11 Jun, 2010.).

Jeff Leng, a member of WuXi PharmaTech's board of directors, predicted most shareholders would back the alliance of the American and Chinese pharmaceutical research outfits.

Leng, who is also managing director of the $15-billion investment firm General Atlantic, one of WuXi PharmaTech's largest institutional investors, said in an interview with PharmAsia News: "There is no doubt a synergy between WuXi PharmaTech and Charles River - that's why the board of directors of each company has already approved the merger."

Meanwhile, as backers and opponents of the U.S.-China CRO alliance prepare to spar, the chief executive officer of Charles River, Jim Foster, and of WuXi PharmaTech, Ge Li, are joining forces to protect the planned union.

"The complementary combination of Charles River's expertise in in vivo biology and WuXi's expertise in discovery chemistry will create a global partner capable of supporting pharmaceutical and biotechnology clients as no other contract research organization can," the two CEOs wrote in the appeal to shareholders.

"The strategic merits of this combination are compelling," they stated. "We believe the combined company will be ideally positioned to address the rapidly changing needs of the customers of both companies."

Ge Li stated in an earlier interview that the alliance "will fast-forward globalization of pharmaceutical research and development in China" (Also see "WuXi PharmaTech Founder Ge Li Says Upcoming Merger With Charles River Is Part Of Globalization Of The Drive To Save Lives" - Scrip, 30 Apr, 2010.).

Holders of WuXi PharmaTech stock are set to vote on the merger on the morning of Aug. 5 in Hong Kong, while Charles River shareholders will review the transaction 10.5 hours later in the U.S.

In the joint statement presented to shareholders and filed with the U.S. Securities and Exchange Commission, Li and Foster wrote that economic pressures and the need for improved efficiency are leading companies to search for a broader range of early-stage outsourcing solutions. "These customers have expressed to both companies their interest in an integrated platform of services that will enable a seamless and more efficient transfer of molecules throughout the drug discovery and development process."

"As we expected," the CEOs said, "client response to the proposed combination of Charles River and WuXi has been overwhelmingly positive."

In a recent research note published by Jefferies and Co., analysts wrote that management still clearly sees value in the merger, a position which is validated by positive feedback from clients.

"After recent channel checks with preclinical managers at Big Pharma," the Jefferies researchers stated, "client comments support the possibility for garnering more business as a combined company."

The Jefferies analysts agree that large companies will begin to gradually migrate to an integrated vendor.

Eric Coldwell and Nicholas Juhle, researchers at Baird, stated in a recent analysis that although some investors have sold their shares in Charles River since the merger blueprint was initially disclosed in April, "the 'fear and loathing selling' is done."

Support But Not Without Risk

"We believe both companies are motivated and the deal structure is supportive of a long-term relationship at senior levels," the Baird researchers said. "We are not suggesting the CRL/WX deal will break."

Yet they added that the transaction still contains substantial risk.

"Past acquisitions haven't been CRL's strong point, nor have the majority panned out across the industry," the Baird researchers noted.

According to Baird, Charles River could see ongoing disruptions to its business due to the mega-mergers of pharmaceutical titans that were launched last year: "Major M&A transactions among CRO clients can disrupt R&D spending and heighten cancellation risk due to pipeline reprioritization and combination of R&D resources."

"However," they noted, "history suggests that outsourcing typically reaccelerates following such transactions as combined entities play catch-up and seek a more efficient approach to drug development."

"Given the company's early-stage focus and approximately 20 percent exposure to smaller biotech," they stated, "CRL is disproportionately exposed to headwinds deriving from pharma restructuring, biotech funding issues and pipeline reprioritization."

- Kevin Holden ([email protected])