The Health Care M&A Monthly: Charles River Expands In China--
Pays $1.6 Billion For WuXi PharmaTech
True to its name, Charles River Laboratories International (NYSE: CRL) is expanding its overseas operations with the $1.6 billion acquisition of WuXi PharmaTech (NYSE: WX). This move enlarges CRL’s presence in China, giving it the target’s expertise in chemistry, as well as greater access to the country’s vast supply of scientific personnel and R&D facilities, all at lower cost than in the West. This acquisition creates a powerhouse that benefits from the ongoing trends to globalize operations and outsouce drug discovery.
Headquartered in Wilmington, Massachusetts, Charles River provides research tools and integrated support services to enable drug discovery and development. It provides these R&D services to a broad variety of drugmakers. The company has operations throughout this country, as well as units in Finland, Germany, Ireland and Japan. Over the years, it has grown organically and through acquisition, making 15 deals since 2000. Returning to the present, on a trailing 12-month basis, CRL generated revenue of $1.2 billion, EBITDA of $277.0 million and net income of $111.0 million.
Based in Shanghai, WuXi is a contract research organization, or CRO, that acts as an R&D outsourcing company for pharma, biotech and medical device companies. The largest company of its kind in China, WX raised $185.0 million when it listed on the New York Stock Exchange in 2007. It applied some of the proceeds to acquisitions, paying $162.7 million in 2008 for AppTec Laboratory Services in St. Paul, Minnesota. That deal was valued at approximately 2.3x revenue. On a trailing 12-month basis, WX generated revenue of $270.0 million, EBITDA of $80.7 million and net income of $53.4 million.
Under terms of the current deal, Charles River is offering $21.25 per share in cash and stock for each WX ADS. Each ADS will be exchanged for $11.25 in cash and $10.00 of CRL common stock determined by an exchange ratio. This offer represents a 28% premium to the stock’s prior-day price. The deal is valued at 5.9x revenue and 19.8x EBITDA. It is CRL’s largest acquisition since its $1.5 billion purchase of Inveresk Research Group in 2004. The acquisition multiples for that deal were 5.1x revenue and 23.4x EBITDA, so CRL has successfully integrated acquisitions of this size—and at this pricing—before. Charles River will finance the cash portion of the transaction through balance sheet cash on hand and one or more sources of new debt financing. The company has received a financing commitment for a $1.25 billion credit facility from J.P. Morgan Chase and Bank of America Merrill Lynch.
Both companies have prospered from—indeed, owe their very existence to—the global trend in outsourcing drug development. According to Credit Suisse, R&D work in drug discovery was done completely in-house in 1997, but by 2009 about one-fifth of that activity was being outsourced. The company that emerges from this current deal hopes to ride the continuing wave of globalization in the CRO industry, and to benefit from the increasing demand from pharmas and biotechs to contain drug discovery costs. On the negative side, some analysts have voiced concerns over the integration of CRL and WuXi based on WX’s less than satisfactory integration of AppTec following its acquisition in 2008. However, the economies of scale and the resulting profitability to be realized from this combination more than offset concerns over “cultural” differences. As the largest CRO in the Chinese market, CRL will have a decisive competitive advantage over other transnational competitors in this field.
J.P. Morgan Securities is providing CRL with financial advice on this transaction; Credit Suisse is providing similar advice to WX.