US-based contract research organisation (CRO) Covance and Chinese counterpart WuXi PharmaTech have decided not to proceed with a planned joint venture for preclinical research services in China.

Neither party gave a reason for the decision, which pushed WuXi’s shares down by 21% to a 52-week low. The deal fell apart only three months after Covance and WuXi announced they would set up a 50:50 joint venture centred on a 323,450sq ft purpose-built facility currently under construction by WuXi in Suzhou and scheduled to open in the second half of 2009.

The Chinese CRO said it would forge ahead with the Good Laboratory Practice (GLP)-standard facility, which would offer a full range of preclinical services and GLP toxicology capabilities. Meanwhile, Covance has returned to its original strategy to “build our own world-class preclinical facility in the region and aggressively compete as the global market leader in a business we know very well”.

Jeffries & Co analyst David Windley told Reuters the management teams at WuXi and Covance had “clearly had a difference of opinion”. There were disagreements about the pace of roll-out for the preclinical operations, he added.

And despite the bullish tone of WuXi’s announcement, which stressed that capital expenditure for the Suzhou facility had already been budgeted, Morningstar analyst Jeffrey Stafford suggested the company “may have trouble expeditiously filling capacity” at the site.

“While WuXi had plans to build the facility before its initial agreement with Covance, we believe the Covance brand name and expertise in toxicology services would have helped attract customers,” Stafford commented.

Both bullish

Covance was also bullish about the break-up, without providing any timetable for constructing its own facility. “We plan to build a comprehensive preclinical capability that matches the high-quality facilities and scientific teams our clients have grown to trust in Europe and North America,” stated chairman and chief executive officer (CEO) Joe Herring.

“Once built, the preclinical facility will complement our existing Phase II/III clinical development, central laboratory and our new bioanalytical capability in China and allow us to enjoy the full financial benefits of further leveraging Covance’s high-quality brand and drug development experience into Asia,” Herring noted.

WuXi’s chairman and CEO, Dr Ge Li, said the company was “committed to offering world-class preclinical toxicology services in China to global customers and committed to delivering this in the way which most benefits our customers and shareholders in longer term …We can leverage the expertise and capability from our AppTec acquisition as well as our US toxicology team to move rapidly in getting GLP compliance. Proceeding with our original plans to operate this facility independently will allow WuXi and our shareholders to receive maximum benefit over the long term”.

The Chinese CRO made a spectacular debut in the US financial markets last year and paid US$151 million for Minnesota-based AppTec Laboratory Services in January. But some analysts questioned the wisdom of the AppTec deal and a planned follow-on US public offering of 10,126,800 American Depositary Shares (ADSs) was terminated in May as market conditions and the price of WuXi’s ADSs declined.

Up to US$37.0 million of the expected proceeds from the follow-on offering had been earmarked for the construction of the preclinical drug safety evaluation centre in Suzhou. Under its memorandum of understanding with Covance, WuXi was going to supply the facility while Covance expected to make an additional investment of around US$30 million as its initial financial contribution to the joint venture.

More recently, leading private equity firm Warburg Pincus gave WuXi a lift by taking a 5.4% stake in the CRO, calling it “a clear leader in the rapidly growing drug and medical device outsourcing industry”, with “an impressive track record of growth and a distinguished reputation for customer service”.