Charles River Laboratories (CRL) and WuXi PharmaTech have caved into pressure from major shareholders and scrapped CRL’s planned US$1.6 billion acquisition of the Chinese contract research organisation.
CRL said it had “mutually agreed” with WuXi to terminate the acquisition agreement announced in April and due to go before shareholders of both companies on 5 August.
The US company will pay WuXi a US$30 million break-up fee and its board has authorised a stock repurchase programme, a course of action recommended by JANA Partners, Relational Investors and other leading partners that have been ratcheting up opposition to the WuXi deal in recent weeks.
“We believed that this transaction, which would have created the premier early-stage contract research organisation, would have resulted in long-term strategic benefits for our business and our shareholders,” said James Foster, chairman, president and chief executive officer (CEO) of Charles River.
“We also value our stockholders’ views and given their concerns about the proposed transaction, and our commitment not to proceed without their support, we have decided that terminating the transaction is the appropriate action to take,” he stated.
The company’s overall strategy “remains unchanged”, Foster added. “We intend to be the premier early-stage CRO and will continue to build our early-development capabilities – specifically our discovery services – in order to support our clients’ efforts across a broader portion of the drug development pipeline.”
WuXi also insisted it would carry on as before. “Our goal is, and has long been, to build a broad, integrated R&D service platform designed to help our customers improve the success of research and shorten the time of new product development,” commented chairman and CEO Dr Ge Li.
“While we are disappointed that this transaction could not be completed, WuXi remains well positioned to meet our customers’ needs and to continue to grow and expand as a stand-alone company.”
Stock repurchase
The Charles River board has approved the repurchase of up to US$500 million of common stock and the company is “currently exploring alternatives for timely execution”, it noted.
CRL had previously repurchased around 11 million shares under a prior US$600 million stock repurchase authorisation and had some 66.3 million shares of common stock outstanding as of 15 July. This programme, with a remaining balance of around US$145 million, has now been cancelled.
The decision to authorise a new stock repurchase plan reflects the board’s “belief that our stock price is substantially undervalued and also its faith in Charles River’s future prospects”, the company stated. The share prices of both CRL and WuXi have declined significantly since the acquisition agreement was announced.
Opposition to the WuXi acquisition, which critics argued was overpriced and without sufficiently compelling synergies to justify the risks of integrating the two businesses, had hardened in the run-up to the shareholder votes. Leading agitator JANA Partners made a final plea to CRL shareholders on 29 July, shortly before the deal was cancelled.
Its main objections, as previously stated, were that:
- the acquisition price was “excessive and relies on highly aggressive assumptions to value WuXi”;
- the claimed revenue synergies were “highly speculative” and the strategic benefits “questionable”;
- CRL had a poor track record of integrating past acquisitions and allocating capita;
- even if the claimed benefits were realised, the return on Charles River’s investment would remain inadequate;
- there were better means of creating value, such as share repurchases or strategic alternatives.
Proxy advisory firms such as RiskMetrics and Glass Lewis & Co also came out against the deal, although the picture was muddied by conflicting claims. On 26 July, for example, JANA announced that the ISS/RiskMetrics Group had recommended Charles River shareholders vote against the proposed acquisition, adding that Glass Lewis & Co had previously taken this stance.
On the following day, though, a press release from WuXi PharmaTech claimed RiskMetrics Group’s ISS Proxy Advisory Services had recommended that WuXi shareholders vote for the deal, a position already taken by both Glass Lewis and another proxy advisory firm, Proxy Governance.
More changes to come?
Morningstar analyst Lauren Migliore said the proposed acquisition had “valued WuXi at a very rich multiple, and we pegged this agreement as damaging to Charles River's value from the start”.
The deal “would have seen Charles River take on a massive amount of debt and dip heavily into its cash reserves”, she commented, adding that the share repurchase programme was “a much better use of capital”.
Other commentators have suggested investors may now push for more radical changes at Charles River, such as a shake-up of top management, splitting the business into its component parts or selling off the whole company.
Second-quarter results
CRL reported a 57.6% fall in net income for the second quarter of 2010, while earnings per diluted share (EPS) slid to US$0.22 from US$0.52 in the second quarter of 2009.
Net sales of US$292.1 million for the latest quarter were 5.2% down on the year-ago period, with a 0.9% increase in the Research Models and Services segment offset by a 12.3% decline in Preclinical services.
“We continue to have extensive discussions with our biopharmaceutical clients, who maintain their intentions to build larger, strategic partnerships with us and increase the amount of outsourced activity,” Foster commented.
“However, the timing of these decisions remains unclear and we do not believe that it is imminent. While our results provide reassurance that preclinical demand appears to have stabilised, positive indications such as the increased number of inquiries and improved June bookings are offset by their value, which is lower due to pricing.”
Accordingly, Charles River has lowered its financial guidance for 2010. Net sales are expected to decline by 2-3% in the full year compared with the previous forecast of low single-digit growth. Guidance for EPS is down from US$1.57 to US$1.77 previously to US$0.71 to US$0.81 now.
Reporting on the same day, WuXi PharmaTech confirmed its preliminary estimate that net revenues in the quarter ended 30 June 2010 grew by 21% to US$81.0 million.
Net income for the second quarter, which included one-off costs for the planned CRL deal, was US$13.8 million, towards the upper end of the expected range. Net income was 6% lower than in Q2 2009, whereas in late July WuiXi said it was likely to fall by 9-5% year on year to US$13.3-14.0 million.
Diluted net earnings per American Depositary Receipt fell by 8% from US$0.20 to US$0.18.
WuXi has reconfirmed the full-year guidance for net revenues it gave last month, i.e., up by 19-20% year on year to US$320-325 million versus earlier guidance in the US$310-320 million range.
On a non-GAAP (Generally Accepted Accounting Principles) basis, annual growth in operating income was projected at 10-15% in July, against 0-10% previously. WuXi now expects that growth to be in the range of 15-20%.
The break-up fee of US$30 million from Charles River will be recorded in the third quarter and “more than offsets our transaction-related expenses”, WuXi said.
