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Charles
River – WuXi Transaction FAQ
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Why
are you acquiring WuXi?
CRL and
WuXi are combining complementary businesses with minimal overlap to create the
first fully integrated, global early-stage CRO. This is a
transformative transaction that will allow the combined companies to
dramatically expand their footprint by offering clients “end-to-end” products
and services for preclinical drug development and
testing. Specifically, the transaction will:
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Combine leaders of
chemistry and in
vivo
biology to provide biopharmaceutical clients with more capabilities
from one early-stage partner, which is particularly important as clients
look to rationalize their supplier base and continue to look to make go,
no-go decisions earlier in the drug development process. This
diversifies CRL’s business by adding a “third leg” in chemistry,
which expands CRL’s portfolio upstream in the
development pipeline.
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Drive profitable
revenue growth to enhance CRL’s revenue and margin growth
potential. The transaction also offers CRL the opportunity to
generate additional sales from new high-growth areas of outsourcing that
biopharmaceutical clients have just begun to perform externally,
particularly service biology, DMPK/ADME, formulation, process research,
and bioanalytical chemistry.
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Offer a more
compelling value proposition for clients because one
early-stage partner with more capabilities can provide more flexible
arrangements while reducing delays between pipeline stages, allowing the
company to retain and expand client
relationships.
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Leverage the
increasing strategic importance of China for those clients who view
China as the new frontier for drug development, allowing global
biopharmaceutical companies to take advantage of the cost advantage and
improved access to the Chinese market. It also gives both
companies’ global clients more choice as to where they would like to place
their work.
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Why
did you decide to do this deal now?
We are at
a critical juncture with our clients, who are consolidating and also revising
their drug development models. The outcome of this process is our
clients’ desire to have larger, strategic relationships with a smaller number of
partners who are financially strong, have scientific depth, a global footprint
and are expanding their portfolios to encompass a larger proportion of the drug
development pipeline. We believe that the next 12-24 months will be a crucial
time, during which we have the opportunity to gain significant new business
pursuant to strategic, long-term contracts.
Both we
and WuXi have reviewed the transaction with our top 20 pharmaceutical and
biotechnology clients and the response has been overwhelmingly
positive. They view WuXi’s
chemistry
business as an excellent strategic fit with CRL’s in vivo business; the combined
entity offers them access to more services, expanded access to China and the
prospect for future relationships with the new CRL.
Charles
River’s perspective: During the market downturn, which began in late 2008, we
invested time and resources to reorganize the company’s Preclinical Services
business and realign the global sales force. We have streamlined the
PCS business through workforce reductions and the temporary closure of our
Shrewsbury facility, which will improve capacity utilization and
margins. In addition, we implemented a Six Sigma initiative focused
on improving operating efficiency and implemented an ERP system. As a
result of these actions, Charles River is a stronger and more efficient company,
better positioned to take on this acquisition at this time.
Understanding
our clients’ challenges and the process reengineering they are undergoing, we
believe this is the right time to expand our portfolio in order to enhance our
ability to support their drug development efforts. With a broader
portfolio, we believe we are in a position to increase the level of services we
provide to major clients, particularly at this critical point in
time. We have a strong balance sheet and a unique competitive
portfolio, both of which are extremely important to our clients as they seek
larger, strategic partners.
WuXi’s
perspective: WuXi believes in the fundamental value of a fully integrated
service provider, and is in the early stages of expanding its portfolio
downstream from its roots in chemistry. While WuXi has been
successful in this endeavor on a small scale, joining with Charles River will
accelerate the realization of WuXi’s vision.
Why
is WuXi selling now?
WuXi
shares our views on the timing and benefits of this transaction, and the
advantages that our two companies will have together as the first fully
integrated, global early-stage CRO. WuXi believes that the
combination of the Charles River brand and access to our large sales force and
client base will enable them to achieve their vision of providing services
globally on a much faster schedule than they could achieve on their
own.
Why
is this transaction a good deal for CRL shareholders?
The
multiples are fair and consistent with other transactions in this space, and are
based upon accretion and revenue growth metrics as well as the long-term
strategic rationale of the combination for CRL and its clients.
We
believe that expanding our portfolio with the market-leading provider of
outsourced chemistry services enables us to offer clients more support for their
drug development efforts. Also, the addition of WuXi’s higher growth rate and
more profitable business enhances CRL’s growth rate and
profitability.
Our
internal analysis certainly suggests that this transaction will be positive to
net present value (NPV). In 2011, based on the combined companies’
projections, the combined company is expected to generate revenues of at least
$1.675 billion with a non-GAAP operating margin of approximately
22%. Non-GAAP earnings per diluted share are expected to be at least
$2.70.
What
is the financial impact of the transaction to Charles River?
We expect
that WuXi’s discovery chemistry services will continue to grow in the mid-teens
on a revenue basis for the 2010E-2013E time frame, which will add to CRL’s
standalone growth rate in that period. In addition, the benefits of
being able to offer a more complete portfolio of services, both upstream and
downstream to existing and new clients, should provide revenue synergies which
will enhance the revenue growth rate.
Because
WuXi’s non-GAAP operating margin is higher than CRL’s, the transaction also
improves the combined non-GAAP operating margin. Furthermore, revenue
synergies from cross-selling and a combined sales force, which are incremental
to the expected combined revenue growth rate, should enhance the non-GAAP
operating margin.
What
synergies do you expect as part of the transaction?
We expect
to realize approximately $20 million of cost synergies in 2011. These consist of
the elimination of public company costs, reduced SG&A expenses and further
refinement of the operating infrastructure. In addition, we believe
that there are significant revenue enhancement opportunities
available. We believe we can capture these opportunities as a result
of 1) the more attractive nature of our portfolio, which offers expanded support
for a broader portion of the drug development pipeline, 2) introducing WuXi’s
capabilities to CRL’s mid-tier and government and academic clients (to which
they currently have no exposure), and 3) leveraging our 200-person sales force
to sell WuXi’s services. Currently, WuXi’s senior management group is
its primary sales force, which limits its reach.
How
can you ensure a smooth integration after the WuXi deal closes, given that this
is your biggest deal yet and involves a non-U.S. partner?
We have
already established a corporate level integration team, jointly headed by David
Johst, EVP Human Resources, CAO and General Counsel from CRL and Edward Hu, COO
of WuXi. They have designated nine sub-teams, each of which will address
operational issues. The teams are already meeting, with a goal of
identifying key deliverables which will form the basis of the 100-day plan to be
implemented immediately following the close.
In
addition, we will use the services of one of the two leading global strategic
management firms to assist us with the integration to ensure that we achieve the
expected cost and revenue synergies outlined above.
With a
shared commitment to both clients and employees, Charles River and WuXi have
very similar corporate cultures. The two companies share other
similarities as well: both companies are leaders in their fields and have
unparalleled scientific depth. In fact, WuXi employs nearly 2,000
chemists, the largest number in the industry. We have overlap in our
top clients, which include most of the large pharma and biotech companies, but
very little overlap in our service businesses.
WuXi is
well-versed in operating a public company and understands the requirements well.
They are NYSE-listed, utilize “Big 4” auditors and most of their senior
management team was educated in the U.S. and had lengthy, successful careers in
the U.S. pharmaceutical industry. SOPs and client communications are
written in English, simplifying the process of combining the two
companies. These characteristics will play an important role in
executing a smooth integration, creating an extremely skilled combined employee
base.
Who
from WuXi will join the combined company’s management team?
The
following top WuXi executives will join CRL’s management team and have
employment agreements for a 3-year period:
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WuXi
Chairman and Chief Executive Officer Ge Li, PhD, will join CRL as
Corporate EVP and President, Global Discovery and China Services. He will
also join the CRL Board, along with two additional directors chosen by
WuXi.
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WuXi
Chief Operating Officer Edward Hu will join CRL as Corporate SVP and
General Manager, Global Discovery and China
Services.
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WuXi
Chief Scientific Officer Shuhui Chen, PhD, will join CRL as Corporate SVP
and General Manager, Chemistry Services and Chief Scientific Officer,
China.
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WuXi
Chief Manufacturing Officer Suhan Tang, PhD, will join CRL as Corporate VP
and General Manager, Manufacturing
Services.
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Safe Harbor Statement: This
document includes “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements may be
identified by the use of words such as “anticipate,” “believe,” “expect,”
“estimate,” “plan,” “outlook,” and “project” and other similar expressions that
predict or indicate future events or trends or that are not statements of
historical matters. These statements are based on current expectations and
beliefs of Charles River Laboratories (“Charles River”) and WuXi PharmaTech
(Cayman) Inc (“WuXi”), and involve a number of risks and uncertainties that
could cause actual results to differ materially from those stated or implied by
the forward-looking statements. Those risks and uncertainties include, but are
not limited to: 1) the possibility that the companies may be unable to obtain
stockholder or regulatory approvals required for the combination; 2) problems
may arise in successfully integrating the businesses of the two companies
(including retention of key executives); 3) the acquisition may involve
unexpected costs; 4) the combined company may be unable to achieve cost and
revenue synergies or achieve potential revenue growth and non-GAAP margin
expansion; 5) the businesses may suffer as a result of uncertainty surrounding
the acquisition; and 6) the industry may be subject to future regulatory or
legislative actions and other risks that are described in Securities and
Exchange Commission (“SEC”) reports filed or furnished by Charles River and
WuXi.
In
addition, these statements include the combined financial outlook of Charles
River for 2011 and anticipated use of cash flow, the availability of funding for
our customers and the impact of economic and market conditions on them
generally, the anticipated strength of our balance sheet, the effects of our
2009 and 2010 cost-saving actions and other actions designed to manage expenses,
operating costs and capital spending, and to streamline efficiency, and the
ability of the Company to withstand the current market conditions.
Forward-looking statements are based on Charles River’s current expectations and
beliefs, and involve a number of risks and uncertainties that are difficult to
predict and that could cause actual results to differ materially from those
stated or implied by the forward-looking statements. Those risks and
uncertainties include, but are not limited to: the ability to successfully
integrate the businesses we acquire; the ability to successfully develop and
commercialize SPC’s technology platform; a decrease
in
research and development spending, a decrease in the level of outsourced
services, or other cost reduction actions by our customers; the ability to
convert backlog to sales; special interest groups; contaminations; industry
trends; new displacement technologies; USDA and FDA regulations; changes in law;
continued availability of products and supplies; loss of key personnel; interest
rate and foreign currency exchange rate fluctuations; changes in tax regulation
and laws; changes in generally accepted accounting principles; and any changes
in business, political, or economic conditions due to the threat of future
terrorist activity in the U.S. and other parts of the world, and related U.S.
military action overseas. A further description of
these risks, uncertainties, and other matters can be found in the Risk Factors
detailed in Charles River’s Annual Report on Form 10-K as filed on February 19,
2010 and Quarterly Report on Form 10-Q as filed on April 29, 2010, as well as
other filings we make with the SEC.
Because
forward-looking statements involve risks and uncertainties, actual results and
events may differ materially from results and events currently expected by
Charles River and WuXi. Charles River and WuXi assume no obligation and
expressly disclaim any duty to update information contained in this filing
except as required by law.
Additional Information: This
document may be deemed to be solicitation material in respect of the proposed
combination of Charles River and WuXi. In connection with the proposed
transaction, Charles River has filed a preliminary proxy statement and will file
a definitive proxy statement with the SEC. The information contained in the
preliminary filing is not complete and may be changed. Before making any voting
or investment decisions, investors and security holders are urged to read the
definitive proxy statement when it becomes available and any other relevant
documents filed with the SEC because they will contain important information.
The definitive proxy statement will be mailed to the shareholders of Charles
River seeking their approval of the proposed transaction. Charles River’s
shareholders will also be able to obtain a copy of the definitive proxy
statement free of charge by directing a request to: Charles River Laboratories,
251 Ballardvale Street, Wilmington, MA 01887, Attention: General Counsel. In
addition, the preliminary proxy statement is and the definitive proxy statement
will be available free of charge at the SEC’s website,
www.sec.gov. Shareholders may also access copies of the documents
filed with the SEC by Charles River on Charles River’s website at
www.criver.com.
Charles
River and its directors and executive officers and other members of management
and employees may be deemed to be participants in the solicitation of proxies in
respect of the proposed transaction. Information regarding Charles River’s
directors and executive officers is available in Charles River’s proxy statement
for its 2010 annual meeting of shareholders, which was filed with the SEC on
March 30, 2010. Information regarding the persons who may, under the rules of
the SEC, be considered participants in the solicitation of Charles River
shareholders in connection with the proposed transaction is set forth in the
preliminary proxy statement filed with the SEC.
This
document does not constitute an offer of any securities for sale or a
solicitation of an offer to buy any securities. The Charles River shares to be
issued in the proposed transaction have not been and will not be registered
under the Securities Act of 1933, as amended (the “Securities Act”), and may not
be offered or sold in the United States absent registration or an applicable
exemption from registration requirements. Charles River intends to issue such
Charles River shares pursuant to the exemption from registration set forth in
Section 3(a)(10) of the Securities Act.
May
27, 2010
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