Steve Snyder06.01.10
I knew something was up when my Blackberry started beeping with incoming email on a Sunday night. Charles River Laboratories (CRL) will acquire WuXi PharmaTech for $1.6 billion! Wow, now that is an acquisition! The deal is projected to close in the fourth quarter of 2010. Because this is such a significant transaction, I decided to explore what this deal means to these companies, to outsourcing customers, and to the preclinical outsourcing industry overall.
What Are the Benefits to Charles River?
What Are the Benefits to WuXi?
What Challenges Will CRL and WuXi Face?
Integration Merging the cultures of two companies is difficult enough but this transaction will be significantly more challenging due to the cultural and language differences between the U.S. and China. Charles River encountered integration challenges when it acquired the Inveresk sites in Montreal and Scotland. It is likely that those integration efforts are still ongoing, and now the WuXi integration will be added to the "to do" list. The good news about the WuXi acquisition is that it likely has given Charles River access to additional large pharma clients. The bad news is that large pharma companies can be very demanding in terms of the type and quality of services that they want from a CRO provider. Operational integration is very important to large pharma clients because they don't want their drug development data package to appear like it came from multiple companies when they were only dealing with a single entity. Many of these clients have the expectation that protocol and report formats look similar. Furthermore, clients prefer consistent standard operating procedures across CRO sites. Multi-site standardized procedures suggest sound operational leadership and they remove technical variability, which could confound research results. Operational integration helps to provide customers with the confidence that the CRO has its operations under control. Integration of this magnitude will require several years of effort.
The Economy The preclinical CRO industry continues to be mired in an extended period of slow customer demand. Covance recently announced that it will lay off 200 and cited a flat demand for toxicology services from the fourth quarter of 2009 through the first quarter of 2010 as reasons for these actions. In announcing the WuXi acquisition, Charles River also released first quarter results for 2010 that showed that its preclinical businesses achieved lower revenue when compared to the same period in 2009 . . . and 2009 was a real slow year for customer demand. In 2009, Charles River laid off staff at least three times. In 2010, Charles River announced the closure of its Shrewsbury, MA preclinical facility and recently announced the departure of a senior member of its management team. These challenges are not exclusive to Charles River. The problem is that integration efforts cost time and money. Integrating two companies is challenging in the best of times, so these current economic struggles just magnify this challenge.
Capacity Additional capacity for preclinical toxicology came on-line in the CRO industry in 2008 just as customer demand declined. Since then, Charles River announced the closure of facilities in Redfield, AR and Shrewsbury. Now in 2010, there seems to be a slow increase in customer demand. Some smaller CROs have seen improved capacity utilization while many larger CROs still have open space. With the acquisition of WuXi, Charles River will acquire additional preclinical toxicology capacity in China beyond what it already had prior to the acquisition. It is widely known in the scientific community that WuXi's toxicology capabilities in China are still under development and not yet fully in "production mode." Accordingly, Charles River is now faced with a few additional challenges. First, the WuXi toxicology capabilities need to be further developed from a work in progress to a viable commercial operation. This requires time and money. Secondly, when a CRO has multiple sites that offer preclinical toxicology, there needs to be a mechanism of leadership in place to make sure that sites in the same company don't compete with each other. Finally, multi-site CROs need to optimize capacity utilization across all of their toxicology facilities. As noted before, research facilities cost money whether the capacity is utilized or not. Despite recent facility closures, there is still significant open preclinical toxicology capacity in North America. Will clients want to place work in China when there is capacity in North America? Will the price advantages for placing toxicology work in China shrink due to integration and infrastructure costs? On the plus side, perhaps the addition of WuXi's manufacturing and chemistry services will help to temper the slow toxicology market until customer demand in this segment improves.
Leadership Who will oversee this conglomerate? Charles River's chief executive officer will manage the company and both companies will contribute business leaders to the new venture but business leaders aren't always the best operational leaders. With the recent departure of a member of Charles River's senior management team, many regard this as a loss of significant operational expertise. Some in the financial sector have noted Charles River's past challenges with acquisitions, so it remains to be seen how effective the new management team will handle this expanded business.
Trust This was an issue before the acquisition and it will remain after the transaction is completed. There continue to be concerns about intellectual property issues in China. Furthermore, where manufacturing and chemistry services have specific endpoints, toxicology results are more subjective. Will clients trust the quality and validity of results that are generated from this business unit? Will the Chinese and American management members develop the trust and the business relationships to become a cohesive management team?
"One-stop shopping" Many preclinical CROs offer a continuum of services that span many drug development activities. The option to use a single outsourcing vendor ("one-stop shopping") is a sound business strategy as customers are passed from one service to another within one CRO. Charles River's acquisition of WuXi will now provide exposure to customers earlier in the drug discovery phase, which presents the opportunity to leverage these customers to later use their preclinical drug development and Phase I clinical capabilities. There is one key challenge with the "one-stop shopping" strategy: just because a CRO offers multiple services, it doesn't necessarily mean that it excels at all of those services. In my opinion, this is true for all multi-service preclinical CROs. Because of this, some customers may pick and choose services from multiple CROs. This especially seems to be a popular vendor strategy among large pharma companies that have the resources to manage multiple outsourcing relationships. Knowing this, Charles River, just like all other multi-service CROs, will be challenged selling the value of "one-stop shopping" to the customer community.
How Will the WuXi Acquisition Impact Preclinical Outsourcing Customers?
If you are a client of Charles River or WuXi, you should be watching to see if the new company can execute its strategy and overcome the challenges noted above. Knowing that these companies will be busy with integration initiatives while concurrently conducting your preclinical research, here are some performance indicators that you can monitor:
While these performance indicators can help customers to determine the effectiveness of merging Charles River and WuXi, I hasten to point out that these same indicators measure the effectiveness of all other preclinical CROs as well. Furthermore, if someone should be slow to return a telephone call, that doesn't mean that the entire Charles River/WuXi deal is a failure. Although minor issues can influence outsourcing decisions, as a customer, you should use these indicators to assess operational trends. Even if you are not a Charles River or WuXi customer, every preclinical CRO has operational challenges and it is likely that some that were described above also apply to your current CRO partner.
What Will be the Impact on the Preclinical CRO Industry?
On paper, the WuXi acquisition appears to be a great strategic move based on the aforementioned benefits. Will this transaction stimulate more consolidation in the industry? Prior to this announcement, Ricerca had acquired assets from MDS Pharma that will provide additional discovery and preclinical toxicology services. Rumors abound regarding other acquisitions. All of this activity leads to the question: "In the preclinical CRO industry, is bigger better?" We are now seeing that as customer demand improves, capacity seems to be filling up at smaller CROs but larger CROs continue to lag in space utilization. In an earlier column this year, I wondered if the preclinical outsourcing industry is now sagging under the weight of maintaining the same infrastructure that the pharmaceutical industry is jettisoning by embracing strategic outsourcing. If we look again at the history of the pharmaceutical industry, years of mergers and acquisitions were ultimately followed by layoffs and the divestiture of assets. Ironically, this is what Charles River was doing prior to the announcement of the WuXi acquisition. Was this a strategic move on the part of Charles River or was it a move of desperation? In the end, it really doesn't matter. Preclinical CROs are judged by their operational performance. Charles River and WuXi have taken the first steps toward integrating the two companies on paper and sharing their vision for the future. After the acquisition dust settles, customers will only be interested if this new CRO can do what it says it can do and do it well . . . just like their expectations for any other preclinical CRO.
Steve Snyder is a consultant with more than 25 years of experience in preclinical toxicology as an outsourcing customer and provider. He can be contacted at info@outsource-support.com.
What Are the Benefits to Charles River?
- Charles River significantly expands its presence in China beyond its ongoing initiatives in Shanghai.
- Charles River acquires WuXi's manufacturing and chemistry operations, which expands Charles River's existing service offerings. Charles River can now offer client services from chemical synthesis through Phase I clinical trials.
- Charles River gains additional drug safety evaluation capacity in China.
- Charles River expands its customer base since there reportedly is little overlap between Charles River's and WuXi's client lists.
- The China operations provide an opportunity for Charles River to expand margins while driving revenue growth.
- Creates a global CRO that can offer "one-stop shopping" for early stage drug discovery and development activities.
What Are the Benefits to WuXi?
- Integrating with Charles River's services expands the services that WuXi can offer to its existing customers.
- Although already successful, affiliation with the Charles River brand can only improve WuXi's global visibility.
- Access to Charles River's salesforce should help drive revenue growth.
- Provides global pharmaceutical companies with access to services in the China market.
What Challenges Will CRL and WuXi Face?
Integration Merging the cultures of two companies is difficult enough but this transaction will be significantly more challenging due to the cultural and language differences between the U.S. and China. Charles River encountered integration challenges when it acquired the Inveresk sites in Montreal and Scotland. It is likely that those integration efforts are still ongoing, and now the WuXi integration will be added to the "to do" list. The good news about the WuXi acquisition is that it likely has given Charles River access to additional large pharma clients. The bad news is that large pharma companies can be very demanding in terms of the type and quality of services that they want from a CRO provider. Operational integration is very important to large pharma clients because they don't want their drug development data package to appear like it came from multiple companies when they were only dealing with a single entity. Many of these clients have the expectation that protocol and report formats look similar. Furthermore, clients prefer consistent standard operating procedures across CRO sites. Multi-site standardized procedures suggest sound operational leadership and they remove technical variability, which could confound research results. Operational integration helps to provide customers with the confidence that the CRO has its operations under control. Integration of this magnitude will require several years of effort.
The Economy The preclinical CRO industry continues to be mired in an extended period of slow customer demand. Covance recently announced that it will lay off 200 and cited a flat demand for toxicology services from the fourth quarter of 2009 through the first quarter of 2010 as reasons for these actions. In announcing the WuXi acquisition, Charles River also released first quarter results for 2010 that showed that its preclinical businesses achieved lower revenue when compared to the same period in 2009 . . . and 2009 was a real slow year for customer demand. In 2009, Charles River laid off staff at least three times. In 2010, Charles River announced the closure of its Shrewsbury, MA preclinical facility and recently announced the departure of a senior member of its management team. These challenges are not exclusive to Charles River. The problem is that integration efforts cost time and money. Integrating two companies is challenging in the best of times, so these current economic struggles just magnify this challenge.
Capacity Additional capacity for preclinical toxicology came on-line in the CRO industry in 2008 just as customer demand declined. Since then, Charles River announced the closure of facilities in Redfield, AR and Shrewsbury. Now in 2010, there seems to be a slow increase in customer demand. Some smaller CROs have seen improved capacity utilization while many larger CROs still have open space. With the acquisition of WuXi, Charles River will acquire additional preclinical toxicology capacity in China beyond what it already had prior to the acquisition. It is widely known in the scientific community that WuXi's toxicology capabilities in China are still under development and not yet fully in "production mode." Accordingly, Charles River is now faced with a few additional challenges. First, the WuXi toxicology capabilities need to be further developed from a work in progress to a viable commercial operation. This requires time and money. Secondly, when a CRO has multiple sites that offer preclinical toxicology, there needs to be a mechanism of leadership in place to make sure that sites in the same company don't compete with each other. Finally, multi-site CROs need to optimize capacity utilization across all of their toxicology facilities. As noted before, research facilities cost money whether the capacity is utilized or not. Despite recent facility closures, there is still significant open preclinical toxicology capacity in North America. Will clients want to place work in China when there is capacity in North America? Will the price advantages for placing toxicology work in China shrink due to integration and infrastructure costs? On the plus side, perhaps the addition of WuXi's manufacturing and chemistry services will help to temper the slow toxicology market until customer demand in this segment improves.
Leadership Who will oversee this conglomerate? Charles River's chief executive officer will manage the company and both companies will contribute business leaders to the new venture but business leaders aren't always the best operational leaders. With the recent departure of a member of Charles River's senior management team, many regard this as a loss of significant operational expertise. Some in the financial sector have noted Charles River's past challenges with acquisitions, so it remains to be seen how effective the new management team will handle this expanded business.
Trust This was an issue before the acquisition and it will remain after the transaction is completed. There continue to be concerns about intellectual property issues in China. Furthermore, where manufacturing and chemistry services have specific endpoints, toxicology results are more subjective. Will clients trust the quality and validity of results that are generated from this business unit? Will the Chinese and American management members develop the trust and the business relationships to become a cohesive management team?
"One-stop shopping" Many preclinical CROs offer a continuum of services that span many drug development activities. The option to use a single outsourcing vendor ("one-stop shopping") is a sound business strategy as customers are passed from one service to another within one CRO. Charles River's acquisition of WuXi will now provide exposure to customers earlier in the drug discovery phase, which presents the opportunity to leverage these customers to later use their preclinical drug development and Phase I clinical capabilities. There is one key challenge with the "one-stop shopping" strategy: just because a CRO offers multiple services, it doesn't necessarily mean that it excels at all of those services. In my opinion, this is true for all multi-service preclinical CROs. Because of this, some customers may pick and choose services from multiple CROs. This especially seems to be a popular vendor strategy among large pharma companies that have the resources to manage multiple outsourcing relationships. Knowing this, Charles River, just like all other multi-service CROs, will be challenged selling the value of "one-stop shopping" to the customer community.
How Will the WuXi Acquisition Impact Preclinical Outsourcing Customers?
If you are a client of Charles River or WuXi, you should be watching to see if the new company can execute its strategy and overcome the challenges noted above. Knowing that these companies will be busy with integration initiatives while concurrently conducting your preclinical research, here are some performance indicators that you can monitor:
- Communication Is it effective and timely? Are phone calls and E-mails answered promptly? Do you receive timely updates about your research?
- Quality Does the staff have sufficient training and experience? Are you pleased with the quality of the data from your study? Are you pleased with the quality of the technical and facility operations? Does the report accurately reflect the study data?
- Regulatory compliance Are you satisfied that all aspects of the preclinical operations meet applicable regulatory guidelines?
- Reports Do you receive draft and final reports by the mutually agreed to designated dates?
- Customer service As a customer, do you feel that you are getting the appropriate service especially based on your experiences with other CROs?
While these performance indicators can help customers to determine the effectiveness of merging Charles River and WuXi, I hasten to point out that these same indicators measure the effectiveness of all other preclinical CROs as well. Furthermore, if someone should be slow to return a telephone call, that doesn't mean that the entire Charles River/WuXi deal is a failure. Although minor issues can influence outsourcing decisions, as a customer, you should use these indicators to assess operational trends. Even if you are not a Charles River or WuXi customer, every preclinical CRO has operational challenges and it is likely that some that were described above also apply to your current CRO partner.
What Will be the Impact on the Preclinical CRO Industry?
On paper, the WuXi acquisition appears to be a great strategic move based on the aforementioned benefits. Will this transaction stimulate more consolidation in the industry? Prior to this announcement, Ricerca had acquired assets from MDS Pharma that will provide additional discovery and preclinical toxicology services. Rumors abound regarding other acquisitions. All of this activity leads to the question: "In the preclinical CRO industry, is bigger better?" We are now seeing that as customer demand improves, capacity seems to be filling up at smaller CROs but larger CROs continue to lag in space utilization. In an earlier column this year, I wondered if the preclinical outsourcing industry is now sagging under the weight of maintaining the same infrastructure that the pharmaceutical industry is jettisoning by embracing strategic outsourcing. If we look again at the history of the pharmaceutical industry, years of mergers and acquisitions were ultimately followed by layoffs and the divestiture of assets. Ironically, this is what Charles River was doing prior to the announcement of the WuXi acquisition. Was this a strategic move on the part of Charles River or was it a move of desperation? In the end, it really doesn't matter. Preclinical CROs are judged by their operational performance. Charles River and WuXi have taken the first steps toward integrating the two companies on paper and sharing their vision for the future. After the acquisition dust settles, customers will only be interested if this new CRO can do what it says it can do and do it well . . . just like their expectations for any other preclinical CRO.
Steve Snyder is a consultant with more than 25 years of experience in preclinical toxicology as an outsourcing customer and provider. He can be contacted at info@outsource-support.com.