Drug R&D Acquisitions in China Kick off

The foreign companies began to eye on the Chinese domestic companies engaged in drug research and development (R&D) and a wave of acquisitions kick off.

On April 26, the largest case of foreigner’s acquiring Chinese drug company emerged out. The US largest drug R&D company – Charles River Laboratories International (CRL), acquired Wuxi AppTech Inc. with 1.6 billion US dollars.

CRL was founded by James C. Foster’s father in the 1940s. Then under the leadership of James C. Foster, the company is developed into a company with the income of 1.2 billion US dollars and 9,000 employees all over the world.

Wuxi AppTech is a company founded 10 years ago. It specializes in drug R&D outsourcing and the company’s annual income is 270 million US dollars. This acquisition means that Wuxi AppTech’s outsourcing drug R&D has come into the notice. In addition, the new round of foreigners’ acquiring Chinese drug R&D companies has already kicked off, which will bring about profound influence over the global pharmaceutical outsourcing industry chain.

On and Out of Stage of Drug R&D Stars

Wuxi AppTech invented the “Chinese style” of drug R&D outsourcing. Now this pattern has become a sample for the Chinese drug R&D companies. Doctor Ning, vice president of Nanjing-based Genscript Corporation – the largest biopharmaceutical R&D outsourcing company in China – said: “In order to save the cost, the large foreign drug companies downsize the engagement of drug scientists. Instead, they have the R&D teams from Wuxi AppTech take R&D work.” The main reason for Wuxi AppTech’ success is its leading place in intensive drug R&D strictly following the international standards.

Wuxi AppTech divides their R&D staff into different teams based on the foreign companies they work for, like Merck Team, Pfizer Team and so on. It also signs years-long outsourcing contracts with these companies. During their cooperation, the R&D teams become the “outer brains” of these big international drug companies and keep in touch with the R&D staff of these companies through telephones and emails. Tests are conducted step by step as required. Xiong Wei, former vice general manager of Chinese largest clinic research company – Excel PharmaStudies, Inc. – said that Wuxi AppTech is first drug R&D company in China to be engaged in the “outsourcing of R&D teams”.

According to the report from Wuxi AppTech, 18 of the Top 20 drug companies in the world have become the clients this company. Its 2009 financial report said that its operation income was 270 million US dollars and gross profit reached 108.3 million US dollars.

On May 6, 2010, Li Ge, founder of Wuxi AppTech, said that the CRL’s acquiring Wuxi AppTech will expand Wuxi AppTech’s business from the drug R&D to clinic research. That’s just what he expects. By then, the new company will realize the annual income of 1.5 billion US dollars and employ 12,000 employees. After the acquisition, Li Ge will take the post of the new company’s vice executive president and president of Global R&D and China Service.

Intensive Actions of Foreign Capital

Before the acquisition of Wuxi AppTech, the largest case of foreigner’s acquiring Chinese drug companies is Germany-based Bayer Group’s acquisition of Topsun Group’s OTC business. On March 4, 2008, the two parties declared that Bayer Group spent 1.264 billion yuan (USD 185.2 million) making the deal. But in the years before and after this case, no news showed that the foreign investors had a crush on the Chinese large drug companies. A veteran in Chinese drug industry said that the there are actually quite a few large-sized drug companies in China. The foreign large drug companies have strong R&D capability and can launch a dozen of new drugs every year. In comparison, the Chinese companies can only develop one or two kinds of new drugs every year. Several years ago it was even haunted by the lack of R&D power.

Gao Zhan, former general manager of Bayer (China), was once engaged in the drug R&D industry. In his opinion, CRL is bullish on Wuxi AppTech’s pattern as well as the cheap research force in China. If building a new company in China to compete with Wuxi AppTech, it will cost a lot of money and time and the risk is huge. In comparison, the acquisition is much easier.

“China has become an important battle field for the outsourcing industry. But most of the companies in China are only engaged in the production with small profits. Wuxi AppTech’s advantage lies in its role in R&D, which could bring it a lot more profits,” said an analyst.

Outsourcing the drug R&D can save the cost. Firstly, it can reduce the labor cost. In the USA, employing a drug specialist costs 10,000 US dollars per month. In China, the monthly salary for a drug R&D worker with doctor degree is 10,000 to 12,000 yuan (USD 1.46 thousand to 1.75 thousand); the worker with master degree is paid 5,000 yuan (USD 732.46) per month and monthly salary for the worker with bachelor degree is 3,200 yuan (USD 468.8). According to the statistics, more than 35% of the drug companies in the world outsourced all or part of its R&D section to the other companies in 2007. The survey of Frost & Sullivan showed that the value of drug R&D outsourcing market exceeded 38.4 billion US dollars in 2004 and it increased to 43 billion US dollars last year.

In fact, the acquisition of Wuxi AppTech is not an isolated case. At the end of 2009 there were two large-sized acquisitions made by foreigners in the Chinese drug R&D industry. Last December, the global third largest contract research organization (CRO) – PPD acquired BioDuro LLC in China with the cost of 77 million US dollars. This acquisition also attracted former global research president of Roche to this company. Before that, PPD also acquired the largest CRO in China – Excel PharmaStudies, Inc.

However, these two cases were not as influential as the one of Wuxi AppTech. “The global drug R&D outsourcing market is changing. A large amount of orders are transferred into China, India and some other developing countries. These drug R&D giants, which never got related with the developing countries before, are now striving to get into the markets of China and India,” said Xiong Wei. The foreign investors are reviewing the Chinese pharmaceutical market and they’ve found that the R&D outsourcing is a big gold mine. Therefore, more big acquisitions will happen in the future.

“I’ve gone through the sale of Excel PharmaStudies, Inc. Now I have to endure the pain of selling Wuxi AppTech. But those things are not bad. At least it has proved that the Chinese drug R&D ability has been acknowledged by foreigners and they believe that the top Chinese drug R&D companies are worth acquiring,” said Xiong Wei.