Paulson Papers on Investment Case Study Series
A Chinese Pharmaceutical Startup Acquires an American Firm to “Go Global”
June 2016 Paulson Papers on Investment Case Study Series
Preface
or decades, bilateral investment manufacturing—to identify tangible has flowed predominantly from the opportunities, examine constraints and FUnited States to China. But Chinese obstacles, and ultimately fashion sensible investments in the United States have investment models. expanded considerably in recent years, and this proliferation of direct investments Most of the case studies in this Investment has, in turn, sparked new debates about series look ahead. For example, our the future of US-China economic relations. agribusiness papers examine trends in the global food system and specific US and Unlike bond holdings, which can be Chinese comparative advantages. They bought or sold through a quick paper propose prospective investment models. transaction, direct investments involve people, plants, and other assets. They are But even as we look ahead, we also a vote of confidence in another country’s aim to look backward, drawing lessons economic system since they take time from past successes and failures. And both to establish and unwind. that is the purpose of the case studies, as distinct from the other papers in this The Paulson Papers on Investment aim series. Some Chinese investments in to look at the underlying economics— the United States have succeeded. They and politics—of these cross-border created or saved jobs, or have proved investments between the United States beneficial in other ways. Other Chinese and China. investments have failed: revenue sank, companies shed jobs, and, in some Many observers debate the economic, cases, businesses closed. In this sense, political, and national security past investments offer a rich set of implications of such investments. But lessons to learn. the debates are, too often, generic or take place at 100,000 feet. Investment Damien Ma, Fellow and Associate opportunities are much discussed by Director of the Paulson Institute think Americans and Chinese in the abstract tank, directs the case study project. but these discussions are not always anchored in the underlying economics For this case study of WuXi AppTec, we or a realistic investment case. are grateful to James Harter, a talented University of Chicago graduate and The goal of the Paulson Papers on student fellow at the Paulson Institute, Investment is to dive deep into various for his excellent research and continued sectors, such as agribusiness or dedication.
A Chinese Pharmaceutical Startup Acquires an American Firm to “Go Global” Paulson Papers on Investment Case Study Series
Case studies are reconstructed on the case. But they may have gaps and basis of the public record, personal other inadequacies where the record is interviews with participants, and incomplete, facts are murky, or players journalistic accounts. They aim to chose not to share their views. reflect a best reconstruction of the
Cover Photo: WuXi AppTec
A Chinese Pharmaceutical Startup Acquires an American Firm to “Go Global” Paulson Papers on Investment Case Study Series
Timeline
1982 From a basement in Minneapolis, Bonnie Baskin, a PhD in microbiology, launches ViroMed Inc., a medical diagnostic testing firm and the precursor to AppTec Laboratories.
1993 A team including Drs. Ge Li and John J. Baldwin, both PhDs in organic chemistry, establishes Pharmacopeia Inc., a provider of pharmaceutical R&D outsourcing in discovery chemistry.
1999 Li and Baldwin find a Chinese joint venture (JV) partner in Wuxi-based Jiangsu Taihushui Group Company. A skeptical board rejects their proposal.
2000-2001 Li, Baldwin, and three Chinese partners establish WuXi PharmaTech (WX) in Jiangsu province with the backing of Jiangsu Taihushui Group Company, offering combinatorial chemistry services to pharmaceutical companies.
2001 After US-based LabCorp acquires ViroMed’s core diagnostic and cell culturing segments for $40 million, Baskin spins off medical device testing and toxicology R&D outsourcing segments into a new company called “AppTec Laboratory Services.”
2003 AppTec builds a new facility in Philadelphia for bio-pharma manufacturing, biologics safety testing, and cellular therapeutics.
2005 WX accepts a first round of foreign venture capital in preparation for an initial public offering (IPO) on the New York Stock Exchange (NYSE).
2006 WX expands beyond discovery chemistry and establishes its biologics division.
2007 WX lists on the NYSE for $14/share, its stock price doubles within a month.
2008
January WX uses IPO proceeds to purchase AppTec Laboratory Services.
A Chinese Pharmaceutical Startup Acquires an American Firm to “Go Global” Paulson Papers on Investment Case Study Series
June Covance, the US-based contract research outsourcing (CRO) giant, agrees but then reneges on a JV with WX to conduct preclinical CRO services in China.
July WX’s stock price collapses, but private equity giant Warburg Pincus steps in to acquire a minority stake in the company.
September The financial crisis has significant effects on the global biotech industry: over the next three years, fully one quarter of all publicly listed biotech companies either cease to operate or are acquired.
December WX announces it will discontinue bio-pharma manufacturing in Philadelphia, laying off around 100 employees; WX writes down most of the acquisition’s value for accounting purposes.
2010 Charles River Laboratories fails in its $1.6 billion attempted acquisition of WX.
A Chinese Pharmaceutical Startup Acquires an American Firm to “Go Global” Paulson Papers on Investment Case Study Series
Key Players
United States
John J. Baldwin Organic chemist, pharmaceutical industry veteran, and serial entrepreneur; plays a key role in establishing Pharmacopeia and WX
Bonnie Baskin Microbiologist and founder and CEO of ViroMed and AppTec Laboratories
AppTec Laboratory Services Inc. (“AppTec”) Minneapolis-based provider of biotechnology and pharmaceutical research and development (R&D) services outsourcing
Pharmacopeia Inc. (“Pharmacopeia”) Pioneering contract research outsourcing firm based in Princeton, New Jersey
China
WuXi PharmaTech Corp. (“WX”) The first and largest China-based provider of pharmaceutical and biotechnology R&D outsourcing
Jiangsu Taihushui Group Company Chinese conglomerate and early funder of WX, based in Wuxi City, Jiangsu province
Ge Li Organic chemist, founding scientist at Pharmacopeia, and Chairman and CEO of WX
A Chinese Pharmaceutical Startup Acquires an American Firm to “Go Global” Paulson Papers on Investment Case Study Series
Introduction
uring the last week of November closer to 17 to 18 percent, well below 2015, US presidential hopefuls Pfizer’s 25.5 percent effective tax rate Don opposite sides of the political in 2014 and 27.4 percent in 2013. The spectrum, Democrat Bernie Sanders merger would have meant enormous tax and Republican Donald J. Trump, struck savings, considering that the company a rare note of shared outrage. Both paid $3.12 billion and $4.31 billion in candidates were said to be incensed taxes in 2014 and 2013, respectively.2 over the intended merger of drug giants Pfizer and Allergan—a merger that Throughout 2014 and 2015, a flurry valued Allergan at over $160 billion.1 In of similar “tax inversion” deals took March 2016, alleging “tax avoidance,” place across a number of industries, Sanders wrote to the Treasury but news of the Pfizer-Allergan merger Department came as a surprise demanding that it because the Obama block the deal. Administration had only just The announced issued new rules deal would have intended to make been the largest inversions harder pharmaceutical to accomplish and merger in history, less profitable. Once creating the the US Treasury world’s fourth Department largest company Photo: WuXi AppTec released the new by market value, behind only Apple, rules, several large inversion deals were Alphabet (Google), and Microsoft. What actually scrapped, including a $54 billion particularly irked the two candidates deal between two other pharmaceutical was the post-merger plan to relocate giants Abbvie and Shire.3 (Pfizer’s the new company to Dublin, Ireland, the merger ultimately floundered for the home of Allergan. Pfizer, of course, had same reason.4) been based in New York for 166 years. Sanders blasted the deal as an But since Ireland has a much lower “unpatriotic” ploy to evade taxes and corporate tax rate than the United “a disaster for American consumers,”5 States, Pfizer and Allergan were in criticizing Pfizer’s recent employment apparent pursuit of an effective tax rate and research practices and charging for the new company that would be that “Pfizer has slashed its workforce in
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recent years. It has repeatedly cut its just $6.55 billion.8 This meant layoffs— research budget in favor of acquisitions between 2008 and the end of 2013, and other profit-driven maneuvers.” Pfizer shed about 51,500 total jobs.9 Trump echoed Sanders’ sentiment Why does this background matter to on potential job losses, fulminating a Chinese acquisition in the United that “the fact that Pfizer is leaving our States? The answer lies in what it says country with a tremendous loss of jobs about underlying changes in the global is disgusting.”6 pharmaceutical industry.
Other politicians piled on too, including Mega deals like Pfizer-Allergan invariably Democratic presidential frontrunner attract the spotlight and invite political Hillary Clinton, Senate Democratic controversy. Yet Pfizer’s move was leader Harry Reid, and Republican part and parcel of a larger shift in an Senator Orrin Hatch, chairman of the industry that has been slashing its R&D Senate Finance Committee. budgets and workforce for years. For example, AstraZeneca cut some 13,500 In fighting back, Pfizer’s CEO Ian jobs during the same timeframe. Merck Read claimed that synergies and tax shed about 24,000 jobs from 2009 to savings from the deal would allow 2013 following its acquisition of Shering- the two companies to preserve, not Plough.10 Indeed, over a ten-year period shed, their research and development beginning in the early 2000s, the US (R&D) operations in the United States. pharmaceutical industry is estimated The merger, he argued, “allows us to to have laid off a total of more than continue to sustain an investment of 300,000 people.11 approximately $9 billion mainly spent in the United States,” adding, “we have This trend poses different challenges 40,000 combined employees in the from job losses seen in more traditional United States.”7 industrial sectors across the United States. Unlike the outsourcing and But Read’s claim was met with automation of low-skilled jobs in skepticism against the backdrop of manufacturing, for instance, the jobs Pfizer’s historical record and secular disappearing from the pharmaceutical trends in the pharmaceutical industry. sector are well paid and require Pfizer’s last major acquisition had advanced degrees. These are precisely occurred in 2009, when the company the types of high-skilled jobs that have bought Wyeth for $68 billion. Before the been assumed to be “safe” for American merger, in 2007, Pfizer’s R&D spending workers from the twin forces of was $7.8 billion and Wyeth’s around $5 globalization and automation that have billion. By 2013, Pfizer had cut the R&D radically altered some industries and budget of the combined company to regions of the United States.
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How and why, then, did this happen? even prioritizing different strategies Put simply, a paradigm shift in drug across different divisions. discovery and development has caused vast labor force disruption. Unlike The first and most prominent strategy the “Golden Age of drug discovery” has been to “merge and slash,” as was that took place after World War II, manifest in the proposed Pfizer-Allergan the pharmaceutical industry has deal. It involves combining products, experienced stagnant revenues, lower consolidating staff, and acquiring productivity, and higher costs over the new treatments from upstart biotech past two decades. companies reaching the later stages of the drug development process. The postwar period saw remarkable advances in chemistry and biology, The second strategy centers on “open which in turn led to the expansion of innovation.” Drug companies formed the industry and creation of important collaborative partnerships to shrink the new intellectual property (IP). This was divide between academic and industrial a period in which strong linkages were research. Their aim in doing so is to established between business and reduce the cost of drug discovery by government in an pooling the risk of effort to create new Unlike the “Golden Age of drug discovery” failure and eliminating antibiotics and blood that took place after World War II, the duplicative research. plasma products. pharmaceutical industry has experienced That effort led to stagnant revenues, lower productivity, and The third strategy— more R&D financing higher costs over the past two decades. and the focus of and investment, and this case study—is pharmaceutical companies led the way “reverse innovation” centered on the in drug discovery and development, with contracting of research from companies outsourcing playing a very limited role. that once lacked the capabilities to do innovative science but now possess such But as the pharmaceutical industry capabilities at lower cost. approached a “patent cliff”—in other words, where revenues would decline The contract research and contract dramatically as patents expired, allowing manufacturing outsourcing (CRO and competitors to produce at lower CMO) model has emerged as the most prices—and sought to contain R&D costs popular strategy for the industry. in recent decades, companies adopted Rather than do all their work internally, different strategies. These firms relied drug companies have for some time primarily on three methods, with some now outsourced R&D to specialty companies emphasizing one over the companies, most of which are located other and some individual companies in the United States and Western
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Europe and were founded by ex- competitors. More recently, Indian pharma executives and scientists. and Chinese firms have begun moving beyond research outsourcing toward In fact, many of the 300,000-plus jobs local drug discovery and development. that major drug companies cut did not A number of small biotech firms trying disappear entirely; rather, they simply to find novel treatments for diseases moved to CROs and small biotech have sprouted up, especially in China. companies that were developing new treatments in the hopes of one day As domestic Chinese and Indian finding a big pharma firm as buyer. As CROs have grown and matured—and a result, the CRO industry in the United as foreign competitors have built States has grown exponentially. their own operations in those two countries—Asian and US/European Even as the CRO industry expanded operations and strategies appear to in the United States, it has also be converging. For instance, many experienced dynamic change over the Indian and Chinese companies have past 15 years. After a strong start in established joint ventures (JVs) with America, many of the CRO jobs shifted their Western counterparts and built from the United States and Western or acquired operations in the United Europe to India and China, two States and Europe. In similar fashion, countries that became major players in Asian firms have been acquired by drug discovery and development. their US competitors that are eager to expand into China. These two Asian giants have lower costs, relatively educated workforces, One such Chinese company is WuXi and governments eager to strategically PharmaTech (“WX”). Founded in China develop domestic healthcare and in 2001, WX acquired a US-based pharmaceutical industries. Almost every firm, AppTec Laboratories, in 2008 for large CRO and pharmaceutical company $163 million. WX then built on this has capitalized on these factors to shift foundation with numerous subsequent varying portions of their R&D operations acquisitions in the United States, as to one or both countries. well as both successful and failed JVs with US CROs, such as Pharmacopeia Moreover, Indian and Chinese citizens, and Covance. A US firm, Charles educated and/or trained in US and River Laboratories, failed in its $1.6 European universities, have also billion bid for the company in 2010. In returned home to set up their own short, WX’s story captures the rapid CRO/CMO companies. A few of these pace of evolution in the CRO and companies have grown in size and pharmaceutical industries over the past reputation and now rival their Western 15 years.
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WX’s acquisition of AppTec must has yielded both rapid growth and be seen within the context of the consolidation of firms in the CRO dramatically changed landscape of industry. pharmaceutical and biotech R&D and innovation: The R&D paradigm for new For WX, these trends meant that the drugs and treatments has evolved from firm would organically grow its service vertical integration within a single, offerings where it could. Ultimately, large pharmaceutical firm to become WX decided to pursue the AppTec more horizontally linked through acquisition in the United States to partnerships with CROs. Over the past expand in areas that it deemed too two decades, research outsourcing difficult to develop internally. companies have moved to capture This case study explores WX’s history the talent arbitrage opportunity and acquisition of AppTec in 2008. It between the United States and Asia provides an analysis of WX’s spectacular by offshoring many of their testing growth and success in China, the and manufacturing motivations behind operations. WX’s acquisition of AppTec must be seen its decision to invest within the context of the dramatically in the United States, China has been changed landscape of pharmaceutical and suggests some an especially big and biotech R&D and innovation. potential lessons that beneficiary of the can be drawn for growth of the global CRO industry. And investors seeking to target the R&D and in that sense, WX’s investment was innovation realm. not necessarily unique in the context of broader industry dynamics, but At a broader level, the case helps to was significant because it involved a illuminate how economic and market Chinese firm that was the first China- changes have profoundly affected the based CRO to specialize in discovery global drug discovery and development chemistry services. machine responsible for advances in healthcare, pharmaceuticals, and Like all firms in the pharmaceutical government-sponsored research over the industry, WX has had to adapt to last few decades. shifting winds and keep up with technological and economic changes. Key Takeaways The CRO space has become fiercely competitive, as companies have vied The case illustrates several lessons: to expand their service offerings and make more stages of the R&D process • In the past, most attention to available for outsourcing. This race outsourcing from America to lower- to become fully integrated providers cost markets has focused on low-
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skilled manufacturing jobs. But by management’s strategy to gain this case shows that similar trends credibility and respect from the are and will continue to occur in international scientific and business high-skilled industries, including in communities. healthcare research and software programming. The trend towards • Highly technical services can be outsourcing more high-skilled labor difficult to develop organically. That will likely accelerate as universities in is because the procedures, expertise, China and India continue to graduate and customer relationships they large numbers of students across require are substantial and onerous. STEM disciplines. An upstart company such as WX may turn to mergers and acquisitions • Essential to WX’s early success was (M&As) to expand its service its ability to effectively leverage the offerings. work experience and connections of its founders. This enabled it to • Large drug companies have had win business from US and European to adapt to tough macroeconomic clients. As China seeks to expand conditions and globalization, but the its services economy, then, winning proliferation of CROs and biotech trust by leveraging international startups has made it easier than ever educational credentials, professional for a scientist with a promising idea experience, and customer to strike out on his or her own and relationships will continue to be establish a niche. crucial for Chinese firms in their effort to attract global customers. • WX learned that attempts to cross-sell AppTec’s services to • To be branded as an “international” WX’s pharmaceutical clients took company rather than a “Chinese” longer than anticipated. This firm proved to be very important to was particularly true of AppTec’s WX and other Chinese CROs. WX was biologics manufacturing business. keen to brand itself as a reputable, Some reasons included difficulties independent, and international in convincing large, bureaucratic operator. Several of its key decisions, pharmaceutical clients to move such as accepting venture capital (VC) quickly to outsource new functions. money from Fidelity and Singaporean WX’s challenge was greatly banks, choosing to go public in the amplified by deteriorating economic United States rather than in China, conditions—these prompted the and the acquisition of US-based companies to undertake drawn-out AppTec, were deeply influenced strategic reviews of their operations.
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The Great Global Pharma Disruption
or most of the past two centuries, incarnation coming of age during the the pharmaceutical industry nation’s rapid period of industrialization Fhas been concentrated in three and transition to Western medicine advanced markets: the United States, and modern corporate structures in the Western Europe, and Japan. In the interwar years. United States, modern pharmaceutical companies began emerging as early as The World War II effort was a major the late 1800s, many of them starting out catalyst for drug discovery in the United as drug store chains that subsequently States, bringing together businesses and expanded into the supply and production government to create new antibiotics, of drugs and elixirs. Familiar names today blood plasma, and other treatments for such as Pfizer and Bristol-Meyers Squibb the armed forces. Both public spending date back to this period. and private capital were eager to finance drug R&D. In Western Europe the postwar period, traces its own the implementation pharmaceutical of socialized industry to the medicine in Europe evolution and and the proliferation combination of dye, of private health apothecaries, and insurance in chemical suppliers the United over the course of States expanded centuries. But it healthcare was in the late 19th Photo: Flickr/Oliver Dodd access to more century that German and Swiss companies people than ever before. As a result, began entering the US market. As part of the pharmaceutical industry began the wartime policies in the first (1914-18) aggressively marketing new drugs and second (1941-45) World Wars, the US and treatments to patients. No such government confiscated these companies’ marketing existed prior to World War II. US operations and spun them off as independent enterprises, creating Merck This so-called “golden age” led to huge & Co. and Schering-Plough, among others. advances in chemistry, biology, and the expansion of the industry. Such an In Japan, the pharmaceutical industry era was made possible because of the dates back to traditional herbal association between large and productive medicine sellers, with its modern pharmaceutical companies, elite research
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universities training the next generation thought too prevalent to tackle but of scientists, and a federal government is now on course for complete global willing to support innovation. eradication. The biotechnology sector also emerged during this period, which During this period, the United States represented an entirely new research became the world’s most important and discovery business model outside pharmaceutical powerhouse, producing the traditional pharmaceutical industry over half of the world’s drugs. With that could also contribute greatly to research advances in chemistry, biology, human health. and synthetic chemistry, major successes were achieved in helping to control At the same time, pharmaceutical chronic long-term diseases and enable companies began to see that it was people to live longer and healthier lives. increasingly costly to develop new For instance, products such as synthetic entities useful in therapies. Research vitamins, sulfonamides, antibiotics costs were rising, and the time it took following penicillin, and antihypertensive to take innovative science and convert agents began to reach patients and it into therapeutic agents grew longer. changed the approach to treating Drug approval times increased, and cardiovascular disease. existing drug products that had provided the fuel to drive investments in R&D Significant progress was also made gradually ran out of patents. during the 1960s-1980s, when the advent of mechanism-based These trends became a major problem drug design created treatments for because pharmaceutical companies’ diseases such as Parkinson’s and high valuations rise and fall with the cholesterol, and led to breakthroughs in discovery and patent expirations of chemotherapy and oral contraceptives. the new chemical entities (NCEs) used As the HIV/AIDS epidemic caught the to make drugs. Further, governments attention of major governments around in the United States and elsewhere, the world, the period from 1980-2000 which earlier had been very supportive saw tremendous efforts placed on of the pharmaceutical industry, began anti-viral research. In recent years, to withdraw their support as they breakthroughs in anti-viral treatments confronted long-term entitlement and changed HIV/AIDS from an automatic fiscal challenges. As a result, whether death sentence to one that could be the state’s historic support for drug R&D managed through chronic therapy. would persist began to be called into serious question (see Figure 1). Another significant discovery during this period was treatment for River Pharmaceutical companies initially Blindness in Africa, a disease once responded to these headwinds by
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Figure 1. Declining Productivity of Pharmaceutical R&D Spending
Source: WuXi PharmaTech Investor Presentation.12
seeking new technologies to lower the Such actions marked a new era in the overall cost of drug discovery by making employer/employee relationship in the it more productive and reducing the pharmaceutical industry. Previously, there time length of discovery. Innovative had existed what essentially amounted new methods such as computational to a researcher’s lifetime commitment design, combinatorial chemistry, high to a single pharmaceutical company, and throughput screening, macromolecular a belief that such a commitment to the x-ray crystallography, informatics, contract would be honored. genomics, and others were developed for this purpose and became integral Some of those employees, armed with methods for drug discovery today. rich insider knowledge of the industry and the drug innovation process, had By the early 1990s, a number of other ideas. leading pharmaceutical companies also faced patent cliffs as many Changing Business Models patents approached expiration. To cut costs, affected companies offered John J. Baldwin, an organic chemist at early retirement incentives to senior Merck & Co, was one such employee scientists and laid off junior staff. offered an early retirement package.
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As a senior scientist and manager of In the past, a major bottleneck in the Merck Research Laboratories, Baldwin drug discovery process involved the had a productive and distinguished limited number and diversity of available 33-year career that included the chemical compounds. Using traditional development of several path breaking manual chemical synthesis techniques, and profitable drugs. He is the holder a chemist is usually able to synthesize of more than 180 US-issued patents 25 to 50 compounds per year. These and has been inducted into the compounds are screened in order to Medicinal Chemistry Division Hall of select potential leads for drug candidates. Fame. Instead of settling for retirement, however, Baldwin struck out to become Over the years, however, several an entrepreneur. technologies were developed to accelerate the synthesis of chemical During Baldwin’s time at Merck, the compounds, but most of the earlier company released several drugs to methods produced high molecular his personal credit, including two for weight compounds that are generally the treatment of glaucoma, Trusopt considered not useful for oral drugs. and Cosopt. Baldwin also made Pharmaceutical companies prefer low important contributions to a wide molecular weight compounds because range of therapeutic areas, including they are more likely to be effective as cardiovascular medicine with Aggrastat, drugs in tablet or capsule form, tend HIV/AIDS treatment with Crixivan, and to have longer-lasting action, and are played a key role in developing Pepcid, cheaper to manufacture. High molecular a blockbuster drug for heartburn and weight compounds are usually degraded indigestion. Pepcid, of course, went by human digestive enzymes and must on to generate billions in revenue for be administered by injection. Merck and became a widely available over-the-counter drug.13 The techniques Still and Wigler developed, called “Encoded Combinatorial Library As Merck was offering early retirement on Polymeric Support” (ECLiPS), incentives, Baldwin at the same time enabled researchers to quickly generate began exploring other options. He and hundreds of thousands of small molecule some of his peers became interested compounds at a fraction of the cost of in research conducted at Columbia traditional chemical synthesis methods.14 University and Cold Springs Laboratory The new technology unleashed the by scientists Clark Still and Michael H. potential to harness recent advances Wigler, respectively. The researchers in combinatorial chemistry, which were developing techniques in the involved the synthesis of large numbers early-stage drug discovery process that of different chemical compounds by would prove to have market potential. creating all possible combinations of
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a set of chemical components, or the Still and Wigler’s efforts unlocked building blocks of a new drug. These the tremendous potential of “pool compounds can then be tested for and split” for research purposes and potential drug candidates in a process simultaneously reduced the cost and called “high-throughput screening” time required to generate leads for new (see Box). drug candidates. But the technique
Box: Accelerating the Drug Discovery Process
Existing approaches to combinatorial chemistry required inducing huge numbers of chemical reactions. For example, a robotics-based method developed and popularized in the 1980s called “parallel synthesis” needed approximately 111,110 individual chemical reactions to synthesize 100,000 compounds. A newer approach, called “pool and split,” dramatically slashed that number to only 50 chemical reactions to synthesize the same 100,000 compounds.15
“Pool and split” had the potential to drastically cut the labor, time, and capital investment that techniques like parallel synthesis required. However, “pool and split” produced a serious complication: it created a mixture of diverse compounds whose structures all need to be determined to be useful for research. The methods available to do so were slow and labor-intensive. Determining the structure of just one of those 100,000 compounds produced in the mixture could take several weeks of a research scientist’s time.16 Consequently, Still and Wigler’s ECLiPS was the solution to accelerate this process, as it permitted rapid identification of compounds synthesized by “pool and split.”
The first component of the method isolated the individual compounds with a technique called “solid phase synthesis.” Instead of synthesizing the compounds in a liquid solution, the solid phase process synthesized compounds on tiny plastic beads. Compounds are bound to these tiny plastic beads using special linkers. Beads are then washed with solvents to remove byproducts, and individual compounds can then be isolated from a mixture by removing a single bead and breaking the linkage to detach the compound from the bead.
The second component overcame the challenge of identifying the compounds. During each step of the solid phase synthesis process, specific tags are attached to each bead to indicate the chemical reagent and reaction conditions used in that step. By the end of the synthesis process, each bead has accumulated a set of tags that represent all of the building blocks used to create the compound on that build. Using the tags, researchers can then quickly identify the structure of an active compound using the “pool and split” technique. The results are captured and stored in a database for active compounds.
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was so cutting edge and new that was to provide collections of compounds pharmaceutical companies had not and drug development candidates to yet adopted it when Baldwin started pharmaceutical and biotechnology exploring these new methods. Baldwin customers using the ECLiPS technology. and his colleagues believed that The company’s customers would be these advantages were exactly what responsible for the clinical development pharmaceutical companies needed to and eventual manufacture and sale be able to reshape early-stage drug of resulting drugs. Baldwin assumed discovery. the role of Pharmacopeia’s Senior Vice President of Chemistry. In 1993, after reluctantly accepting the early retirement package, Baldwin Pharmacopeia tailored its services to joined several of his Merck colleagues the individual customer’s needs within in an effort to commercialize ECLiPS, three broad frameworks: forming drug including Joseph A. Mollica, the former discovery collaborations, licensing Chairman and CEO of Merck’s JV with libraries, and out-licensing compounds DuPont Chemical Company, John from internal discovery programs. The Chabala, Merck’s former Executive first two are the most important and Director of Basic Chemistry, and Nolan proved to be the most successful. “Drug Sigal, Merck’s former Executive Director discovery collaborations” meant that of Immunology Research. a pharmaceutical company would hire Pharmacopeia to synthesize targeted The group entered into an exclusive and optimized libraries of compounds license agreement with Columbia and conduct high-throughput screening University and Cold Springs for their to identify drug development candidates patent applications covering molecule in the libraries. encoding. Several of Still’s PhD students at Columbia also signed on to the venture, For example, in December 1994 including Ge Li, a Chinese national Pharmacopeia signed its first who had just earned his doctorate in collaborative agreement with Schering- chemistry at Columbia in 1993. Plough, in which Schering-Plough tasked Pharmacopeia with synthesizing and New Startup Formed optimizing libraries of lead compounds that interact with molecular targets In March 1993, the group established related to cancer and asthma. As for Pharmacopeia Inc. in Princeton, New “licensing libraries,” Pharmacopeia Jersey. Unlike traditional pharmaceutical would continuously add to its own set firms, Pharmacopeia had no plans to of internal compound libraries, to which develop, manufacture, and sell its own customers could pay for access. With products. Rather, the company’s strategy access, customers would themselves
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screen compounds for potential drug the desire to obtain maximum patent lead candidates at their own facilities and other protection of their internal using Pharmacopeia’s internal libraries. programs all argued for the more vertically integrated model. As a startup, Pharmacopeia was a unique entrant into the rapidly To convince these very large and emerging CRO industry. At the time, sophisticated clients to take the unusual most CROs primarily served smaller step to outsource parts of the early- biotech companies, and to the extent stage drug discovery process to a third- that they worked with big drug party startup, Pharmacopeia needed companies, it mainly focused on later more than just the impressive ECLiPS stages of the drug development process technology. Ultimately, the reputations, such as preclinical and clinical trials. connections, and achievements of the Pharmacopeia was unusual in that its startup’s management and scientific services were (1) for early-stage drug teams were indispensable factors in discovery and (2) targeted to serve large sealing some significant deals, despite pharmaceutical companies. the lack of industry precedent.
This was a break from historical In fact, the company quickly signed practices, where drug companies up major customers, including conducted early-stage discovery entirely Schering-Plough, Sandoz, Bayer, within their own research departments. and the Japanese pharmaceutical Factors such as the highly proprietary company Daiichi. Its initial success nature of the work, the central led Pharmacopeia to list publicly on importance of the activities to their drug NASDAQ in December 1995—less than discovery and development efforts, and three years after its inception.
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The CRO Boom
he existence of the CRO industry is companies earning hundreds of millions predicated on the simple premise of dollars in annual revenue, such as Tthat certain products, testing, Quintiles, Parexel, and PPD. and services can be more efficiently provided by third parties, even in the Although CROs had existed for decades sophisticated and technology-intensive prior to the proliferation of biotech, they field of pharmaceutical research. had served only a supporting role during the later stages of the drug development During the 1980s and 1990s, CROs process, such as conducting preclinical were riding on the coattails of the and clinical trials in animals and humans. biotech boom. Unlike large and diverse Such trials require complex permitting, pharmaceutical companies, biotech breeding, sales, and upkeep of exotic startups generally have a specific lab animals and finding a sufficient expertise and research focus, such as number of humans with the desired novel lead generation methodologies characteristics for trials. and understanding of a disease’s models The existence of the CRO industry is For a long time, and pathways. They predicated on the simple premise that researchers are generally much certain products, testing, and services can had recognized smaller and may have be more efficiently provided by third parties. the benefits of a predetermined outsourcing some operational lifespan for the company of that type of work to specialized in mind. As such, biotech firms often companies. Not surprisingly, therefore, lack the resources to develop the full many of the oldest CRO companies spectrum of capabilities needed to that existed prior to the biotech boom execute every stage of drug discovery originated in the business of laboratory and development internally, which animals, the most prominent ones being would require significant investments Covance and Charles River Laboratories. in capital expenditure for laboratories, manufacturing, human capital, and other Animal Testing and CROs preclinical and clinical testing capabilities. A young veterinarian named Henry To fill these gaps, biotech firms must Foster founded Charles River outsource services to third parties, Laboratories shortly after the end of and as the biotech industry soared, a World War II. Foster anticipated that all number of CROs were established to the new money being pumped into the serve them and grew into significant Boston/Cambridge area’s elite university
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research laboratories would create amount of global attention and was healthy demand for lab animals. In subsequently dramatized in the best- 1947, Foster had thousands of rat cages selling nonfiction thriller The Hot Zone that he had purchased from a defunct by Richard Preston. Nevertheless, Virginia farm shipped up to a rental by Covance recovered from the crisis and the Charles River in Boston and began continued to grow. By 1998, it had net breeding rats. (Rodents are widely used annual revenue of $732 million.19 in medical research because they have immune systems similar to humans and The New Paradigm: Outsourcing R&D reproduce rapidly.) As market pressure mounted on the From its unremarkable beginnings, pharmaceutical industry in the 1990s, Charles River Laboratories slowly drug companies began outsourcing grew and broadened its services over a small but sizable portion of their the ensuing decades into toxicology, R&D activities to these CROs. By preclinical, and clinical testing.17 It 1997, four years after the founding became a pioneer in commercializing of Pharmacopeia, 37 percent of US transgenics when, in 1987, the company pharmaceutical companies outsourced started selling transgenic mice that had at least some R&D projects. This been gene spliced at the embryo stage translated into about $2 billion—or to produce a particular desired trait.18 10 percent of the US pharmaceutical industry’s total R&D spending in Covance, on the other hand, traces its 1997—a significant portion of their roots back to a grocery store’s basement R&D spending but still less compared to in Seattle, Washington in 1968, where biotech firms.20 a team manufactured equipment used with laboratory animals. Over the years, In Western Europe, the R&D paradigm the company expanded its services to was disrupted earlier, which included include breeding and selling lab animals, both using CROs for preclinical and toxicology testing, preclinical and clinical clinical trials and relocating internal development services, and cell culturing, R&D operations to other markets. For primarily serving the biotech industry. instance, in 1990, as much as three quarters of European pharmaceutical The company gained international companies’ R&D budgets were allocated notoriety in 1989 when primates in its domestically. That proportion had Reston, Virginia testing facility were dropped to under 60 percent by the end found to be infected by the deadly of the decade.21 Ebola virus. Because of the facility’s close proximity to Washington, DC, Government policies, particularly price the incident attracted a tremendous controls on prescription drugs, had
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an impact on the increasing trend of chemistry segment was pulling in $39 outsourcing. Throughout the 1990s million in annual revenue.23 Baldwin, and 2000s, healthcare spending in who by then had taken on greater Western European countries soared, in responsibility as Chief Science and part because the government provided Technology Officer, knew the company partial or total reimbursement for needed a new direction for its discovery the cost of prescription medicines. chemistry segment. At the same time, most governments also resorted to price controls to “As times changed, really the only curtail runaway government spending advantage that Pharmacopeia had in on entitlement benefits that cover selling what had become a commodity prescription drugs. was price and its experience in drug discovery,” Baldwin recalled in an Such policies had the cascade effect of interview.24 hitting company revenues, which led to R&D funding cuts and increasing Making these compounds into libraries pressure to contain drug development is very labor intensive. It is a complex costs. Many European pharmaceutical chemical process performed repeatedly companies ended up shifting sales and with different reagents to produce R&D activities to the United States, different compounds. A researcher where drug prices were still more can easily have 200,000 different market based.22 compounds all in the same pot. Each of those little particles is then encoded While business was heating up for many with coding molecules. This allows for CROs in the late 1990s, Pharmacopeia’s the compound to be identified easily, chemistry discovery business was as the coding molecules are removed, slowing. Within a few years of which tells the researcher what steps Pharmacopeia’s launch, nearly all drug that bead has been exposed to. The companies had adopted theirs or a process requires a great deal of hands- comparable approach to generate large on work, which is expensive. screening collections. What had been deemed cutting-edge technology not so “One obvious solution to the price issue long ago very quickly became a common was to move compound production to basic requirement within every drug a lower-cost environment,” Baldwin discovery organization. added.25 In fact, some drug companies and CROs had already begun pursuing By 2000, Pharmacopeia had grown to this idea, although they worked on 746 employees, about 40 percent of different stages of the drug discovery which were chemists, biologists, and and development process from engineers with PhDs, and the discovery Pharmacopeia’s own specialization.
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In particular, countries in Eastern Europe clinical trial proposals.28 Since all clinical and India had been experiencing an trials require human subjects, this was influx of pharmaceutical companies and an important asset from the vantage CROs. Those two regions had a labor point of CROs and drug companies. pool that was considered skilled relative For most of the 20th century, these to the prevailing wage rates in those advantages were stifled by differences labor markets, creating what has been in disease profiles between the Indian termed “talent arbitrage” opportunities. and Western populations. But, over the Exploiting this potential allowed CROs past two decades, increasingly common and drug companies to reduce R&D “lifestyle” diseases in the West such as spending without sacrificing the quality obesity, diabetes, and lung cancer have of their research. become much more prevalent in India, which has diversified its patient pool into CRO/CMOs and more areas of study. pharmaceutical companies that These advantages shifted R&D turned India into a activities to India hotbed for clinical benefited from trials, as companies lower wages, flocked there. In fewer regulations, 1984, UK-based and cheaper giant AstraZeneca infrastructure such opened an R&D as IT support, and center in Bangalore a large potential Photo: WuXi AppTec to support clinical supply of patients for clinical trials.26 development and trials.29 In 1997, North Moreover, English is widely spoken in Carolina-based CRO Quintiles became India, giving it an edge over other low- essentially the first foreign CRO to enter cost markets with language barriers the market when it began conducting that inhibit communication, which is clinical research. Quintiles grew into the crucial for these types of innovation- largest CRO operation in India, growing driven and knowledge-based firms. to around 700 employees in three cities Studies showed that moving R&D by the mid-2000s.30 to India could save multinationals anywhere between 30-50 percent in India also had a number of successful costs, depending on the service.27 homegrown CROs, as returnees with overseas experience in Western On the regulatory front, India was companies rushed in to set up domestic known, up until recently, as one of the competitors. A prominent example easiest places to obtain approvals for is Biocon—one of the first of these
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firms—which dates back to 1978 when particularly for clinical trials. Since two scientists in Bangalore opened a effective drug testing often requires the makeshift “lab” in the garage of a rented patient population to be genetically and house. They produced an enzyme used racially similar to the intended final to prevent beer from appearing hazy users, clinical trials for certain types and sold it to local brewers. Over the of drugs tend to be conducted in the years, the company moved out of the same region as where the customers garage and entered segments spanning are located. biopharmaceuticals, biologics, and CRO businesses. Today, Biocon is India’s Like India, Eastern Europe also had largest domestic biopharmaceutical cost advantages because patient company by revenue.31 reimbursements were generally significantly lower than in the United Beyond clinical trials, India also emerged States or Western Europe. For instance, as a major player in manufacturing in the early 2000s, compensation for active pharmaceutical ingredients (APIs), volunteers and medical staff for clinical which are commonly referred to as “bulk trials in Western Europe and the United pharmaceuticals.” To cut costs, biotech States was typically around $5,000 firms, followed by pharmaceutical per person. By contrast, it only cost an companies, have been winding down average of $2,000 per person in Bulgaria, their internal API manufacturing and Romania, and Croatia, so potential simultaneously ramping up outsourcing. savings could be considerable.33 For example, in 2009, AstraZeneca announced its intention to withdraw As a result, during the 1990s and early from all API production in favor of 2000s, many leading CROs established outsourcing to CMOs by 2016. At that bases in Hungary, Poland, and the time, the company still manufactured 85 Czech Republic. For example, Quintiles percent of its own APIs.32 opened offices in Bulgaria, Russia, and Croatia, while ICON Group International In addition to India, Eastern Europe and Parexel set up operations in Latvia was also a growth market for CROs, and Lithuania.34
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China Enters the Pharma Outsourcing Game
espite the rapid changes in the The entity they eventually found pharmaceutical R&D landscape, most promising was a state-owned Dearly-stage CROs such as Baldwin’s conglomerate in Wuxi, Jiangsu province remained relatively untouched by the called Taihushui, which owned a diverse outsourcing trend to lower cost markets. array of assets, ranging from beer “Our methodology of encoding to predict breweries to horse racing tracks. structures was so novel,” said Baldwin, “India wasn’t doing anything like this.” Most relevant for Pharmacopeia, however, was that Taihushui also had As noted above, Baldwin did, however, some experience in chemistry-related hire a talented young Chinese chemist manufacturing: the company made named Ge Li at Pharmacopeia. “He and sold green tea extracts to the had just got out of his PhD at Columbia US food industry as an ingredient in where he was a canned products. student of Clark It also helped that Still. Ge Li and I Taihushui was decided, why not very receptive to lower the cost Pharmacopeia’s structure by moving proposal and this hand work to expressed serious China?”35 interest in investing in the US company. With the blessing of Pharmacopeia’s The two men board, Baldwin Photo: Flickr/Gwydion M. Williams returned to New and Li traveled to China in 1999 and Jersey convinced that relocating met with a number of companies Pharmacopeia’s early-stage discovery that they hoped could develop the chemistry to China was both feasible capabilities and acquire the expertise and economical. They recommended to do their type of chemistry and would that Pharmacopeia pursue an alliance be willing to form an alliance with with Taihushui to what was admittedly Pharmacopeia. This was a tall order at a skeptical board. China had yet to the time. After all, the kind of discovery enter the World Trade Organization and chemistry needed for early-stage drug emerge as the economic powerhouse of development did not even exist in today, not to mention that a few of the China, so the two men cast a wide net in board members had negative views on search of potential partners. the China market.36
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Beyond this general skepticism of doing added Hai Mi, a former investor business in China, the company’s board relations representative at WuXi had also changed its primary focus PharmaTech.39 from discovery chemistry outsourcing to molecular modeling and simulation Striking Out on Their Own software for the life sciences and materials research markets. That was Sensing that Pharmacopeia would be because the tech boom of the late ultimately unwilling to take the risk, Li 1990s had led the company’s software and Baldwin decided to take matters business to grow much faster, and it into their own hands. In early 2001, quickly eclipsed the discovery chemistry the two men, along with Chinese segment in total revenue. businessmen Xiaozhong Liu and Tao Lin and a Chinese marketing professional For these reasons the board did not Zhaohui Zhang, established WuXi move forward on Baldwin and Li’s PharmaTech (“WX”) using the founders’ proposal. The question became “what own savings and funding from Taihushui. were we going to do with all this information we had learned [in Wuxi]?”37 Li resigned from his job at Pharmacopeia to become CEO and Baldwin got The two men could not let the idea permission from Pharmacopeia to sit go. With the eventual permission of on the new company’s board. Li’s wife, Pharmacopeia’s board, they traveled Ning Zhao, who had also received her again to China to dig deeper. On that doctorate in chemistry from Columbia, trip, they met with China’s State Food left her job at Bristol-Meyers Squibb and Drug Administration, Taihushui, soon after to join her husband at the and others to determine how much it new venture. would cost to establish an independent discovery chemistry outsourcing WX’s equity was split into three blocks: company. ChinaTechs Inc., Jiangsu Taihushui Group Company, and Baldwin himself. “At that point in time, we decided, ‘all The three parties held 55 percent, 39 right we’re going to set up a company, percent, and 5 percent equity interests and Ge Li is going to go over there and in the new company, respectively. The run it,’” Baldwin recounted. “When ChinaTechs stake was an investment Pharmacopeia wasn’t willing to spread vehicle split between WX’s founders and out to China, we went back to Taihushui other early employees. and did a deal with them.” 38 The founders decided to locate the “[Li] felt that the idea was so compelling company in Wuxi, a city of over six that he had to do this on his own,” million near Shanghai in order to be
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close to Taihushui’s headquarters. The A FTE arrangement, however, requires company received generous support the CRO to assign a dedicated team of from the city government, including scientists to the needs of an individual a very favorable land deal and some customer for a specified duration. The income and sales tax exemptions. customer pays a fixed rate regardless However, it did not take long for WX of the workload, overtime, or how to decide that it would rather move the assignment may change, and the its headquarters into one of the trade agreement generally includes material zones located outside of Shanghai. That’s costs. In general, CROs such as WX exactly what WX did within a year, after would hope to start a relationship with a selling the land it had received from the new customer through FFS assignments. Wuxi government. If the customer is impressed and satisfied, WX would aim to sign them up The startup spent much of 2001 hiring for a FTE agreement. staff, building its facility, and establishing internal processes. In its first year, WX Like most CROs, WX offered very hired 48 employees, 27 of whom held flexible contracts to customers, doctorates. By March generally allowing 2002, WX secured its This kind of flexibility made WX an the termination of first major customer appealing outsourcing partner since it the agreements or Merck & Co., which was “cheap to use and easy to dump.” reduction in the scope incidentally counted of services with little several of Pharmacopeia’s founders to no notice. For the majority of WX’s as alumni. WX’s job was to prepare contracts, customers reserved the right synthetic organic compounds and to unilaterally terminate the contract libraries on a fee-for-service (FFS) basis.40 upon prior notice ranging from 30 to 90 days. This kind of flexibility made WX an The FFS structure is one of two industry appealing outsourcing partner since it standard types of laboratory service was “cheap to use and easy to dump.”41 agreements that WX offers, the other being the full-time-equivalent (FTE) basis. In a twist of irony, WX finally won The FFS agreement is a more flexible its first FTE contract in March 2003 project-by-project contract that does from Pharmacopeia, providing not require a long-term commitment. A Pharmacopeia’s legacy chemistry significant portion of net revenues from business essentially the same service these projects—often structured as a fixed that Li and Baldwin originally proposed price or FFS with a cap—is contingent to the board. Pharmacopeia’s on successful execution. CROs receive management had wanted to avoid proceeds from the customer during or an actual China-based JV but was after the completion of a FFS project. comfortable in contracting out to
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Li’s new team. WX agreed to provide projects that involve the exchange of IP. Pharmacopeia’s clients synthesis of Being the first-of-its-kind China-based combinatorial chemistry templates, discovery chemistry CRO certainly did compound libraries, and individual not make that task any easier. For these compounds. reasons, WX needed to establish the company’s credibility early on through “This alliance enables Pharmacopeia employee and board relationships to offer the (pharmaceutical) industry and direct work experience with timely, high-quality chemistry services pharmaceutical companies and other and products, with US-based scientific potential clients. project management at the highly competitive pricing that offshore Baldwin recalled, “Having several on sourcing provides,” claimed Joseph the board who have broad recognition A. Mollica, the chairman and CEO of in the industry is critical for a new Pharmacopeia, in a press release.42 company like WuXi.”45
In the same press release, Li claimed, Daniel Auerbach, a managing director “By leveraging Pharmacopeia’s synthetic of Fidelity Asia Ventures, one of WX’s expertise and well-honed client first institutional investors, agreed. project management skills with WuXi “The experiences and connections PharmaTech’s state-of-the-art offshore of management are phenomenally synthesis capabilities, I truly believe important. If it weren’t for Ge Li, his we offer our mutual clients the best of credibility, and the credibility of the both worlds.”43 people around him like Dr. Baldwin, he never would have pulled it off. Why? The next year, in 2004, Pharmacopeia Because they’re dealing with IP that’s announced that it would be spinning off borrowed, worked on, and handed back. its software business as Accelrys. At the If that’s ever violated, the company is time, the discovery chemistry business toast. So having the validation of an was more or less breaking even, had incredibly strong international network been outgrown considerably by the and the trust associated with that got software segment, and anticipated WX off the ground.”46 future competition from an expanding array of companies that specialized in WX’s discovery chemistry business grew this business line.44 rapidly, snapping up 12 FTE projects and expanding to 252 employees by the end Not surprisingly, it is difficult for a of 2003.47 Since WX’s labs were located new startup to be taken seriously by far from the client, usually in a different establishment players, such as Pfizer country, WX made additional efforts to and Merck, for complex outsourcing build trust and rapport.
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WX’s scientists would convene routine One area the company explored at meetings and send daily emails and this time was moving into the higher bi-weekly reports to the chemists at value-added aspects of drug discovery. the client companies. The company However, conventional wisdom in held English classes for their lab the pharmaceutical industry deemed technicians and researchers to improve it something of a taboo for a service communications at all levels. An online provider to enter into drug discovery monitoring and reporting system was because it creates competition for the also developed to allow a customer’s company’s own clients. Furthermore, project manager to monitor progress if the service business is already over- through a secure website. stretched, the internal research suffers as capacity is diverted to satisfying In addition, to ensure IP protection, WX the client business. Pharmacopeia had had put in place an infrastructure— experimented with internal research independent labs, to discover and IT, and security sell molecules at services—that a higher price, physically and but had not been operationally terribly successful in separated customer making it work. projects and could be customized for To get around different client these issues, WX specifications and considered setting expectations. up a separate Photo: WuXi AppTec company in China Move Up the Value Chain or Double that would be wholly owned by WX, Down? Baldwin, and one of Baldwin’s former Merck colleagues. The subsidiary For WX, the discovery chemistry would formulate ideas for internal business seemed to be booming as research and then use WX’s chemistry it continued to win assignments and outsourcing services to do much of the turned out high-quality libraries. work. The proposal, however, ran into The company was accruing valuable questions regarding potential legality experience and credibility and looked and logistical challenges and was to be on a solid growth trajectory. abandoned thereafter.48 At this point, the startup began contemplating how to evolve the Subsequently, Baldwin decided to business beyond capturing the cost once again strike out on his own and arbitrage in discovery chemistry. start a biotech company that would
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find promising drug candidates and Rather than pursuing higher value outsource much of the work to WX. In internal discovery, WX decided to 2003, he founded Vitae Pharmaceuticals double down on outsourcing services by in the United States, a clinical stage expanding its capabilities to serve more biotech company focused on discovering areas of the discovery and development and developing novel, small molecule process. The company set its sights drugs for diseases, such as diabetes and on becoming an integrated solutions Alzheimer’s, that represent large market provider, buttressed by a competitive opportunities. Vitae became an important cost structure. “The consensus was, we early customer for WX, paying anywhere will keep putting blocks together until between $1.2-$2.8 million between 2004 we have a wall,” said Baldwin.50 and 2006 for WX’s services.49
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Adapting to Change: Diversification and Expansion
t precisely the moment WX to biotech firms in terms of both scale began forming strategic plans to and variety of offerings. Aexpand services to cover all areas of drug discovery and development, Despite the pressures on the global economic pressures intensified on the industry, US pharmaceutical R&D pharmaceutical industry, creating market spending was still growing rapidly at opportunities for these services (see around 9 percent a year, from $20 billion Figure 2). Pharmaceutical companies in 1997 to $40 billion in 2005.52 The responded by increasing their emphasis increased spending reflected the need on cost control. The market for to plough through mounting difficulties outsourcing services gradually caught up to bring new treatments to patients.
Figure 2. R&D Outsourcing Spending Outgrows Total R&D Spending
Source: Kalorama Information.51
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Figure 3. R&D Spending at Different Stages of the Drug Development Process
Source: WX IPO Prospectus.
Failure rates of potential candidates are as these R&D costs were rising, expiring very high. For example, for every 5,000 to patents, government price controls, and 10,000 compounds tested as a potential competition from generic substitutes drug, only one will receive regulatory continued to cut into revenues and approval and become a new treatment.53 compress the profit margins of pharmaceutical firms. According to Pharma, in 2005 it took an average of 10 to 15 years and Since it can be expensive to hire and approximately $800 million to develop maintain specialized teams whose a drug and bring it to market. This services may no longer be required after includes the capital spent on drug a project is completed, pharmaceutical candidates that failed. The cost of firms could use CROs as effective cost developing and bringing to market a controls for their R&D budgets (see biologic drug—one that is produced Figure 3). In addition, outsourcing could through a cell culture rather than shorten drug development time by as chemistry—was even higher: roughly much as 30 percent, according to a 2004 $1.2 billion at 2005 prices.54 And even Frost & Sullivan study.55
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For all these reasons, R&D outsourcing drug development pipeline, sizing a became a common practice. US plant to maintain maximum capacity pharmaceutical companies outsourced can be a challenge. To reduce risks, just 10 percent of their total R&D companies sought to benefit by spending in 1997, but that rate diverting some of their manufacturing grew to 24 percent in 2001 and 33 to outsourcing firms, which enabled percent in 2005. The proportion of them to manage unexpected surges in pharmaceutical companies outsourcing capacity needs without stranding assets at least some R&D activities increased during slower periods. from 37 percent in 1997 to 70 percent by 2005.56 Components of early- For this reason, in the mid-2000s, the stage drug development, toxicology, pharmaceutical industry was spending preclinical testing, clinical testing, more than $15 billion yearly on regulatory approval preparation, and outsourced manufacturing, formulation, manufacturing were all beginning to be and the packaging of drugs, according routinely outsourced, particularly for to a 2006 report by research firm the more “assembly line” testing and Kalorama Information. It estimated that labor-intensive activities. the market was growing annually at 10 to 12 percent, and that the percentage The pharmaceutical sector also of pharmaceutical companies that followed the biotech industry’s lead in outsourced at least some manufacturing outsourcing primary manufacturing, would grow from 35 percent in 2004 to which includes APIs for approved nearly 50 percent by 2009. This study drugs and chemical intermediates, also predicted that the outsourced as well as secondary manufacturing, manufacturing market would exceed which involves formulation, dosage $17.5 billion in 2006 and would reach form, and packaging manufacturing more than $26 billion by 2011.57 ranging from small clinical amounts to commercial scale. By the early 2000s, In that kind of growth market, CROs pharmaceutical companies’ demand for offering a variety of services could capture outsourced manufacturing was quickly significant revenue synergies and gain catching up to trends already prevalent an edge on the competition. Dedicated in the biotech industry. “procurement groups” in drug companies aimed to match internal research teams’ Historically, the pharmaceutical industry needs with capable CROs/CMOs. To obtain had been inclined to do its own more favorable pricing from CROs/CMOs, manufacturing to maximize their return these procurement groups try to bundle on investment in facilities and capital services whenever possible. Even putting by operating at full capacity. However, aside pricing, if a pharmaceutical client is because of the unpredictability of the pleased with a CRO’s work on one stage
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of the drug discovery pipeline, then compounds (WX’s original services). they are naturally more likely to use Then, with leads identified from them again for other processes such chemical compounds synthesis, the as preclinical trials, clinical trials, and CRO could develop biological assays for manufacturing. drug screening, which involves the use of live animal or plant (in vivo) or tissue Competition Intensifies cell (in vitro) to determine the biological activity of a substance like a drug. This economy of scale dynamic set off a race within the CRO industry to stay The CRO could then be hired to ahead of competitors by expanding perform the drug metabolism and service offerings through organic growth pharmacopeia kinetics (DMPK) and and acquisitions. bioanalytical analysis for elucidation of the compound’s properties. If the To illustrate, a typical case of serving a compound passed that stage, the CRO large pharmaceutical company across could finally be hired to develop the a range of spectrums could start with manufacturing process and formulation a contract to synthesize chemical to produce material for a clinical trial.
Figure 4. Outsourcing Advantages: Greater Flexibility and Capacity
Source: WuXi Pharmatech Investor Presentation.60
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WX’s strategy to “build a wall” of service cost,” Li argued in a 2009 speech to offerings reflected this competitive investors, clients, and competitors landscape. While a number of US CROs at the annual JP Morgan Healthcare had a head start, the talent arbitrage Conference. “We want to continuously opportunity in China gave WX a big build our capability and capacity to potential pricing advantage over its provide a fully integrated service to American competitors. At the time, the help our partners to improve success starting salary for a PhD in the United of discovery and shorten development States was roughly $200,000 a year time. We believe this is the true value but just $23,000 in China, according to from R&D outsourcing.”61 research from UBS.58 And the supply was abundant as Chinese universities By doing so, WX would try to position were pumping out more STEM (science, itself as a “strategic partner” for its technology, engineering, and math) clients rather than just an outsourcing graduates than their US counterparts. service provider. WX would aim to share common goals, engage in joint “I think since day one we realized strategic planning, and experiment with people are going to new business forms be our most valuable By building a wall, WX hoped to evolve with its clients. “The asset … so people ask beyond a cost arbitrage opportunity into idea was that when us how difficult it is an integrated services and global platform. X pharmaceutical to recruit scientists company lays off in China,” said Li, “my answer is that another 5,000 people, WX can go to it’s not that difficult because China them and say, ‘look, we have all of produces 300,000 life science-related these capabilities, give us your business raw talent every year.”59 and we’ll do it for you’,” said Baldwin.62
By building a wall, WX hoped to evolve To reinforce the point, Li explained that beyond a cost arbitrage opportunity “WuXi is trying to become strategic into an integrated services and global partners with a majority of our platform covering small molecules, customers and it’s interesting—because biologics, and medical devices. WX it takes time to gain trust from the believed offering broader capabilities, customer to become strategic partners. combined with its competitive cost I think the more service capabilities you structure, would enhance its value can offer, the more bonded you are with proposition to customers and keep pace your customers and the more likely you with its competition (see Figure 4). can have a strategic relationship.”63
“R&D from WuXi’s point of view is WX recognized that the firm needed far beyond just the arbitrage of labor to move quickly, since it was no longer
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the only company of its kind in China. are typically synthesized in relatively Indeed, WX’s success had attracted small, milligram-size quantities. Before a attention, so new entrants sought to drug candidate can enter preclinical and replicate its model. All of a sudden, clinical trials, kilogram-size quantities WX found itself in the position of an must be synthesized. incumbent even though it had been a mere startup a few years before. The goal of process development is to improve the ease with which At this point in the development of the compounds can be synthesized in these Chinese industry, a number of Chinese larger quantities, typically by minimizing returnees, all with extensive experience the number of steps, scaling up, and in the US and European pharmaceutical determining how to reduce the time and industries, had also set up discovery cost of production. chemistry businesses, such as ShanghaiBio, Pharmaron, and Medicilon. These services were a natural extension These CROs, too, were starting to of the early-stage discovery chemistry broaden their service offerings into that opened the door to CMO services, other areas of drug discovery and which WX began in 2004. The company development as they tried to ride the had entered the offshore CMO market industry trend. against well-established rivals in India. To run the business, WX hired a veteran At the same time, US CROs were in Indian API manufacturing, Jagdish also looking to start new or offshore Sastry, the head of Jubilant Organosys, existing services to China. For example, to develop these manufacturing BioDuro, a CRO based outside of capabilities. Washington, DC, opened a discovery chemistry laboratory in Beijing with WX first leased a temporary facility in 300 employees.64 Indeed, CROs in Taizhou, located in next-door Zhejiang India were also getting in on the game province, and eventually broke ground by expanding their services beyond in 2003 on a permanent 220,000 square- traditional areas in clinical trials and foot manufacturing facility in Jinshan, API manufacturing into discovery a Shanghai suburb, with an initial chemistry. investment of $7.2 million. In 2004, WX announced plans to invest another $12 In 2003, then, WX established process million to expand the facility.65 development services to help customers manufacture their drug candidates WX obtained a loan from Chinese state more efficiently. For instance, the banks to finance the construction, and compounds created for screening in repaid $4.1 million worth of outstanding lead generation and lead optimization debt in 2004. The facility was completed
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in May 2004 and WX terminated its lease analyses to support preclinical and on the Taizhou facility. Facility utilization clinical studies of pharmocokinetics, remained low for a while as WX’s major toxicokinetics, pharmacodynamics, and customers arrived in China to perform immunogenicity. The services analyze audits on whether the facility met strict small-molecule drugs using liquid standards. By 2006, however, these chromatography/mass spectroscopy audits were largely completed and WX and measure biomarker/biologics experienced a surge in manufacturing and antibody immunogenicity revenue, dramatically doubling it from using immunochemistry. A typical the $24 million in 2005.66 bioanalytical laboratory generates hundreds or even thousands of test Like other CMOs, results daily, which WX marketed its must be securely manufacturing stored for long services on a FFS periods. basis. The CMO business has lower Now, having gross margins than developed a rather the laboratory mature discovery services business chemistry business, and its earnings WX decided to tend to fluctuate set its sights on more. This is largely Photo: Flickr/Novartis biologics. After because the shipment of a product clients synthesized compounds with WX, is dependent on the customer’s R&D a natural next step would be to hire WX progress, which can be unpredictable. to study their biological properties, such as levels of acidity in a certain in vitro After starting to integrate process assay, how they perform in vivo, how research with some manufacturing, WX the drug interacts with the metabolism, launched a new vertical in bioanalytical where it is stable, and other factors. services in 2005, bringing onboard Furthermore, if these pharmaceutical a well-known Princeton University companies continued to study and scientist to set up the division. “You tinker with the compounds with a WX have to get the talent before you set up biology department, it would reduce the an offering,” Baldwin noted. “If someone need to ship compounds back and forth at the top is recognized, it’s much easier from China to the United States, making to get interest from customers.”67 for a smoother transition.
Bioanalytical services include At the time, in vivo animal studies in the quantitative and qualitative sample United States were very profitable. A
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major cost of such services is obtaining to provide DMPK, PK/PD modeling, large animal specimens and permitting animal disease modeling, and toxicology for DMPK testing. Two of the most widely services. (Toxicology involves the used large animals for in vivo testing are scientific analysis of the effects of toxic the cynomolgus monkey and the beagle chemical substances, either in vitro, on dog. In the mid-2000s, China was the cultured bacteria or mammalian cells, or biggest supplier of cynomolgus monkeys in vivo, in living animals.) to the United States, and animal testing there did not have the same level of “At that time [2005/2006] we started stigma and regulation that existed in exploring what type of biologics services the United States and India. This was an would be a profitable business in additional advantage for WX. China,” Wong recalled. “In the middle of the 2000s, in vivo testing was very Besides drug testing, biologics were profitable business for CROs. WX had just starting to break out in a big way. built an excellent platform with a Global sales of biologics products very large base of collaboration with reached $76 billion in 2006, and were large US pharmaceutical companies projected to double by 2012.68 Biological in chemistry. These clients, after they CRO services were also generally much synthesized compounds at WX, would higher margin than chemistry services then study their biological properties, and required more highly trained either internally or with another CRO. We researchers to conduct them. Up wanted to capture this business as we until then, these areas were the core knew it could be very profitable.”71 strengths of US CROs, although several Chinese biologics CROs had already Establishing biologics would allow WX been established.69 to capture higher profit margins but it would also be a challenge, as such So WX also began exploring what types services require a higher degree of skill. of biology services would be profitable “Because of the nature and variability in China and decided to start offering of the assay, biologics are definitely a DMPK services in 2006. Li had lured more highly skilled service,” Wong said. Angela Wong, a PhD in pharmacology “Customers need a lot of sorting out and from Baylor University, back to an intensive selection process to pick China in 2005 to head WX’s biologics out a biologics CRO.”72 department.70 WX again saw its cost structure as an Wong had worked at SmithKline, advantage in this area, particularly for Pharmacopeia, and Vitae toxicology on large animals. To house Pharmaceuticals, where she headed the toxicology and DMPK services, WX a team responsible for selecting CROs initially leased and renovated a 13,000
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square-foot facility in Xishan, one of six business unit. So Wong selected an urban districts of Wuxi City and about architect who had designed Merck and 60 kilometers from Shanghai. AstraZeneca’s US toxicology facilities. WX subsequently broke ground on a But with ambitious growth plans in 215,000 square-foot facility in Suzhou, mind, WX decided to instead build a Jiangsu province, with a goal to begin new, state-of-the-art facility for the operations in 2009.73
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Financing Growth and Going Public
lthough WX invested heavily WX spent the initial equity investments in new physical infrastructure, from its founders and Taihushui, ACROs generally can monetize proceeds from the land deal, and loans their investments in R&D and capital with the help of Taihushui to finance expenditure (capex) much faster than the construction of labs and hire biotech and drug companies. Typically, employees. “Ge [Li] didn’t want classic biotech and pharmaceutical startups financing (external capital),” Auerbach are very dependent on VC funding. This of Fidelity Asia Ventures recalled, “in is because these companies make R&D line with his very entrepreneurial investments that most likely will not side, he bootstrapped.”74 By 2002, generate revenue for years, and there is WX had brought in enough clients to a good chance the investment will never operate without any VC money. In fact, be profitable. By contrast, CROs are paid the company did not accept any VC by the project, so investment in its first they can partially four years, except finance their growth for the initial angel through cash flows investment from and take on more Taihushui. debt in the interim. Taihushui had The biggest drag on guaranteed some how quickly a CRO of the loans and can start generating also provided very cash from new favorable unsecured, capex and services Photo: Flickr/Kjetil Ree non-interest bearing, is the wait time for the authorities and and repayable on-demand loans to customer inspections. Before being WX.75 Since WX was paid on a FFS basis, chosen for a project, customers usually the company generated revenue from conduct rigorous due diligence of a the start. The cash flows CROs generate CRO/CMO, including on-site audits and make debt financing feasible, even for referral contacts. Even after signing an a relatively small company. This makes agreement, clients still routinely audit the CRO business model less reliant on and inspect facilities, processes, and outside equity investors than traditional practices to ensure that the CRO is pharmaceutical and biotech firms. meeting both internal standards and complying with regulations in the drug In 2003, the company borrowed $2.5 development process. million, and then another $5.3 million in
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2004 to finance a new headquarters in the money,” said Baldwin, “we wanted the Shanghai Waigaoqiao Free Trade Zone. At recognition.”77 the end of 2005, the company’s total debt outstanding was $14.7 million.76 So WX brought on an investment banker who had raised money for In 2004, WX began negotiating with Pharmacopeia. Given the company’s its initial group of investors to lay the growth and business plan, WX had little groundwork for a public listing. To gain trouble finding institutional investors. traction with international investors WX generated $20.9 million in revenues ahead of an expected initial public in 2004 and was on track to rake in $34 offering (IPO), the company decided that million in 2005 (see Figure 5). it needed to bring in well-known VCs. In addition, its management wanted the WX selected Fidelity Asian Ventures VCs to buy out Taihushui, which was a and two Singaporean banks, UOB and local state-owned enterprise, to avoid TianDi Capital, to take a 28.41 percent the perception of Chinese government stake in the company for $2.21 million. control or influence over the company. The Fidelity fund had been an early “We didn’t actually need the [VC] backer of Alibaba starting in 1999
Figure 5. WX’s Rapid Growth Reflected in its Scientist Headcount
Source: WX Investor Presentation.78
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and was actively investing in China’s Commission and announced that JP healthcare sector. Morgan and Credit Suisse would take WX public on the New York Stock “I first met Drs. Li and Baldwin in Exchange (NYSE). 2003,” recalled Auerbach. “There were comparable [firms] in the US which During the company’s IPO roadshow hadn’t done so well, and there were to investors, WX articulated a vision of discussions about a hybrid model building a company that could transform that was both a service and product pharmaceutical R&D processes by company … There were a variety of providing fully integrated services to [strategy] iterations between 2003 and improve success rates and shorten 2005, during which I was spending an development time. In particular, WX awful lot of time getting to know Dr. Li stressed future growth in the biologics, personally as a human being but also as toxicology, and preclinical testing areas. an entrepreneur, scientist, and visionary. The firm stated that its objective was In the end, the investment thesis was to use proceeds from the IPO to invest pretty straightforward: it was a labor in expanding its service offerings by and quality arbitrage play.”79 growing more organically and exploring strategic acquisitions. The next year, WX decided it was time to raise money for major capex The banks initially proposed pricing WX’s investments. “Dr. Li decided the time shares at $11-$13 per American Depository had come to really crank up and Share (“ADS,” each ADS represented eight do something extraordinary,” said ordinary shares). Due to strong demand Auerbach. In October 2006, WX held from investors, the banks raised the price a Series B financing round and the to $14 per ADS.81 Consequently, WX same three investors bought in for an raised $185 million from the offering, of additional $19.2 million. In February which around $140 million went to the 2007, WX brought in more investors company and the rest to employees and for a Series C round during which it investors selling shares. The company’s raised $54.5 million. Much of the VC stock debuted on the NYSE on August money went into the construction of 9, 2007 at $14 per share.82 Existing VC the Jinshan manufacturing and Suzhou shareholders paid the equivalent of toxicology facilities.80 $2.72 per ADS for their shares; for early investors, a $14 IPO price represented During the first week of July 2007, better than a five-to-one return.83 rumors began swirling in the press that WX was on the verge of an IPO. Later The stock price doubled in just one that month, WX completed its IPO month, raising WX’s market valuation to filing with the Securities and Exchange $1.65 billion. It continued to climb from
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there, reaching an astounding $40 per ballooning of the share in WuXi ADS by mid-October. Given that WX’s PharmaTech has drawn gasps … It would 2006 profits were only $9 million on be hard to exaggerate the enthusiasm $70 million in revenues, this response this suggests.”84 suggested investors were very optimistic on the company’s growth prospects. WX’s IPO success certainly got the industry’s attention, particularly its chief In a short profile of WX in September, Chinese rival ShangPharma, which told The Economist seemed to capture the Reuters in October that the company mood: “Even in the overheated world of and its private equity backer TPG were Chinese IPOs, the listing and subsequent also mulling a public listing.85
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A Good Time to Buy
fter WX’s highly successful IPO, center in Guangzhou, offering process management now faced the development services.86 Achallenge of putting the $213 million in cash on its balance sheet In 2005, Albany Molecular Research to work. One of the pitches WX used (“AMR”), a chemistry-based drug to woo investors for its listing was discovery and development company that it intended to make strategic and one of WX’s fiercest competitors acquisitions and partnerships, in that market, announced it was particularly in areas that would be opening its first R&D lab in India, difficult to build internally. which broke ground in May 2006 in Hyderabad, India. The new facility These plans seemed to comport with raised the company’s scientist general trends in the industry at the headcount in India to around 140, with time: the CRO industry at this point saw a the infrastructure in place to quickly wave of consolidations in both developed double that number.87 In July 2007, and emerging markets. AMR also purchased A key question would After WX’s highly successful IPO, two pharmaceutical be whether WX might management now faced the challenge manufacturing sites now acquire Chinese of putting the $213 million in cash on and additional land and/or Western assets. its balance sheet to work. for expansion in Aurangabad and WX’s European and American Mumbai to compete with WX’s CMO competitors were snapping up business in API manufacturing.88 existing capacity and building new manufacturing and R&D centers in Asia In June 2007—a couple of months prior to to keep their pricing competitive against WX’s IPO—Connecticut-based CRO Aptuit the rapidly growing Chinese and Indian raised eyebrows when it announced competition, as some of the examples the formation of a JV with a brand new below attest. Indian CRO Laurus Labs. Aptuit pledged to pour $100 million into the project. Racing To Compete: Acquisitions and Commenting on the JV, Michael Griffith, Expansions Aptuit’s CEO, acknowledged the heat Western-based CROs were feeling from Swiss CRO/CMO Lonza established Asian competitors. API manufacturing in Guangzhou, Guangdong province in 2003. In “If you look at a list of leading global March 2004, it opened its first R&D providers of pharmaceutical services
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today, we think that fewer than 20 believed they needed to transform percent of those companies will be on from regional players to global ones. that list 10 years from now,” he said. Moreover, certain activities, such as “We think that many of the leaders on projects that require close interaction that list will be replaced with leadership with client scientists and/or involve IP coming out of Asia.”89 protection issues, are best conducted near the client’s R&D operations, giving Conversely, several of WX’s Indian international CROs an advantage for competitors were already making a certain projects. And in an industry built flurry of acquisitions in the United on trust and reputation, owning US and States and Europe. In 2005 and 2006, European operations could enhance Mumbai-based Nicholas Piramal credibility with investors, clients, and bought UK operations from Avecia the general public. The higher level of and Pfizer. In early 2007, the Indian trust usually leads to more business—a company announced that it was raising virtuous cycle. In short, proximity was capital to make further US acquisitions, important. and, according to a spokesperson, “the company is very serious about But the Indian firms were hardly the establishing itself in the US.”90 only ones playing the acquisition game. Several of WX’s domestic Chinese In addition, Dishman Pharmaceuticals, an competitors, including ShanghaiBio, Indian API manufacturer, in 2006 bought Bridge Laboratories, and BioDuro either two subsidiaries in the United States already operated laboratories in the and Switzerland of US-based Solutia United States or else were setting up for $75 million. Jubilant Organosys, the sales and marketing operations there. behemoth Indian CRO/CMO, followed These companies believed that their these moves in April 2007 by acquiring US presence would allow them to have Spokane, Washington-based Hollister better and timelier communication Laboratories for $122.5 million.91 with customers, especially the smaller biotech companies. The industry buying spree had multiple rationales: First, to expand service WX Makes the Move offerings to create integrated platforms for low-cost drug development; second, Within this industry context, on January to level the playing field with Western 4, 2008, WX announced that it had competitors by buying up US/European reached an agreement to buy AppTec operations. Laboratory Services, Inc., a US-based biologics and medical device testing In order to compete globally with CRO/CMO, for $169 million. In line with the largest US CROs, the Indian firms the company’s growth strategy, the
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AppTec acquisition would immediately driven by the opening of an expanded give WX capabilities and expertise in toxicology facility and continued organic biologics testing and manufacturing. In growth in biologics testing.93 addition, the acquisition would expand WX’s US customer base and addressable From Academic to Entrepreneur: market, while AppTec would give WX a Creating AppTec significant operational footprint in the United States. A detour into the origins of AppTec before WX’s acquisition is useful at this “The combination of WuXi PharmaTech point. Among other things, it sets the and AppTec will bring together context for understanding why AppTec complementary service offerings and became an attractive acquisition target expertise to create for WX in the first a broad platform place. covering both chemistry and AppTec’s history biologics,” Li told dates to 1982, analysts at the time. when Bonnie Baskin “The combined founded ViroMed company will be Laboratories. In able to provide 2001, Baskin sold more value-added three divisions of services to our ViroMed to LabCorp customers in the Photo: Flickr/Sanofi Pasteur and consolidated pharmaceutical, biotechnology, and the remaining divisions under a new medical device industries.”92 company, AppTec Laboratories.
AppTec had generated $71 million Born in Chicago, Baskin followed in total revenue in 2007. To justify the example of her scientist and the hefty $169 million price tag, WX entrepreneurial father Sy Baskin, who expected AppTec’s robust growth ran and owned a successful chemical to continue. For instance, AppTec’s company. In high school, Baskin thought revenue grew 56 percent in 2006 and she had found her calling as a marine 38 percent in 2007, and WX expected biologist after reading Rachel Carson’s that mid to high 30 percent growth rate novel Silent Spring, a nonfiction to continue into 2008, with an $85- work that documented the harmful $90 million revenue range for the 11 environmental and ecological impacts months of 2008 that WX would own of the widespread use of pesticides. She AppTec (the deal closed on January 31). subsequently enrolled in the University WX expected this revenue growth to be of Miami’s marine biology program.
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During her first semester in 1966, she Prior to that time, clinical virology was had an epiphany during a field trip to primarily done for epidemiological Biscayne Bay, an inlet of the Atlantic purposes to track outbreaks and for Ocean on the southeast coast of screening at large hospitals that had Florida. She became very seasick and organ transplant and blood transfusion realized that the ocean was not her practices. Most hospital labs did not calling. But she was still interested in have the expertise or the required pursuing science and ended up settling environments for virus diagnostic testing on microbiology. She went on to earn for patients, and there was public a doctorate in microbiology from the concern about contagion. University of Miami and was awarded a Postdoctoral Fellowship at the National Baskin decided that the time was right Institute of Health (NIH). Thereafter, to open a new kind of private clinical she moved to Minneapolis with her virology laboratory to do diagnostic then-husband and took a laboratory job testing for physicians and hospitals. working for a professor at the University “Without any business experience and of Minnesota.94 not much of a business plan to speak of, I began doing some back-of-the- But Baskin discovered that she was envelope calculations on how I could ill suited for the life of a university make this work,” Baskin recalled.97 researcher. “I needed to have more people encounters,” she said.95 The In an effort to differentiate her new nature of the work wasn’t the only venture and garner attention, she settled problem. Now a divorced mother of two on the idea of a “lab on wheels”— boys, Baskin felt the competing pressures retrofitting and remodeling a van into a of balancing work and family and also mobile lab with an incubator that could that her employer was unsympathetic to keep the viruses alive until they could be the demands on her time. processed in a permanent lab.
This was in 1981, when a significant Not only was Baskin’s idea catchy, it milestone in medicine was about to also addressed a practical concern that hit the market. The US Food and Drug nearly every potential customer would Administration (FDA) was on the verge have: how to get the samples from of approving a new drug to treat the hospitals into the lab before the viruses symptoms of herpes—the first FDA- die. Since viruses need a host to survive, approved antiviral drug.96 they tend to not live long once they are outside the body. So it is not unusual To prescribe the new antiviral drug, for a diagnostic test to return a false Baskin predicted that physicians would negative result if the virus dies before need diagnostic testing capabilities. testing begins.
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The solution is to pick up the samples sweeping the United States, further at hospitals and immediately put them raising the demand for ViroMed’s clinical in the incubator with special food in the diagnostic services.99 back of the mobile lab. The van would then return to a base lab at the end of Faced with some early challenges, the day and fully process the samples. the company was able to turn them into opportunities for expansion into Baskin began floating her business complementary lines of business. One of proposal with various hospitals and those challenges involved obtaining the universities around Minnesota, inquiring cell cultures needed for viral diagnostics whether they would send samples, testing. At the time, two east coast and, if so, approximately how many. “It companies were the only suppliers of (the plan) was well received because the cell cultures ViroMed needed, and it gave the physician the opportunity their minimum order quantities were for much better results,” she said.98 too large for a startup with very little After Baskin convinced two colleagues volume. Buying high volumes was also at the University of very wasteful as cell Minnesota to join Baskin decided that the time was right cultures have a short her, she established to open a new kind of private clinical shelf life of only about ViroMed in February virology laboratory to do diagnostic a week, so unused 1982 with the lab on testing for physicians and hospitals. cultures had to be wheels and a main lab thrown away. “That located in an 800 square-foot basement. would bring up my cost of doing the test to a prohibitive point,” Baskin recalled. Business picked up quickly, validating “It was a real dilemma for me.”100 Baskin’s hunch that doctors would start testing for herpes and other viruses But Baskin had learned how to create as the new drug came to market. Her cell cultures during her graduate work, timing proved fortuitous in other ways so she decided ViroMed would start as well. producing its own cells rather than rely on suppliers. She reached out to That year, Newsweek and Time both another lab startup in the twin city of ran stories about the STD epidemic St. Paul that she suspected must be on their magazine covers, with facing the same problem. She proposed Time’s provocative cover featuring a that ViroMed would buy an initial cells couple uneasily staring at each other batch from suppliers on the East Coast, over a skin-colored background and reproduce them, prepare them, and a screaming, bright red headline: sell the other startup what it needed “HERPES, Today’s Scarlet Letter.” Soon and keep the rest. The two companies after, the HIV/AIDS epidemic began quickly struck a deal.
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So Baskin proceeded to buy an Diversifying Business Lines original stock of cells from the Federal Depository, and contracted with primate In the early 1990s, with the clinical centers to obtain monkey kidneys on virology and cell culture business firmly a weekly basis to begin producing cell established, Baskin looked for new cultures for viral diagnostics. Soon, growth toward the testing portion of the ViroMed began making all the cells the CRO industry. “We had a broad expertise other lab needed, not just the monkey in microbiology, and we asked ourselves, kidney cells. It didn’t take long for how can we diversify and still utilize our ViroMed to scale its cell culture business core expertise?” she recounted. “We and broaden its customer base to were in Minneapolis, a ‘la-la land’ of include big players like the Mayo Clinic. medical device companies. The industry is highly regulated—the FDA requires a Another challenge was dealing with the ton of testing—there’s high barrier to harsh Minnesota winters that impeded entry, and we knew how to do it.”103 the company’s new product line. The cell cultures ViroMed shipped would ViroMed opened a division for the often freeze, thus killing all the cells and tissue bank industry for heart valves destroying the product. But then an and for screening human cells, tissues, innovative solution struck Baskin on a and cellular- and tissue-based products. Colorado ski trip when she noticed the The company was also successful in this exothermic hand and foot warmer packs particular area, becoming the largest tester for sale in the ski shop. “It occurred to for the tissue bank industry in the United me: why can’t we use these to put into States, providing comprehensive laboratory boxes with cell cultures to keep them services to meet the unique testing needs from freezing?”101 of the tissue and eye bank industry.
After a botched attempt that fried the In the process, Baskin met a woman who cell cultures, the exothermic ski hand owned a medical device testing company and foot warmers worked. The stopgap in Atlanta, Georgia. The entrepreneur solution was enough to keep shipping was a nationally recognized expert in a cultures throughout the winter to buy type of medical device testing, and the the company time until it developed two women clicked. They soon agreed to special foam containers. Before long, the a deal that saw ViroMed buy and run the startup grew into the largest cell culture Atlanta company, which had about 25-30 business in the United States, selling employees. about 150,000 units per week without mandating prohibitively high minimum In 1997, ViroMed learned of an orders.102 The two East Coast-based opportunity to purchase Quality Biotech, suppliers eventually went out of business. a New Jersey-based lab that specialized
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in the testing of new medicines. The others for pharmaceutical companies, company specialized in virology testing and others for biotech, without much strictly for pharmaceutical companies, overlap. but was encountering serious problems with testing for a hepatitis product, “I didn’t think it should be siloed,” raising the specter of significant liability Baskin said. “The industry is a and spooking its VC investors. continuum: device, biologics, and pharma flow together, so why not During the due diligence process, Baskin create a company that has bigger concluded that the VCs’ fears were not scope and bring together the different warranted and that the fire-sale price customer bases?”105 was actually an attractive opportunity. The deal closed for As the stock a very low price, market boomed beginning a long in the late 1990s, and painful but the high valuations ultimately successful of publicly traded integration. clinical labs caught Baskin’s attention. “It wasn’t the liability In the fall of 2000, with the testing she attended that justified the a healthcare cheap price,” Baskin conference that reflected, “but the Photo: Flickr/S2N82 featured the CEO company itself was so poorly run, and of Laboratory Corporation of America there were significant cultural differences (LabCorp). Historically, ViroMed had between our teams. While it only cost not competed with LabCorp, since us pennies on the dollar to buy, it cost us the former specialized in small-scale over a penny to get it working.”104 esoteric testing, while the latter focused on massive fixed-price contracts for It was during this period the idea of more standardized testing. LabCorp in forming ViroMed’s own industrial group 2000 generated revenues of $1.9 billion began to germinate—it would offer a and employed nearly 19,000 people spectrum of testing services for both worldwide.106 medical device and biologic therapeutics serving medical device, biotech, and During his speech, the LabCorp CEO pharmaceutical companies. Prior to emphasized that esoteric testing was this time, the outsourcing for device the future of the company because of testing and R&D was stove piped—some the niche’s higher margins and progress labs did testing for the device industry, in discovering treatments for various
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ailments. “Listening to his talk made me class called “monoclonal antibodies” concerned,” Baskin recalled. “If LabCorp that have a wide range of applications. decided to enter the market, how would we compete?”107 Monoclonal (meaning all of one type) antibodies are clones of a single parent In the face of this potential threat, cell, which basically means there Baskin decided that her best move are many copies of a specific type of would be to sell the clinical diagnostics antibody that recognizes and attaches division of ViroMed, which pulled in $26 to a specific protein. They are used million in revenue in 2000, to LabCorp to treat diseases like cancer, Crohn’s or another buyer. She proceeded to disease, and arthritis, and are also used contact a healthcare investment banker in diagnostic tests. Doing this kind of at Piper Jaffray & Co. to begin exploring biologics manufacturing also had the a deal possibility. In May 2001, LabCorp potential to establish a project pipeline purchased ViroMed’s diagnostics into AppTec’s biologics testing business. testing division, clinical trials division for pharmaceuticals, and cell culture Baskin had ambitions to build a company division for around $40 million.108 significantly larger than ViroMed but recognized that substantial capital would AppTec Is Born have to be raised for a new facility to manufacture biologics. A new facility Baskin kept the new industrial part would allow AppTec to move from only of the company, which included the providing laboratory testing for medical biologics and medical device testing device, bio-pharmaceutical, and biotech units, because these were just starting firms to also providing manufacturing out and had yet to turn a profit. She services for businesses with products renamed the entity “AppTec Laboratory moving into clinical trials. In addition, all Services,” launching the new firm with the employees and services at a Camden, 130 of the 350 employees that had been New Jersey facility (formerly Quality at ViroMed and $12 million in revenue Biotech Inc.) would be likely relocated to at an operating loss.109 Baskin set a Philadelphia, Pennsylvania—the intended strategy for the company as a CRO/CMO site of the new facility. that served biotech, pharmaceutical, and medical device customers. Why Philadelphia? For one thing, the Mid-Atlantic region of the United States To expand the company, Baskin wanted is a hub for pharmaceutical and biotech to establish a biologics manufacturing companies. And Philadelphia’s municipal business. The most commercially government offered a generous successful biologics, or what Baskin calls package: tax incentives, no sales tax, “the blockbuster of biologics,” were a grants, and low-interest loans. Stauback
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Co., a national real estate firm founded Bonnie understands the industry, has by former Dallas Cowboys quarterback good industry contacts, and a good Roger Staubach, helped AppTec evaluate reputation.”112 20 potential sites in the city. Dalvey also noted the good exit The company settled on a site in opportunity for the investment the 195-year-old Philadelphia Naval given the consolidation trend in the Shipyard, which had 11,000 employees CRO/CMO industry. “Several large before the Navy shut it down conglomerates nationwide are buying between 1991-1995. In 2000, the city companies like AppTec, and if Bonnie government took over the shipyard to decides to sell, she could sell for an begin redevelopment, designating it a attractive multiple,” he said in March “Keystone Opportunity Improvement 2004. Ed Spencer, Affinity Capital Zone.” Businesses that located there chairman and founder agreed: “AppTec would be exempt had a good core from state and local Baskin had ambitions to build a company business that was business and property significantly larger than ViroMed but generating revenue. taxes until 2015.110 recognized that substantial capital More importantly, the would have to be raised for a new company was moving Despite the fact facility to manufacture biologics. into new businesses that 2002 was not that had significant an ideal time to raise money, since it growth potential. With startups, it’s coincided with the trough of the dot- usually the latter. Not both.”113 com bubble bursting, Baskin still found VC investors—Brightstone Capital, AppTec used the new capital, along with Minnesota-based Affinity Capital a $3.7 million loan of federal military Management, and Thomas McNearly base closure funds from Philadelphia & Partners, who together invested $14 Industrial Development Corporation million.111 and a $500,000 loan and $250,000 grant from the state, to build a $28 “AppTec was an appealing investment, million, 75,000 square-foot facility. As because Bonnie had a prior track record discussed above, this was around the of building and exiting a business,” David time that pharmaceutical companies Dalvey, a partner at Brightstone Capital, began to focus on sales and marketing, told Upsize Magazine. “As a venture while outsourcing R&D, clinical testing, capitalist—if I’m doing my job—90 and manufacturing services to CROs, percent of my due diligence and final so the market seemed ripe. Of the decision is made on the people. AppTec 200 employees hired during the first was an existing business with revenue phase of the project, 75 percent held and some history. Also important, doctorates.114
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Several facilities now enabled the rapidly from $22.8 million to $71 company to expand its services from million in 2007—a 46 percent CAGR. traditional biologics and medical devices In that same year, biologic testing to newer cell therapeutics and biologics- accounted for 69 percent of AppTec’s based devices: the new Philadelphia revenue, and manufacturing made up facility; AppTec’s 63,000 square-foot the rest. Nearly two-thirds of AppTec’s St. Paul facility for in vitro and in vivo customers were in the bio-pharma biocompatibility, small animal toxicology, industry, and 37 percent were in the contract cGMP manufacturing and medical device industry. AppTec had processing for tissue-based products; built out a broad customer base of and its 46,000 square-foot facility for 700 companies, ranging from large microbiology, medical device chemistry, pharmaceutical companies to small sterilization validations, and package biotech startups. And it employed testing in Atlanta. 495 professionals across three FDA- registered facilities totaling 176,000 After the Philadelphia facility began square feet.115 operating in 2004, revenue rose
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The WX Connection
n the spring of 2007, Baskin decided different business philosophy, with a it was time to exit again by selling her hard driving entrepreneurial culture. Icompany. “We had a sexy company, But it was time to sell. I thought they really starting to hit its stride,” she were really smart, and I was impressed recounted. “I had no desire to become by their US training. Dr. Li struck me as a public CEO … It didn’t look like a lot of a very smart, savvy guy, and he showed fun to me.”116 Moreover, Baskin had also a lot of respect for the business we had started a horse racing business with her built.”119 The two sides subsequently father that she hoped to spend more entered a long due diligence process, time pursuing. She again called the and ultimately closed the deal in investment bankers at Piper Jaffray to January 2008 without noticeable look for a buyer, and this did not prove hiccups or concerns. particularly difficult as buyers from Europe With AppTec now “...But it was time to sell. I thought they to Asia soon courted under the wings of 117 were really smart, and I was impressed by the company. their US training. Dr. Li struck me as a very WX, the Chinese firm smart, savvy guy, and he showed a lot of chose not to separate Buyer Found respect for the business we had built.” its operations into geographic regions. “We heard about this Instead, WX settled on company, WuXi PharmaTech, that JP splitting the company into two divisions: Morgan was taking public. It was a Wall laboratory testing and manufacturing. Street darling at the time of the IPO. We Management justified this decision based all thought it would be an interesting on the fact that much of WX’s China- company because they were looking based operations’ sales, general, and to be global and have a presence in administrative expenses (SG&A) came the USA,” Baskin said, “I think they from the United States, such as its US- were particularly interested in the based sales force and marketing expenses. Philadelphia site, because that’s where much of their customer base was.”118 Its traditional chemistry-based services would remain in China, and WX would “I had some concerns, particularly integrate AppTec’s toxicology and regarding the common perception biological testing services into this that women are not given the same division. These US operations focused opportunities that men are given in on AppTec’s existing small animal many Asian companies,” she continued, toxicology, commercial lot release “and they seemed to have a little testing, medical device testing, and viral
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clearance services. WX management contract negotiations. Such customer said it intended to “amplify” these diversification, WX believed, would services in China rather than completely reduce its overall risk profile. transferring them overseas. The manufacturing division would include While WX had started developing the API manufacturing in China and the biologics testing and toxicology services biologics manufacturing in Philadelphia, in China, WX and AppTec’s service where WX intended this business unit to offerings and customer bases did not remain into the foreseeable future. really overlap. Edward Hu, WX’s CFO, told investors, “The companies’ [WX and Exploiting Complementarities and AppTec] are so complementary—there Boosting Opportunities really is no overlap per se, therefore we intend to keep the operations in the US Unlike WX, which primarily served a almost as is as we integrate.”122 smaller number of large pharmaceutical companies, AppTec primarily served a In an interview, Baldwin further larger number of small to medium-size elaborated on the complementarity biotech and medical devices companies. between the two: “You accomplish two AppTec already had over 700 clients things here. First, you accomplish a US in total and about 20 manufacturing presence for the company. Now you clients,120 making its revenue base more have a Chinese company with a sizable diffuse than that of WX. US company underneath its wing. And so it gave a lot of credibility to the For instance, AppTec’s top 20 customers [Chinese] company. Second, it gave accounted for 50 percent of its total them a group of specialists to work in revenues, while WX’s top ten customers the analytics of large molecules. It was accounted for approximately 70 percent all kind of diagnostic stuff they were of the company’s revenues (WX had doing, so they got a foot into a whole just 70 customers in 2007 before its new phase of drug therapy that was acquisition of AppTec).121 evolving. And that’s not easy to develop as a priority. I think it was a smart Therefore, the merger would diversify move, whether it was economically and grow WX’s customer base both by smart, I don’t know, but certainly it gave sheer number and into different types credibility to the company.”123 of companies. Having relied heavily on large pharmaceutical customers before WX’s management said that they prized the acquisition, the loss of a single client AppTec’s biologics manufacturing would have dealt a great blow to WX. capabilities above all, because they That meant these types of clients had believed it had the potential to be a very strong bargaining power during lucrative business but one that would
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Figure 6. Expectation of Robust Growth in Biologics
Source: 2008 WX Investor Presentation.125
have been difficult to develop internally manufacturing business also served (see Figure 6). as a pipeline into the facility’s testing business, which generated around “The decision [to buy] AppTec is $13 million in revenue in 2007. The complex and there were several Philadelphia facility’s combined important reasons. One of the major operations accounted for about half of reasons was that WX saw the potential AppTec’s total 2007 revenue. of the fermentation of the biologics manufacturing protein-related drugs And yet the facility’s utilization for like antibodies,” Wong said. “In the late biopharma manufacturing had been 2000s, it wasn’t a good time to start that pretty low over its first few years of business in China because there wasn’t operation—historically around 40-50 the talent pool there to develop it.”124 percent.126 WX became aware of the low utilization rate for the biopharma Biopharma manufacturing in the manufacturing during its long due Philadelphia facility generated around diligence process before buying the $22 million in revenue in 2007, company.127 Because of the highly representing 31 percent of AppTec’s talented workforce and sophistication total revenue. For AppTec, this biologics of the facility, the biopharma
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manufacturing business had high fixed line, process development and early- costs—over $10 million a year on about stage clinical manufacturing services, $22 million in revenue in 2007.128 including a full spectrum of biosafety testing services.”129 Given the expected growth in biologics, WX believed that a stronger biopharma AppTec had a small toxicology business in manufacturing project pipeline would Minneapolis that focused on three types materialize from small biotech clients of services: protein molecules (biologics), that AppTec had traditionally served. medical devices (biologics), and small Just as important, WX was confident molecules (chemistry), each accounting that it could convince the company’s for about a third of the business. large pharmaceutical clients, which still did their own biopharma manufacturing, In this area, WX also saw the opportunity to begin outsourcing this function. to cross-sell AppTec’s small-molecule toxicology business to WX’s existing Both of these factors—stronger demand customer base. While WX’s own from biotech firms, and opening toxicology facility was under construction up a new area of pharmaceutical in Suzhou, that facility, when completed, outsourcing—would solve AppTec’s would primarily focus on testing on biopharma manufacturing primates and other large animals. underutilization issue and grow the AppTec’s toxicology services, however, revenue of the Philadelphia facility. mostly used smaller animals like mice and rats, so it made economic sense to WX planned for the biologics keep these services in the United States. manufacturing division to build up a solid and steady customer base until In June 2008, WX announced that it the Philadelphia facility was at full had agreed to a framework agreement capacity. Then, any additional capacity to form a 50-50 JV with Covance, expansion would be transferred to the largest CRO in the world, to offer its China operations based on the US preclinical large animal toxicology knowledge transfer. services. WX’s offer in the partnership included the soon-to-be-completed “Historically, AppTec focused on the Suzhou facility and the facility’s biopharma’s business development workforce. Covance would, in turn, with small biotech companies,” Hu told contribute $30 million and the investors. “Going forward, by leveraging operational and procedural know-how WuXi’s relationship with big pharma, to get the facility up and running quickly. we are working on establishing long- This would allow WX to get revenue term collaborations with big pharma flowing into its new facility faster than it customers to provide integrated cell would be able to do on its own.130
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However, shortly thereafter, WX Plans Derailed announced that the JV agreement had fallen apart. Company representatives In the second half of 2007, however, told analysts and investors that without a funding slowdown started to hit the Covance’s expertise, it would now have biotech industry, and AppTec continued to rely heavily on WX’s new AppTec to have problems with utilization of its toxicology colleagues to get the facility biologics manufacturing facility. Full up and running. capacity utilization for AppTec’s biologics manufacturing was only around five “We know this is going to be a huge manufacturing projects at once, so the challenge,” Li said on a conference call. cancelation of just one project would “We never underestimated that [in the cause a significant drop in capacity. Still, decision to terminate the JV]—it’s just WX hoped to cross sell its manufacturing a huge challenge. But we’re going to services to large pharmaceutical clients highly leverage our who would agree to US operation.”131 WX more stable contracts subsequently moved WX was not immune to these effects over longer periods to its senior toxicology of the financial crisis, which created sustain operations at enormous difficulties as it sought to director from full capacity. successfully integrate with its new Minneapolis to Suzhou AppTec acquisition. for many months and But as 2008 progressed, began an exchange ripples from the global program of technicians and scientists financial crisis took a huge toll on small between the two facilities. and medium-size biotech companies. Even larger firms felt the pinch of what “At that time, there were a lot of became a severe global recession. By exchanges of scientists between AppTec the end of 2008, more than 40 percent in the USA and us in China, especially of small biotech firms had less than one in toxicology. We shared our SOPs year of cash remaining, and over 30 (standard operating procedures) and percent of small, publicly traded firms also assay protocols. At the beginning, had less than six months of cash to it was quite beneficial,” Wong reflected. survive.133 As a result, these companies “AppTec scientists came to help began hoarding cash and cutting back establish quality systems. We made sure on R&D, which meant less outsourcing. both sites [were] using the same quality control systems and replicated a lot of This trend would continue for several their procedures in China.”132 This cross- years. From 2008 to 2011, a quarter border collaboration would prove crucial of all publicly traded biotech firms to opening and scaling up the Suzhou were either acquired or shut down facility on time. completely.134 Further, in response to
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the financial crisis, many of WX’s large Yet WX had more bad news to tell pharmaceutical clients undertook efforts investors during the second quarter to review and then restructure their conference call that summer. own operations. Management disclosed that the biologics manufacturing business WX was not immune to these effects had experienced further project of the financial crisis, which created cancellations and could not win a enormous difficulties as it sought to sufficient number of new projects to successfully integrate with its new offset lost business. AppTec acquisition. First, many of AppTec’s established clients were in WX’s pharmaceutical clients’ own severe financial straits, especially in restructuring efforts also hindered the the biologics manufacturing space. company’s effort to cross-sell biologics This caused the Philadelphia facility’s manufacturing to them. These companies biopharma manufacturing utilization had their own biologics manufacturing rate to drop even lower. capabilities, and WX had hoped that by adding the service, they could convince While the testing component of AppTec large pharmaceutical clients to outsource and WX businesses were more stable these services to WX instead. as clients still needed to keep testing for safety and effectiveness of new But it turned out that these companies’ products, manufacturing projects have internal review processes were delaying a much longer time horizon and are decisions on whether to rely on harder to commit to during periods of outsourcing biologics manufacturing. In vast uncertainty. spite of these headwinds, WX maintained its revenue guidance for 2008, saying In the company’s first quarter 2008 that it expected AppTec’s business to pick conference call with investors, WX up in the latter half of the year. disclosed that AppTec’s biologics manufacturing had fallen behind the By September, Lehman Brothers had revenue target set at the start of the filed for bankruptcy amid turmoil in the year. Two stalled projects, one resulting financial markets, and in the following from a cell line quality issue and the month, WX finally cut its revenue other due to failure of a clinical trial guidance for 2008 by $15 million to $40 candidate, were blamed for the setback. million. The shortfall was on account of Nevertheless, WX’s management the biologics manufacturing business reaffirmed their revenue guidance from and the knock-on effects on biologics the beginning of the year, arguing that testing related to manufacturing they expected to see an increase in the projects that have significant testing utilization rate. requirements.135 WX management
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also discussed inquiries from clients product’s clinical failure … several requesting that WX move biologics projects cancelled that way. And then manufacturing to China to facilitate the second wave of delays were due to more cost savings that would help cell line issues. And then lately, we see weather the economic downturn. the postponement and cancellation is mostly due to funding issues.”137 “Due to cancellations and the delays from our small biotech clients, our The next month, on WX’s third quarter biologics business is not performing earnings call, management disclosed that as well as we expected,” Li explained its biologics manufacturing utilization had on a conference call announcing the continued to deteriorate and a turnaround adjusted guidance. “[The] shortfall in the fourth quarter was not expected. is really coming WX’s management from the funding told analysts and environment. We investors they anticipated more were looking into projects to be “strategic options signed up by now, and alternatives” but those customers for the Philadelphia have been delaying facility since the their decision now. challenge that And the ones who business line faced have already signed would endure. Due up, they’ve basically Photo: WuXi AppTec to the restructuring cancelled or delayed. Everybody is trying exercises underway at many of WX’s to save money at the moment.”136 pharmaceutical clients, WX explained that it was not having success replacing the lost WX’s management did, however, reaffirm business and customers. the strategic rationale for the AppTec acquisition, expressing confidence that On December 2, 2008, WX announced the biologics manufacturing business that it would be shutting down its would pick up once macroeconomic biologics manufacturing operations in conditions improved. Philadelphia. Given the high fixed cost of this business line, WX decided that waiting Hu, who has changed jobs from CFO to for an economic rebound would be too COO of WX as of this writing, described much of a drag on the entire company. the biologics manufacturing situation this way: “We’ve been hit by a perfect “When we made the [AppTec] storm. Earlier in the year, we had a acquisition decision, we held the belief cancellation because of a company that biologics capability is an essential
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part of our future growth strategy. to $110 million, a huge sum considering When we did the deal, that thesis was it had paid $169 million for AppTec just pretty strong,” Hu explained on the a year earlier.) investor conference call. “And then over the last three to six months, the “In retrospect, we wish we had economic environment deteriorated foreseen the unprecedented economic significantly, and impacted the business downturn and credit freeze that by constraining biotech companies’ severely impacted many of AppTec’s ability to finance those early-stage customers,” Li told investors.140 After manufacturing projects. And therefore this December 5 conference call, we don’t see a turnaround in the WX saw its stock price plummet to a foreseeable future.”138 staggeringly low $5 per share.
Biologics manufacturing capability A J.P. Morgan analyst also proffered his was precisely the segment WX most view on the buyout, “The 2008 AppTec coveted at the time of its AppTec acquisition in hindsight was more of acquisition. And so the speed at which a disruption than an enhancement. that segment collapsed is notable. Although the strategic rationale for Ultimately, WX would lay off around buying AppTec remains in question, 100 of AppTec’s 490 employees the decision to exit US biologic through workforce reduction and manufacturing should drive cost savings employee attrition. With the closure, this year as WuXi will now shift the US WX had to write down $60.5 million on focus to existing capabilities, including its AppTec acquisition.139 (In the next biologic testing, cell banking, and quarter, WX increased this write-down therapy services.”141
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Conclusion
X’s acquisition of AppTec was WX intended for the AppTec acquisition a disappointment but not a to jumpstart its push into biologics Wcomplete disaster. The timing outsourcing, which required highly of the deal could not have been worse. skilled and technical talent that was not While potential signs of trouble ahead available in China. It could have been a were evident around the time the deal differentiator for WX since few CROs at closed, such as the low utilization rate the time offered such services. With a of the facility and growing indicators of technically oriented US company under an economic shock, it is hard to fault its wing, such an acquisition could also WX’s management for not anticipating change the perception of WX from a the global financial crisis and its low-cost, regional outsourcing provider subsequent impact to a global CRO on the biotech and competitor on par pharmaceutical with leading firms in industries. the industry.
Biologics overall WX clearly failed to were beginning execute its plan to to break out in a ramp up biologics big way. To stay manufacturing in competitive, WX Philadelphia. Yet recognized that it the company’s needed to quickly Photo: WuXi AppTec integration efforts develop a strong biologics outsourcing with biologics and medical device segment as part of a fully integrated testing were much more successful. platform to offer its clients. And to keep up with the rapidly evolving CRO For instance, WX successfully business, WX knew that it had to extend integrated AppTec’s legacy toxicology itself beyond its legacy chemistry business and leveraged it to quickly outsourcing and manufacturing offerings. monetize WX’s Suzhou toxicology facility. Such an effort became even Viewed in this light, WX’s strategy to more crucial after the Covance JV pursue acquisitions and JV partnerships deal collapsed. Moreover, WX’s US- to ramp up those new service offerings based testing business has continued was, in many ways, based on a proper to grow since the acquisition, and is diagnosis of the market dynamics and substantially larger today than it was competitive landscape at the time. in 2007.
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As is the case with many cross-border able to capture this outsourcing bonanza acquisitions, analysts raised concerns at by building out their own companies and the time about whether WX would be capabilities. able to retain AppTec’s key employees. And since relationships are so vital to the As China and India continue to attract CRO business, it was widely presumed talented returnees into their respective that a large part of the deal’s success domestic biotech and healthcare hinged on the extent to which WX would sectors, similar acquisitions of US be able to retain key management and CROs may become less common. In scientific personnel at AppTec. addition, improved technology and communication has lessened the Analysts also questioned whether perception that geographic proximity AppTec’s employees feared the potential is important to build and maintain for WX to “cut and paste” AppTec’s relationships with clients. services from the United States to China, and whether such a concern would Offshoring of healthcare and biotech trigger a mass exodus of employees from research jobs to China and India will the company. probably continue for some time, although it will likely slow as the labor Those concerns ultimately did not cost differential converges and as materialize as WX demonstrated its homegrown human capital makes talent commitment to the US operations and arbitrage opportunities less appealing. was relatively successful in retaining AppTec’s key personnel.142 Nor did Much of this anticipated future problems in the aftermath of the deal depends, of course, on whether China scare WX away from making additional can successfully develop a domestic acquisitions of US-based businesses. healthcare and biotechnology industry, In fact, it has made several more since replicating its success in the CRO 2008.143 sector. Such an endeavor will likely require the similar network of Chinese On a broader level, then, WX’s “returnees” that proved so central to experience reflects the rapid the development of China’s CRO/CMO emergence and evolution of the global industry. One potential risk in the near pharmaceutical R&D industry. Faced with term, then, may be that a seemingly economic pressures and the impetus harsher political environment in China to change over the last 15-20 years, could deter overseas Chinese students pharmaceutical companies had to adapt and talent from returning.144 to new business models, including those that led to the emergence of the CRO/ Another challenge is that China will CMO industry. India and China have been have to continue competing with India
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to develop these industries as it did in The success of the CRO/CMO industry the CRO/CMO realm. With its own large shows that the model has clearly helped and talented diaspora and a low-cost pharmaceuticals and biotech firms with business environment, India possesses their productivity problems. But whether many of the same advantages as China this outsourcing model is a cure or just a for these services. panacea is still an open question.
In the near term, the CRO/CMO business Meanwhile, policymakers and will continue to grow, but the industry’s consumers could increasingly adopt a long-term prospects surely depend on “what we have now is good enough” what happens in the pharmaceutical and attitude, accepting that existing and biotechnology industries more broadly. developing lines of generic drug products cover a large Although 2014 proved enough therapeutic to be a banner year Offshoring of healthcare and biotech range that high levels for drug discovery, research jobs to China and India will of R&D are no longer probably continue for some time, with the US FDA necessary. This could although it will likely slow as the announcing a total of leave government labor cost differential converges. 41 NCE approvals for entities like the NIH treatments, the prior to pick up slack for 10-year average was just 24 per year.145 investment in R&D, which would likely Moreover, most of the approvals were focus on just a limited number of actually for niche drugs. For instance, breakthrough drugs and treatments. of the 100 top selling pharmaceutical products in the United States, only one Epilogue147 has been approved in the past decade.146 WX again attracted the attention of To illustrate this point a bit further, Pfizer, global investors in April 2010, when for example, spent over $1 billion a year Charles River Laboratories announced on drug discovery research between that it had reached a deal to acquire 2001 and 2010, but only brought forward WX for $1.6 billion. The acquisition four internally discovered drugs. This would have combined WX’s experience demonstrates that drug discovery is in discovery and preclinical stages of neither easy nor predictable, and it drug development with Charles River’s is no big surprise that the return on expertise in pre-clinical and clinical assets for the pharmaceutical industry trials.148 is only around 5 percent—a figure much closer to industrial companies than But the deal fell apart as analysts to innovative and high-tech firms that highlighted integration risks, given the prioritize R&D. disparate geographies and cultures and
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questioned whether Charles River was Laboratories. This acquisition added overpaying. Investor pressure eventually 150 US employees and a 45,000 killed the deal. square-foot research center in New Jersey, strengthening its presence Meanwhile, WX’s US testing business in bioanalytical and DMPK/ADME stabilized and actually returned to services, particularly in studies profitability in 2009. This segment of radio-labeled compounds, and earned $64.1 million, which represented gaining the company access to 2 percent annual growth on a pro-forma new agricultural and animal health basis.149 And it performed strongly in customers.153 Finally, in 2015, WX 2010, growing 18 percent to $75.5 acquired NextCODE, a genome million. That same year, WX announced sequencing company based in that it would reestablish biologics Cambridge, Massachusetts for $65 manufacturing services, only this time in million.154 China, using expertise gained from the defunct Philadelphia facility.150 WX has also continued to expand its facilities in the United States. In WX’s China-based and US-based April 2014, WX broke ground on an businesses have both continued to grow. entirely new facility in Philadelphia to By 2014, WX’s total annual revenue manufacture cell therapies, adding to had grown to $674.3 million, with its its existing 16,000 square-foot facility. US-based testing services accounting The expansion supported growing for $99.6 million. By this time, WX had customer demand for allogeneic and amplified AppTec’s biologics and testing autologous cell-based therapeutics.155 capabilities in China, and those segments generated $42.6 million and $124.3 The next month, in May 2014, WX million, respectively.151 completed another 20,000 square-foot materials characterization facility in St. Nor has WX’s difficulty with the AppTec Paul, Minnesota to expand its biologics acquisition deterred it from pursuing testing services.156 And in 2015, WX additional M&As in China and the United began the first phase of constructing States, as noted earlier. In 2011, WX yet another 145,000 square-foot facility acquired Abgent, a provider of biological in Philadelphia for manufacturing gene- research reagent products and services mediated cell therapies, expected to be with a 34,000 square-foot facility in completed by mid-2016.157 Suzhou and a 10,000 square-foot lab in San Diego, California.152 For all its challenges with the AppTec acquisition, WX seems to have regained In 2014, WX expanded its US testing its footing and is forging ahead after business by acquiring XenoBiotic the financial crisis storm.
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Endnotes
1 Ramsey, Lydia, “Pfizer and Allergan Just Announced a $160 Billion Megamerger, and It’s Already Drawing Political Backlash,” Business Insider, November 23, 2015, http://www.businessinsider.com/bernie-sanders-on- allergan-pfizer-deal-2015-11.
2 “[Pfizer] Appendix A: 2014 Financial Report,” http://www.pfizer.com/system/files/presentation/2014_Pfizer_ Financial_Report.pdf.
3 Ramsey, Lydia, “Pfizer and Allergan Just Announced a $160 Billion Megamerger, and It’s Already Drawing Political Backlash,” Business Insider, November 23, 2015, http://www.businessinsider.com/bernie-sanders-on- allergan-pfizer-deal-2015-11.
4 Humer, Caroline and Ransdell Pierson, “Obama’s Inversion Curbs Kill Pfizer’s $160 Billion Allergan Deal,” Reuters, April 6, 2016, http://www.reuters.com/article/us-allergan-m-a-pfizer-idUSKCN0X21NV.
5 Sanders, Bernie, “Sen. Bernie Sanders: The Pfizer/Allergan Drug Merger Must Be Stopped,” New Hampshire Union Leader, December 6, 2015, http://www.unionleader.com/apps/pbcs.dll/article?AID=/20151207/ LOCALVOICES/151209400.
6 Campbell, Colin, “Donald Trump slammed Pfizer’s ‘Disgusting’ Megamerger,” Business Insider, November 28, 2015, http://www.businessinsider.com/donald-trump-pfizer-allergan-deal-inversion-2-2015-11.
7 “CNBC Exclusive: CNBC’s Meg Tirrell Sits Down with Pfizer CEO Ian Read and Allergan CEO Brent Saunders Today on CNBC,” CNBC, November 23, 2015, http://www.cnbc.com/2015/11/23/cnbc-exclusive-cnbc-transcript- cnbcs-meg-tirrell-sits-down-with-pfizer-ceo-ian-read-and-allergan-ceo-brent-saunders-today-on-cnbc.html.
8 LaMattina, John, “Pfizer, The Shark That Can’t Stop Feeding,” Forbes, May 6, 2014, http://www.forbes. com/sites/johnlamattina/2014/05/06/major-acquisitions-now-a-necessary-part-of-pfizers-future- strategy/#17bb46284d0c.
9 Staton, Tracy, “UPDATED: Pfizer’s Post-Megamerger Cost-Cutting Record? 51,500 Jobs in 7 Years,” Fierce Pharma, April 29, 2014, http://www.fiercepharma.com/story/pfizers-post-megamerger-cost-cutting-record- 51500-jobs-7-years/2014-04-29.
10 Ibid.
11 Baldwin, Dr. John J., “Is Drug Discovery Dead?” Future Medicinal Chemistry, November 2011, accessed at http://www.future-science.com/doi/abs/10.4155/fmc.11.143.
A Chinese Pharmaceutical Startup Acquires an American Firm to “Go Global” Paulson Papers on Investment Case Study Series
12 WuXi PharmaTech Second Quarter 2010 Earnings Presentation, August 2, 2010, accessed at http:// ir.wuxipharmatech.com/phoenix.zhtml?c=212698&p=irol-presentations.
13 Interview.
14 United States Patent No.: US 6,503,759 B1, Published October 26, 1995, accessed at http://pdfpiw.uspto. gov/.piw?PageNum=0&docid=06503759&IDKey=414470E721CC%0D%0A&HomeUrl=http%3A%2F%2Fpatft. uspto.gov%2Fnetacgi%2Fnph-Parser%3FSect1%3DPTO1%2526Sect2%3DHITOFF%2526d%3DPALL%2526p%3D1 %2526u%3D%25252Fnetahtml%25252FPTO%25252Fsrchnum.htm%2526r%3D1%2526f%3DG%2526l%3D50% 2526s1%3D6%2C503%2C759.PN.%2526OS%3DPN%2F6%2C503%2C759%2526RS%3DPN%2F6%2C503%2C759.
15 Pharmacopeia Inc. 1994 10-K, accessed at http://www.getfilings.com/o0000950109-97-002535.html.
16 Ibid.
17 Company website accessed at http://www.criver.com/about-us/who-we-are.
18 Vardi, Nathan, “The Rat Pack,” Forbes, October 28 2002, http://www.forbes.com/free_ forbes/2002/1028/228.html.
19 “Covance, Inc. History,” Funding Universe, http://www.fundinguniverse.com/company-histories/co- vance-inc-history/.
20 WuXi Pharmatech IPO Offering Prospectus, accessed at http://www.sec.gov/Archives/edgar/ data/1403132/000119312507177145/d424b4.htm.
21 Baid, Ajit, “CRO Industry Rides High on Emerging Opportunities in Eastern Europe,” BioProcess International, April 2004, http://www.bioprocessintl.com/wp-content/uploads/bpi-content/0204ar02_77375a.pdf.
22 Ibid.
23 Pharmacopeia Inc. 2000 10-K, accessed at http://www.sec.gov/Archives/edgar/ data/1002388/000091205701008512/a2041048z10-k.txt.
24 Interview.
25 Interview.
26 Barnes, Kristy, “India Top of the World for Contract Research Business,” Outsourcing Pharma, August 29, 2006, http://www.outsourcing-pharma.com/Clinical-Development/India-top-of-the-world-for-contract-re- search-business.
A Chinese Pharmaceutical Startup Acquires an American Firm to “Go Global” Paulson Papers on Investment Case Study Series
27 Ibid.
28 Nair, A, “Clinical Research: Regulatory Uncertainty Hits Drug Trials in India,” The Pharmaceutical Journal, March 12, 2015, http://www.pharmaceutical-journal.com/news-and-analysis/features/clinical-research-regula- tory-uncertainty-hits-drug-trials-in-india/20068063.article.
29 “Core R&D Facilities of Ten Pharmaceutical Companies in Asia,” Nature Reviews Drug Discovery, June 2010, accessed at http://www.nature.com/nrd/journal/v9/n6/fig_tab/nrd3204_T1.html.
30 Barnes, Kristy, “Quintiles Steps Up Indian Presence,” Outsourcing Pharma, October 19, 2006, http://www. outsourcing-pharma.com/Clinical-Development/Quintiles-steps-up-Indian-presence.
31 Mazumdar-Shaw, Kiran, “Biotech Is Not for Punters,” Outlook Money, http://www.outlookmoney.com/ar- chive/kiran-mazumdar-shaw-cmd-biocon-ltd-88528.
32 Macdonald, Gareth, “AZ To Outsource All API Production in 7 Years,” In-Pharma Technologist, November 30, 2009, http://www.in-pharmatechnologist.com/Ingredients/AZ-to-outsource-all-API-production-in-7-years.
33 Baid, Ajit, “CRO Industry Rides High on Emerging Opportunities in Eastern Europe,” BioProcess International, April 2004, http://www.bioprocessintl.com/wp-content/uploads/bpi-content/0204ar02_77375a.pdf.
34 Ibid.
35 Interview.
36 Interview.
37 Interview.
38 Interview.
39 Kitchens, Susan, “Farmed-Out Pharma,” Forbes, February 1, 2008, http://www.forbes.com/ global/2008/0211/035.html.
40 Custom Synthesis Agreement By and Between Merck & Co., Inc. and WuXi PharmaTech Co., Ltd., December 1, 2002, accessed at http://www.sec.gov/Archives/edgar/containers/fix300/1403132/000119312507174941/ dex107.htm.
41 “Talent Arbitrage,” The Economist, September 20, 2007, http://www.economist.com/node/9833587.
A Chinese Pharmaceutical Startup Acquires an American Firm to “Go Global” Paulson Papers on Investment Case Study Series
42 “Pharmacopeia Forms Strategic Alliance with WuXi Pharmatech,” March 17, 2003, accessed at http://www. prnewswire.com/news-releases/pharmacopeia-forms-strategic-alliance-with-wuxi-pharmatech-74689562.html.
43 Company press release accessed at http://www.prnewswire.com/news-releases/pharmacopeia-forms- strategic-alliance-with-wuxi-pharmatech-74689562.html.
44 Somers, Terri, “Accelrys Lays Off 50 Workers, Exports Jobs,” San Diego Union-Tribune, January 10, 2004, http://legacy.sandiegouniontribune.com/news/business/biotech/20040110-9999_1b10accelrys.html.
45 Interview.
46 Interview.
47 “Philadelphia Corporate Day Presentation,” September 10, 2008, accessed at http://library.corporate-ir.net/ library/21/212/212698/items/306862/PhiladelphiaCorporateDayPresentation.pdf.
48 Interview.
49 WuXi PharmaTech IPO Offering Prospectus, accessed at http://www.sec.gov/Archives/edgar/ data/1403132/000119312507177145/d424b4.htm.
50 Interview.
51 “Philadelphia Corporate Day Presentation,” September 10, 2008, accessed at http://library.corporate-ir.net/ library/21/212/212698/items/306862/PhiladelphiaCorporateDayPresentation.pdf.
52 WuXi PharmaTech IPO Offering Prospectus, accessed at http://www.sec.gov/Archives/edgar/ data/1403132/000119312507177145/d424b4.htm.
53 Ibid.
54 Ibid.
55 Ibid.
56 Ibid.
57 Ibid.
58 “Talent Arbitrage,” The Economist, September 20, 2007, http://www.economist.com/node/9833587.
A Chinese Pharmaceutical Startup Acquires an American Firm to “Go Global” Paulson Papers on Investment Case Study Series
59 “WuXi PharmaTech Presentation at JP Morgan Healthcare Conference,” January 14, 2009, transcript purchased from Thomson Reuters.
60 “Philadelphia Corporate Day Presentation,” September 10, 2008, accessed at http://library.corporate-ir.net/ library/21/212/212698/items/306862/PhiladelphiaCorporateDayPresentation.pdf.
61 “WuXi PharmaTech Presentation at JP Morgan Healthcare Conference,” January 14, 2009, transcript pur- chased from Thomson Reuters.
62 Interview.
63 “WuXi PharmaTech Presentation at JP Morgan Healthcare Conference,” January 14, 2009, transcript purchased from Thomson Reuters.
64 Somers, Terri, “San Diego Biotechs Find Partners Across Pacific,” San Diego Union-Tribune, December 16, 2007, http://www.sandiegouniontribune.com/uniontrib/20071216/news_1b16asiabio.html
65 Company Press Release accessed at http://ir.wuxipharmatech.com/phoenix.zhtml?c=212698&p=irol-newsAr- ticle&ID=1020414.
66 WuXi PharmaTech IPO Offering Prospectus, accessed at http://www.sec.gov/Archives/edgar/ data/1403132/000119312507177145/d424b4.htm.
67 Interview.
68 “Second Quarter 2008 Earnings Presentation,” August 14, 2008, accessed at http://library.corporate-ir.net/ library/21/212/212698/items/304518/WuXi_Q208_ppt_08_14_08_v03.pdf.
69 Interview.
70 “WuXi PharmaTech Appoints Angela Wong as Service Biology VP,” PR Newswire, January 23, 2006, http://www.prnewswire.com/news-releases/wuxi-pharmatech-appoints-angela-wong-as-service-biolo- gy-vp-53700442.html.
71 Interview.
72 Interview.
73 Interview.
74 Interview.
A Chinese Pharmaceutical Startup Acquires an American Firm to “Go Global” Paulson Papers on Investment Case Study Series
75 WuXi PharmaTech IPO Offering Prospectus, accessed at http://www.sec.gov/Archives/edgar/ data/1403132/000119312507177145/d424b4.htm.
76 Ibid.
77 Interview.
78 “Presentation at 28th Annual J.P. Morgan Healthcare Conference on January 12, 2010,” accessed at http://library.corporate-ir.net/library/21/212/212698/Items/320206/9E17B68C-4A41-4EF8-8052-3DD0FF- 97D5C4_JP%20Morgan%20Presentation%20Final%20Final%20With%20Takeda%20Logo%20Removed%20 [Read-Only].pdf.
79 Interview.
80 WuXi PharmaTech IPO Prospectus, accessed at http://www.sec.gov/Archives/edgar/ data/1403132/000119312507177145/d424b4.htm.
81 “WuXi PharmaTech Files for IPO, Seems Undervalued Considering Growth,” ChinaBio Today, July 26, 2007, accessed at http://seekingalpha.com/article/42461-wuxi-pharmatech-files-for-ipo-seems-undervalued-consid- ering-growth.
82 “Talent Arbitrage,” The Economist, September 20, 2007, http://www.economist.com/node/9833587.
83 “WuXi PharmaTech Files for IPO, Seems Undervalued Considering Growth,” ChinaBio Today, July 26, 2007, Accessed at http://seekingalpha.com/article/42461-wuxi-pharmatech-files-for-ipo-seems-undervalued-consid- ering-growth.
84 “Talent Arbitrage,” The Economist, September 20, 2007, http://www.economist.com/node/9833587.
85 “China Drug R&D Outsourcing Firm Mulls IPO,” Reuters, October 30, 2007, http://www.reuters.com/article/ us-shangpharma-ipo-idUKHKG13527920071030.
86 Company website accessed at http://www.lonza.com/custom-manufacturing/capabilities-overview/our- sites/guangzhou-nansha-china.aspx.
87 Company press release accessed at http://www.amriglobal.com/news_and_publications/Albany_Molecular_ Research_Inc_Breaks_Ground_On_New_R_and_D_Centre_in_India__41_news.htm.
88 Company press release accessed at http://www.amriglobal.com/news_and_publications/AMRI_Completes_ Acquisition_of_Manufacturing_Facilities_in_India_Names_Prasad_S_Raje_Ph_D_as_Managing_Director__5_ news.htm.
A Chinese Pharmaceutical Startup Acquires an American Firm to “Go Global” Paulson Papers on Investment Case Study Series
89 Van Arnum, Patricia, “Aptuit Establishes New Company in India,” Pharmatech, September 5, 2007, http:// www.pharmtech.com/aptuit-establishes-new-company-india.
90 Barnes, Kristy, “Nicholas Piramal Announces Funding for Planned US Assault,” Outsourcing Pharma, February 27, 2007, http://www.outsourcing-pharma.com/Contract-Manufacturing/Nicholas-Piramal-announces-fund- ing-for-planned-US-assault.
91 Company Press Release accessed at http://www.evaluategroup.com/Universal/View. aspx?type=Story&id=125160.
92 Investor and Analyst Conference Call, January 4, 2008, transcript purchased from Thomson Reuters.
93 Investor and Analyst Conference Call, March 13, 2009, transcript purchased from Thomson Reuters.
94 Jordan, Robert, How They Did It; Billion Dollar Insights from the Heart of America, November 16, 2010, Red- Flash Press.
95 Interview.
96 Jordan, Robert, How They Did It; Billion Dollar Insights from the Heart of America, November 16, 2010, Red- Flash Press.
97 Interview.
98 Interview.
99 Jordan, Robert, How They Did It; Billion Dollar Insights from the Heart of America, November 16, 2010, Red- Flash Press.
100 Interview.
101 Interview.
102 Jordan, Robert, How They Did It; Billion Dollar Insights from the Heart of America, November 16, 2010, Red- Flash Press.
103 Interview.
104 Interview.
A Chinese Pharmaceutical Startup Acquires an American Firm to “Go Global” Paulson Papers on Investment Case Study Series
105 Interview.
106 Laboratory Corporation of America 2000 10-K, accessed at http://www.getfilings.com/o0000920148-01- 000003.html.
107 Interview.
108 Jordan, Robert, How They Did It; Billion Dollar Insights from the Heart of America, November 16, 2010, Red- Flash Press.
109 Ibid.
110 Holocomb, Henry J., “Biotech Moves in at Navy Base; Growing Firm Creates Manufacturing Site,” The Philadelphia Inquirer, April 10, 2004, http://articles.philly.com/2004-04-10/business/25365582_1_mili- tary-base-skilled-workers-facility.
111 Wolf, Liz, “Bonnie Baskin Tries for Second Knockout with AppTec,” Upsizemag, March 2004, http://www. upsizemag.com/cover-story/round-two.
112 Ibid.
113 Lee, Thomas, “Honing the Edge: The Entrepreneur; Eight in a Continuing Series on Innovation in Minnesota,” Minneapolis Star Tribune, September 22, 2008, accessed at https://www.highbeam.com/doc/1G1-185620147. html.
114 Holocomb, Henry J., “Biotech Moves in at Navy Base; Growing Firm Creates Manufacturing Site,” The Philadelphia Inquirer, April 10, 2004, http://articles.philly.com/2004-04-10/business/25365582_1_mili- tary-base-skilled-workers-facility.
115 WuXi PharmaTech Investor and Analyst Call Presentation, January 4, 2008, accessed at http://library.corpo- rate-ir.net/library/21/212/212698/items/274275/FinalWXPPT.pdf.
116 Jordan, Robert, How They Did It; Billion Dollar Insights from the Heart of America, November 16, 2010, Red- Flash Press.
117 Lee, Thomas, “China’s WuXi To Acquire AppTec; The Impact of The $163 Million Deal on AppTec’s St. Paul Workers Is Unclear,” January 4, 2008, Minneapolis Star Tribune, accessed at https://www.highbeam.com/ doc/1G1-173300536.html.
118 Interview.
A Chinese Pharmaceutical Startup Acquires an American Firm to “Go Global” Paulson Papers on Investment Case Study Series
119 Interview.
120 Investor and Analyst Conference Call, December 2, 2008, transcript purchased from Thomason Reuters.
121 Investor and Analyst Conference Call, January 4, 2008, transcript from Thomson Reuters.
122 Investor and Analyst Conference Call, January 4, 2008, transcript purchased from Thomson Reuters.
123 Interview.
124 Interview.
125 “Philadelphia Corporate Day Presentation,” September 10, 2008, accessed at http://library.corporate-ir.net/ library/21/212/212698/items/306862/PhiladelphiaCorporateDayPresentation.pdf.
126 Investor and Analyst Conference Call, October 2008, transcript purchased from Thomson Reuters.
127 Interview.
128 Investor and Analyst Conference Call, December 2, 2008, transcript purchased from Thomson Reuters.
129 Investor and Analyst Conference Call, August 14, 2008, accessed at http://seekingalpha.com/article/96970- wuxi-pharmatech-cayman-inc-q2-2008-earnings-call-transcript.
130 Company press release, June 28, 2008, accessed at http://www.prnewswire.com/news-releases/covance- and-wuxi-pharmatech-to-form-a-joint-venture-to-provide-world-class-preclinical-services-in-china-57537362. html.
131 Investor and Analyst Conference Call, October 14, 2008, transcript purchased from Thomson Reuters.
132 Interview.
133 “Fourth-Quarter and Full-Year 2008 Earnings Presentation,” accessed at http://library.corporate-ir.net/ library/21/212/212698/Items/329989/84B4F1A0-EB73-4C34-99D6-808E9DA5D63B_FourthQuarter2008Earn- ingsSlidePresentation4.pdf.
134 JPS Luncheon: John J. Baldwin, “The Changing Face of Pharmaceutical Research,” October 2010, audio recording accessed at http://www.chemheritage.org/visit/events/joseph-priestley-society/2010-10-john-j-bald- win.aspx.
A Chinese Pharmaceutical Startup Acquires an American Firm to “Go Global” Paulson Papers on Investment Case Study Series
135 Analyst and Investor Call, October 14, 2008, transcript purchased from Thomson Reuters.
136 Analyst and Investor Call, October 14, 2008, transcript purchased from Thomson Reuters.
137 Analyst and Investor Call, October 14, 2008, transcript purchased from Thomson Reuters.
138 Investor and Analyst Conference Call, December 2, 2008, transcript purchased from Thomson Reuters.
139 “WuXi PharmaTech Disappointed by AppTec Acquisition,” Seeking Alpha, March 27, 2009, http://seekingal- pha.com/article/128149-wuxi-pharmatech-disappointed-by-apptec-acquisition?page=2.
140 Investor and Analyst Conference Call, December 2, 2008, transcript purchased from Thomson Reuters.
141 Lee, Thomas, “WuXi’s Big 2008 Acquisition of St. Paul-based Apptec Ran Straight into the Global Recession,” Minneapolis Star Tribune, April 12, 2009, accessed from Lexis Nexis.
142 Interview.
143 “Wuxi Snaps UP NextCODE Health for $65M,” GEN News Highlights, January 9, 2015, http://www.geneng- news.com/gen-news-highlights/wuxi-snaps-up-nextcode-health-for-65m/81250785.
144 Chen, Te-Ping, “China Curbs Elite Education Programs,” The Wall Street Journal, December 20, 2015, http:// www.wsj.com/articles/china-curbs-elite-education-programs-1450665387.
145 Baldwin, John J. “Drug Discovery and Development 2014: Returning Toward the Norm?” Future Medicinal Chemistry, June 2015, http://www.future-science.com/doi/abs/10.4155/fmc.15.39?journalCode=fmc.
146 See “U.S. Pharmaceutical Sales - Q4 2013,” Drugs.com, February 2014, accessed at http://www.drugs.com/ stats/top100/sales; also see “Patent Terms Extended Under 35 USC §156”, US Department of Patent and Trade- mark Office, accessed at http://www.uspto.gov/patent/laws-and-regulations/patent-term-extension/patent- terms-extended-under-35-usc-156.
147 Although not directly related to the case, it is worth noting in April 2015, WX announced that it had received an offer to be taken private by Li and Ally Bridge Group Capital Partners, a private equity fund. The reason was simple: companies trading on the Shanghai, Shenzhen, and Hong Kong exchanges have much higher valuations than comparable ones on the NYSE, even after the Chinese stock market turbulence in mid-2015. WX and its private equity backer hoped to profit from delisting from the NYSE and then relisting on a Chinese exchange at a higher valuation. (See “US Traded Chinese Stocks Drop on Going-Private Scrutiny,” Bloomberg News, May 6, 2016, http://www.bloomberg.com/news/articles/2016-05-06/china-reviews-concerns-over-relisting- companies-delisted-abroad.)
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148 “Charles River Laboratories and WuXi PharmaTech to Combine, Creating the First Global CRO Offering Fully Integrated Early-Stage Drug Development Services to Clients Worldwide,” accessed at http://ir.criver.com/phoe- nix.zhtml?c=121668&p=irol-newsArticle_print&ID=1417485.
149 “Q4 2009 Earnings Presentation,” March 8, 2010, accessed at http://ir.wuxipharmatech.com/phoenix.zhtm- l?c=212698&p=irol-presentations.
150 “Q4 2010 Earnings Presentation,” March 8, 2011, accessed at http://ir.wuxipharmatech.com/phoenix.zhtm- l?c=212698&p=irol-presentations.
151 “Q4 2015 Earnings Presentation,” March 5, 2015, accessed at http://ir.wuxipharmatech.com/phoenix.zhtm- l?c=212698&p=irol-presentations.
152 “WuXi PharmaTech Acquires Abgent, a Leading Producer of Biological Research Reagents,” October, 14, 2011, http://www.wuxiapptec.com/press/detail/154/18.html.
153 “WuXi PharmaTech Laboratory Testing Division Expands in US With Acquisition of XenoBiotic Laboratories, Inc.,”October 1, 2014, http://www.wuxiapptec.com/press/detail/244/18.html.
154 “Wuxi Snaps UP NextCODE Health for $65M,” GEN News Highlights, January 9, 2015, http://www.geneng- news.com/gen-news-highlights/wuxi-snaps-up-nextcode-health-for-65m/81250785/.
155 “WuXi PharmaTech Breaks Ground on New Cell Therapy Manufacturing Facility,” April 29, 2014, http://www. wuxiapptec.com/press/detail/218/18.html.
156 “WuXi PharmaTech Completes Construction of New Materials Characterization Facility in St. Paul,” May 12, 2014, http://www.prnewswire.com/news-releases/wuxi-pharmatech-completes-construction-of-new-materi- als-characterization-facility-in-st-paul-258885731.html.
157 “Q2 2015 Earnings Presentation,” August 13, 2015, accessed at http://ir.wuxipharmatech.com/phoenix. zhtml?c=212698&p=irol-presentations.
A Chinese Pharmaceutical Startup Acquires an American Firm to “Go Global” Paulson Papers on Investment Case Study Series
The Paulson Institute’s Program on Cross-Border Investment
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