Jana says Wuxi deal offers inadequate returns for CRL
The US hedge fund, which has previously announced its intention to oppose the acquisition, was responding to recent CRL suggestions that post-merger synergies could add $100m (€77m) to its annual revenue.
In a letter to CRL CEO James Foster Jana described the sales forecast as “speculative at best” adding that such gains would run counter to industry perceptions and market trends.
Jana managing partner Barry Rosenstein wrote that: “Our recent discussions with industry operators also confirm that such synergy claims cannot be reconciled with practical industry dynamics.”
And, while none of the “industry operators” were named by Jana, the sales gains CRL forecasts could be seen as being ambitious given the slowdown that has affected the contract research sector in recent years.
No chemistry crossover
Rosenstein also said there would be little cross-over between Wuxi’s chemistry offering and CRL’s toxicology unit as the respective businesses operate at different timescales and stages of the development process.
This prediction, if accurate, would be a blow for the US contract research organisation’s (CRO) efforts to develop a fully integrated preclinical to clinical development offering, which it cited as a key driver for the acquisition in April.
Worse still for CRL’s plan is Jana’s suggestion that, even if the firm's sales forecasts are correct, they may still not big be enough to make the $1.6bn takeover deal worthwhile.
“Our analysis shows that by 2015 the return on this acquisition still would fall short of the midpoint of Wuxi’s cost of capital [and] not come close to [CRL’s] previously stated mid-teens return requirement.”
CRL’s track record
Jana’s most damning criticism however comes with its questions about the Wuxi deal in light of CRL’s previous investment and capital allocation decisions.
The group, which holds a 7.2 per cent stake in the CRO according to a recent filing, said CRL’s efforts to grow its preclinical business through acquisition “should serve as a cautionary tale.”
Jana said that despite spending $1.5bn on Inveresk Research in 2004 and allocating a further $600m to boost its early-phase contract development operations CRL has yet to generate a 5 per cent return on its investment.
The hedge fund goes on to suggest that this, coupled with a $700m goodwill write-down and several other factors, has seen CRL’s price fall 30 per cent in value.
Wuxi positive on CRL deal; Q2 sales and operating revs up
CRL has not yet responded to Jana’s comments, other than to report that the takeover and its rationale are supported by a proxy voting advisory firm called Proxy Governance. However the flurry of communication seen over the past few months, coupled with the CRO’s zeal for the deal, suggests a more detailed reply will not be long in coming.
The most recent comments on the acquisition come from Wuxi and CEO Ge Li who said the merger “will create the premier early-stage CRO, one that will provide a complete range of R&D services from compound synthesis through first-in-human clinical trials.
“The opportunity to combine complementary operations of these two CRO leaders and to achieve significant revenue synergies through cross-selling will provide shareholders of both companies with substantial value far greater than that available from the two companies on their own.”
Li was speaking at Wuxi’s at a second quarter financial presentation at which the Chinese firm reported revenues growth of 20 per cent to $325m, and a 14 per cent hike in operation income to $16.3m.
