The 50-50 joint venture has been created to "provide world-class preclinical contract research services in China" as the companies look to capitalise on the rise in outsourcing.

Financial and logistical details of the deal are expected to be disclosed later in the year when definitive terms are agreed upon.

Joe Herring, Covance CEO, said: "This joint venture will create a powerful partnership between China's leading provider of discovery and development services with the world's largest public contract research organization.

"Covance's market-leading and high-quality preclinical operations, combined with WuXi's track record of delivering world-class drug discovery and development services, will enable us to provide superior drug development solutions to our global pharmaceutical and biotech clients in the region."

Operations will be run out of a 323,450 sq. ft. facility which is currently being constructed by WuXi in Suzhou, China and is due to be completed in 2009.

The site will be equipped with GLP toxicology, drug metabolism and bioanalytical chemistry services, all of which will be designed to be compliant with US Food and Drug Adminstration (FDA) standards.

Covance is expected to make an initial investment of around $30m as part of the deal.

Through the joint venture Covance will gain a foothold in China, with the inherent benefits of lower wages and higher margins the nation can bring. This should put it in a position from which it can more effectively compete against the likes of Parexel and PPD.

In turn, WuXi will gain access to Covance's pharmaceutical clients. However, WuXi has been picking up plenty of business on its own of late.

It has seen revenues from its top 10 clients fall by 15 per cent over the last year, even as overall revenues grew by 69 per cent, suggesting a broadening of the company's client portfolio.

Jefferies & Co analyst David Windley, offered his explanation for WuXi's willingness to partake in the joint-venture.

In a note to investors he said: "This deal with Covance lends immediate credibility to the company's (WuXi's) expansion into mammalian toxicology services, a business into which it is investing significant capital."

The financial market has reacted well to the deal, with WuXi's share price jumping by 11.4 per cent, with Covance's also seeing a small rise.