This is one partnership I didn't see coming.
WuXi PharmaTech (NYSE: WX ) has been firing on all cylinders lately, persuading big pharma like Merck (NYSE: MRK ) and AstraZeneca (NYSE: AZN ) to outsource their research and development with it. The company has even acquired a U.S. presence.
But on Tuesday, the Chinese outsourcing giant announced that it's partnering with one of its biggest rivals, U.S.-based Covance (NYSE: CVD ) . The duo still needs to work out a few details, but the crux is that the companies will form a joint venture to provide outsourcing for preclinical drug development. WuXi will provide the space in a new building expected to be completed next year, and Covance will donate $30 million to get the venture started.
The benefit to Covance is clear: It gains a presence in China, where scientists' wages are considerably cheaper. Higher margins should help it compete for pharma and biotech business against PAREXEL International (Nasdaq: PRXL ) , PPD (Nasdaq: PPDI ) , and others.
For WuXi, I don't really see the long-term benefit. Sure, the joint venture will give it access to drug companies that have been working with Covance for years, but it seems like it was headed down that path on its own anyway. Its top 10 customers made up 77% of its revenue in the first quarter of 2007, but that dropped to 62% in the most recent quarter, even as spending by the largest customers grew by 35%. Clearly, the company is picking up plenty of new business on its own.
As drug developers cut costs and try to do more with less, contract research organizations should be able to prosper. Unfortunately for WuXi, it'll only get to enjoy half of the growth from the joint venture.