WuXi PharmaTech (NYSE: WX) and ShangPharma (NYSE: SHP) are both attractive M&A targets, according to a Bloomberg News article (see article). Both China CROs have higher profit margins than their US peers, and both are growing faster than US CROs. Nevertheless, their PE ratios are lower, making them value propositions for their US competitors.

To gain perspective on the situation, Bloomberg quoted Greg Scott, ChinaBio®’s CEO, who said China’s CRO industry is healthy, with demand growing steadily. Both companies have the “ability to deliver a cost advantage while maintaining very high quality,” he added.

The cost advantage remains significant. WuXi and ShangPharma can deliver top quality CRO services at about 50% the cost of US-based companies. Even at their lower rates, they remain more profitable than western CROs.

Most of their business comes from big multinational pharmas, though they are seeking to develop China clients as well. With their great experience, they have developed an equally great expertise. WuXi and ShangPharma feel they are at least the technological equals of their western competitors.

As most ChinaBio® Today readers will remember, WuXi has already signed one merger agreement. In 2010, the company agreed to be bought by Charles River Labs (NYSE: CRL) for $1.6 billion (see story). Charles River eventually backed out of the deal because its major shareholders fought against the merger, thinking the company overpaid for WuXi (see story). The offer was priced at 31 times WuXi’s 2009 earnings. Now WuXi’s profit is up about 50% from 2009 levels, meaning the deal would be priced at a P/E of about 20. That is just about the prevailing price for US CROs that aren’t growing as fast.

Nevertheless, the specter of the failed WuXi-Charles River merger hangs over any consideration of M&A.  As a result, CRL closed their Shanghai facility, which was snapped up by ShangPharma, enabling it to quickly expand its offering by establishing a world class animal facility (see story).

There are lots of reasons to look at these two CROs – as Bloomberg points out, strong fundamentals and an inexpensive foothold in the growing China CRO market are both compelling arguments. But this time, management should probably do a better job of talking to its major shareholders than Charles River did, carefully counting the number of “yes” votes before issuing any press releases.

See our other articles on WuXi PharmaTech and ShangPharma.

Disclosure: none.