Averion International, the US-based contract research organisation (CRO) specialising in oncology, cardiovascular disease and medical devices, has decided to go private to cut the costs and administrative burden of operating as a public company.

The CRO has filed an information statement with the US Securities and Exchange Commission (SEC) detailing its plans for a reverse stock split that should reduce the number of shareholders of record to below the 300 required under the 1934 Securities Act to register common stock. This is turn would release Averion from its obligations to file annual, quarterly and other reports with the SEC.

The CRO believes it can make “annual tangible” cost savings of around US$805,000 by stripping out the external auditor, consulting and legal fees needed to maintain its status as a public company. Adding in the costs that Averion would eventually have to incur to comply with the internal control audit requirements of Section 404 of the Sarbanes-Oxley Act takes the estimated savings up to $1,210,000 per year before taxes.

Financial health

Like many of its counterparts in the clinical research industry, Averion has not been in the best of financial health. In 2008 the company recorded an operating loss of US$31.8 million compared with a US$2.20 million loss in the previous year. That was despite net service revenues rising 90.4% year on year to US$66.4 million.

In the second quarter ended 30 June 2009, operating income was 15.8% higher year on year at US$1.21 million, reflecting staff reductions and cost efficiency initiatives. Net revenues dropped by 15.0% against the second quarter of 2007, to US$15.9 million.

During the latest quarter, Averion’s shares traded at a high of US$0.02 and a low of US$0.05. “In addition to the related direct financial burden from being a public company, the thin trading market in our common stock has not provided the desired level of liquidity to our stockholders nor provided a meaningful incentive for our key employees,” the CRO stated.

A reverse stock split is a means of reducing the volume of a company’s outstanding shares, usually with the aim of boosting the price of the stock. In this case, it is expected to whittle down the 850 or so existing Averion shareholders to below the 300 mark. The ratio of the split is 20,500 shares for 1, and the CRO estimates that some 725 of its shareholders own less than that amount.

These shareholders will instead have the right to a cash payment of US$0.01 per share immediately before the reverse split. As soon as the split is completed, Averion will implement a 1 for 20,500 forward split restoring the remaining shareholders to their previous position.

“Averion is a successful provider of clinical research services in a very competitive business environment,” commented chairman James McGuire. “The increasing cost and time associated with public company regulatory compliance required a significant amount of expense and management resources with no tangible benefit to our shareholders.”

The Averion board did consider strategic alternatives to the reverse stock split, namely maintaining the status quo or a merger or other business combination with a third party. However, the first option was considered detrimental to shareholders while the second produced only one potential suitor.

Following a “significant marketing effort”, financial consultants Edgemont Advisers “identified only a single potential third party”, Averion noted. “After preliminary discussions with this third party and without receiving a formal offer, our Board concluded that the terms of the proposed transaction were not in the best interests of the Company, our stockholders or our debt holders,” it said.