With its share price languishing at US$0.40 following its withdrawal from a deal to globalise its operations through a merger with investment vehicle Linkcon, US-based contract research organisation (CRO) Encorium Group had some more encouraging news for investors as it announced US$6.2 million in new business contracts.
Any sense of relief was short-lived, though. Encorium subsequently revealed that it had agreed with Prologue Research International, the US CRO Encorium was due to acquire on 19 September, to postpone negotiations on the deal. Instead, the two companies will form a strategic partnership “while leaving open the possibility of restarting negotiations relating to a merger of the two entities at a later date”, Encorium stated.
The company had already negotiated a lower price for oncology specialist Prologue, which made some shareholders uneasy about the transaction. Encorium put its best face on what increasingly looked like a string of bad business decisions, arguing that “in light of the strong strategic and cultural fit between Encorium and Prologue and their respective management teams”, a strategic partnership “will enable us to realise many of the potential benefits that a transaction could have created”.
The breathing space “will also allow Encorium to continue to focus in profitability improvements and our cost reduction plan to help us achieve profitability as soon as possible”, added executive chairman Dr Kai Lindevall.
On that front, Encorium announced a “strategic re-organisation” designed to preserve capital and cut costs by around US$1.0 million annually. As a first step, the CRO is laying off around 18% of its staff in the US.
Together with this and other immediate actions to improve profitability in its US and European operations, the company will focus its management energies on intra-company sales growth. More ominously, it has hired Mufson Howe Hunter & Company to “investigate possible strategic alternatives to maximise shareholder value”.
New chief executive officer (CEO) Dr David Ginsberg said Encorium believed it was “repositioning the business to take advantage of the high-growth opportunities in the clinical research industry” and would “continue to review strategic alternatives for the company as we strive to make Encorium successful”.
New contracts
Most of the new business announced prior to the rehash of the Prologue deal consists of vaccine trials in multiple European countries with an unnamed “major global biopharmaceutical company”. Revenue recognition for the contracts will begin in the fourth quarter of 2008, with the remainder expected to occur on a proportional basis as services are provided on each project, Encorium noted.
Lindevall said he was “very encouraged by the volume of contracts we have been able to sign during the last 10 weeks. Most of these wins relate to our European operations but we are currently strengthening our business development efforts in the US and expect to achieve results from this effort early next year”.
Over the last month Encorium has seen its share price fall by more than 80%. It sank to US$0.35 on the back of the latest revelations. The shares dived by nearly 50% after the company ended negotiations with Linkcon in the face of uncertainty over the latter’s pending CRO acquisitions in India, China and Latin America.
That prompted a management shake-out in which Lindevall was replaced as CEO by Ginsberg, formerly of KV Pharmaceuticals, and Encorium president and onetime CEO Dr Kenneth Borrow found himself out in the cold.
