US-based contract research organisation (CRO) Encorium Group has scaled back the ambitious expansion package it announced last June, pulling out of a proposed merger with investment vehicle Linkcon while negotiating a lower price for the acquisition of Prologue Research International, a US CRO specialising in oncology.

Encorium had previously signed a non-binding letter of intent with Fine Success Investments, a British Virgin Islands company trading as Linkcon, to combine Encorium and Linkcon in what the former’s chief executive officer (CEO), Dr Kai Lindevall, described as “an incredible growth opportunity”.

Since then, the shine has come off the deal. Encorium explained that, in the course of negotiations, the terms of the proposed merger had “changed materially to the deteriment of the Company and its shareholders”. As a result, the Encorium board had decided to end talks with Linkcon and “position Encorium to pursue its own growth strategy”.

Under the proposed transaction, which would have involved Linkcon merging “with and into” Encorium, Linkcon shareholders were to receive around 12.5 million shares of Encorium common stock while Chardan Capital, a merchant bank and founder of Linkcon, would have overseen the raising of US$25 million on behalf of Linkcon, in exchange for around 10 million shares of the combined entity.

This money was earmarked to fund a string of CRO acquisitions either completed by Linkcon or pending in India, China and Latin America. It would also have supplied working capital and repaid a portion of the debt to be incurred in connection with the proposed acquisition of Prologue.

The deal with Linkcon had been trumpeted as opening the door to the key emerging markets of India, Latin America and China, which would have complemented Encorium’s existing presence in North America and Europe. It would also have enabled the CRO to meet “the size and geographic requirements established by many biopharmaceutical companies as a minimum qualification for consideration for large-scale, multinational Phase III, IIIb and IV clinical trial contracts”, Encorium said at the time.

Other attractions had included opportunities to pursue in-licensing and co-development tie-ups for selected early-stage products and to improve profitability by eliminating operational and overhead redundancies, exploiting lower-cost, global operations and leveraging existing expertise across a much larger base.

Still thinking global

Encorium has by no means given up on globalisation. The short- to mid-term strategy, confirmed by the proposed acquisition of Prologue, is to focus growth on three main therapeutic areas: cardiovascular disease, vaccines and oncology. “Since our globalisation strategy remains unchanged, we feel that the services we can provide in the aforementioned areas constitute an excellent platform for further growth on the global arena,” Lindevall commented.

Encorium expects the acquisition of Prologue to position it as “one of the strongest oncology-specialised CROs in the United States and Europe”, broadening Encorium’s expertise in “this very important and high-growth area of drug/biologics development”. According to Tom Ludlam, president and CEO of Prologue, the merged operation will be “a best-in-class oncology CRO with a geographic footprint that includes over one billion people in North America, Western/Central/Eastern Europe, Scandinavia, and the Baltics”.

The previous arrangement had been that Encorium would acquire all of Prologue’s issued and outstanding shares for US$13.0 million, comprising US$4.5 million in cash and US$8.5 million in a combination of non-convertible, non-redeemable senior subordinated debt and convertible, redeemable senior subordinated debt.

The cash portion of this deal was to be funded by a US$5 million loan to be procured by Chardan Capital, which had been a long-term investor in Encorium through Chardan’s founder and chairman, Dr Richard Propper. Encorium also made an additional US$500,000 non-refundable cash payment to Prologue to secure an exclusivity period for the transaction.

The amended letter of intent with Prologue eliminates most of the cash component from this deal. Encorium will now acquire all of Prologue’s issued and outstanding stock for around US$11.75 million, consisting of: the US$500,000 in cash previously paid to Prologue as a non-refundable exclusivity fee; US$1.13 million in assumed debt obligations; US$2.0 million in senior non-convertible notes with an eight-month term; US$2.0 million in senior non-convertible notes with a 18 month term; and US$6.12 million in subordinated convertible notes with a three year term.

Closing is subject to approval by the Encorium and Prologue boards and the signature of a definitive agreement. The acquisition is expected to be completed on 19 September 2008.