Underlining its conviction that contract research organisations (CROs) “must be global in order to be competitive”, US-based Encorium Group has delivered the double punch of a proposed merger with Linkcon, an investment vehicle currently mopping up CROs in India, China and Latin America, and the proposed acquisition of Prologue Research International, a US speciality CRO focused on oncology.

The first of these deals involves a non-binding letter of intent to combine with Fine Success Investments, a British Virgin Islands company operating as Linkcon.

Under the proposal, which will result in Linkcon merging “with and into” Encorium, Linckon shareholders will get around 12.5 million shares of Encorium common stock while Chardan Capital, a merchant bank and founder of Linkcon – as well as a long-term investor in Encorium through Chardan’s founder and chairman Dr Richard Propper – will oversee the raising of US$25 million on behalf of Linkcon, in exchange for around 10 million shares of the combined entity.

The US$25 million raised on behalf of Linckon will be used to fund the aforementioned CRO acquisitions in India, China and Latin America, repay a portion of the debt to be incurred in connection with the proposed acquisition of Prologue, and to provide working capital.

At closing, which is subject to a number of contingencies including due diligence, board and shareholder approvals, and Linkcon’s ability to complete the aforementioned acquisitions, it is expected that Linkcon and its investors will own around 22.5 million shares and Encorium shareholders around 23.6 million shares respectively in the merged entity.

The annualised revenue of the combined company including Prologue is projected at US$50-55 million, supported by a backlog of about US$65-70 million. Linkcon is expected to add an aggregate of $11 million in net revenue to Encorium on a pro forma basis.

At the time of the announcement, Linckon had acquired or was poised to acquire “either prior to or simultaneously with the proposed business combination with Encorium”:

- a CRO based in India with more than 10 years of clinical trial experience;

- a CRO operating throughout Latin America, also with over 10 years’ clinical trial experience;
- a Chinese CRO licensed to conduct clinical trials in the People’s Republic of China and Hong Kong;
- a controlling interest in the Chinese company that holds the licence to JK1, a healthcare portal for medical professionals and consumers promoting information exchange between China and the West.

The JK1 platform is seen as “an extremely valuable resource for recruiting patients, developing business, collecting and distributing data and communicating with China’s State Food and Drug Administration”.

Other perceived benefits of the Encorium-Linkcon merger include:

- access for Encorium to the key emerging markets of India, Latin America and China, complementing “a strong presence in North America and Europe” (Encorium has a European operational base in Espoo, Finland);
- the capability, as a global 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”;
- opportunities to pursue in-licensing and co-development tie-ups for selected early-stage products;
- the chance to improve profitability “as operational and overhead redundancies are eliminated and lower-cost, global operations are exploited and the existing expertise is leveraged across a much larger base”.


Dr Kai Lindevall, chief executive officer of Encorium, said the proposed merger was “an incredible growth opportunity” for the US company.

“As we have noted in our conference calls and in announcements over the past year, we feel that CROs must be global in order to be competitive,” he commented. “Regulatory authorities worldwide are requiring more safety data, and the size of clinical trials continues to increase. CROs require access to large multi-ethnic populations with a wide variety of disease states … We feel that Linkcon’s expanding group of CROs in India, Latin America and China/Asia are not only geographically and functionally complementary to, but synergistic with, Encorium’s capabilities in North America and Europe.”

Prologue acquisition

As far as Prologue is concerned, Encorium has signed a non-binding letter of intent to acquire all of the oncology specialist’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 will be funded with a US$5 million loan to be procured by Chardan Capital.

Encorium has also made an additional US$500,000 non-refundable cash payment to Prologue to secure an exclusivity period for the transaction, which is expected to close in the third quarter of 2008.

Prologue was originally set up in 1998 as a not-for-profit CRO focused exclusively on oncology trials, with support from the James Cancer Hospital/Solove Research Centre at Ohio State University. Prologue was subsequently restructured to operate independently from the University and in mid-2004 it became a private, for-profit business as a means of enhancing access to capital.

For the fiscal year ended 31 December 2007, Prologue reported audited net revenues of around US$12.2 million and earnings before interest, taxes, depreciation and amortisation (EBITDA) of roughly US$900,000.

Compelling opportunity

Explaining why Prologue was a “compelling strategic acquisition opportunity”, Lindevall cited the CRO’s historical growth and its strong market position within the “increasingly important” oncology category, as well the potential to expand Prologue’s collaboration with the James Cancer Hospital and Comprehensive Cancer Center at Ohio State University, “whose recognition in the area of cancer therapy has grown globally over the past several years”.

A full-service contract research organisation based in Wayne, Pennsylvania, Encorium Group was created through the acquisition of Finnish CRO Remedium by US rival Covalent Group in the summer of 2006.