Encorium plans liquidation if subsidiary sold

24-Aug-2009 - Last updated on 25-Aug-2009 at 10:15 GMT

Encorium plans to liquidate if it can negotiate the sale of its Finland-based business, which could happen in the fourth quarter.

The contract research organisation (CRO) struggled financially in 2008, which played a role in it pulling out of an attempt to buy Prologue Research International and signing non-binding letters of intent to sell its US and Finish businesses.

Pierrel Research completed the acquisition of the US business in June and negotiations for the Finish subsidiary, Encorium Oy, are ongoing. In its latest financial results Encorium said the deal will not close until during or after the fourth quarter of 2009.

After this the board of directors intend to liquidate the company, subject to stockholder approval. If the company fails to sell Encorium Oy it anticipates it will be able to meet financial requirements until June 2010.

However, this assumes that the company will win additional contracts in fiscal 2009. In a regulatory filing Encorium warned that the perception that it “may not be able to continue as a going concern” could worry clients and “adversely affect [its] ability to win new contracts”.

The company has historically had a healthy cash reserve but this has been eaten into. Total current assets in its second quarter results were $5.9m (€4.1m), down from $14.1m a year ago. Of the current assets $839,000 consists of cash and cash equivalents.

In the second quarter net revenues declined by 24 per cent to $4.5m. Operating losses grew by 90 per cent to $1.3m. Backlog as of June 30 was $19.6m, which includes $4.8m of new business won in the first half of 2009.

Hot competition in CRO market

Encorium’s most recent regulatory filing revealed some of the challenges facing smaller CROs. Drug companies are increasingly outsourcing “to a smaller number of preferred CROs that have far greater resources and capabilities”, according to Encorium.

The “established global presence” and “substantially greater” resources of the big CROs, six of which Encorium lists in its filing, give them an advantage over the competition.

However, Encorium also comments on the competition from small, niche CROs. The CRO business has relatively low barriers for entry and this has allowed small businesses with speciality focuses to form and “compete aggressively against [Encorium] for clients”.

In addition Encorium notes that consolidation in the pharma industry has reduced the number of clients that CROs compete for.