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Form 10-K

(MARK ONE)

þ	Annual report pursuant to Section 13 or 15(d)

For the Fiscal Year ended December 31, 2002

OR

o	Transition report pursuant to Section 13 or 15(d) of the

For the transition period from                               to                               .

Commission file number 000-49765.

Inveresk Research Group, Inc.

919-460-9005

Securities registered pursuant to Section 12(b) of the Act:     None

Securities registered pursuant to Section 12(g) of the Act:

Title of each class

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.          Yes     þ No     o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     Yes     o               No     þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).   Yes     o               No     þ

      As of February 14, 2002, the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $255 million. As of that date, there were outstanding 36,017,455 shares of the registrant’s common stock, $0.01 par value per share.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the company’s definitive proxy statement relating to its 2003 Annual Stockholders Meeting are incorporated herein by reference in Part III.

Table of Contents

TABLE OF CONTENTS

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PART I

Overview

      We are a leading provider of drug development services to companies in the pharmaceutical and biotechnology industries. Through our pre-clinical and clinical business segments, we offer a broad range of drug development services, including pre-clinical safety and pharmacology evaluation services, laboratory sciences services and clinical development services. We are one of a small number of drug development services companies currently providing a comprehensive range of pre-clinical and clinical development services on a worldwide basis. Our client base includes major pharmaceutical companies in North America, Europe and Japan, as well as many biotechnology and specialty pharmaceutical companies. We completed our initial public offering of common stock in July 2002.

      Our pre-clinical development business was established over 35 years ago, employs approximately 1,830 people and operates from two principal facilities, one located in Tranent, Scotland and the other in Montreal, Canada. This business segment provides pre-clinical safety and pharmacology evaluation services and laboratory sciences services (including clinical support services). Based upon net service revenue, we estimate that we are the third largest provider of pre-clinical safety evaluation services in the world. Our pre-clinical business has a diverse client base, with no single client representing more than 7.5% of our net service revenue in 2002. More than 85% of the 2002 net service revenue from our pre-clinical business was generated from repeat clients.

      Our clinical development business was established in 1988 and operates from 15 facilities located across the United States and Europe, employing approximately 720 people. This business segment conducts Phase I clinical trials and provides Phase II-IV clinical trials management services (including medical data sciences services and regulatory support). Our 62-bed clinic in Edinburgh conducts a wide range of Phase I clinical trials and has completed an average of 11 first-in-man studies annually over the past five years. The global infrastructure of our clinical development business permits us to offer our clients multi-country Phase II-IV clinical trials, as well as smaller single-country projects.

Corporate History

      Prior to 1999 we operated as a division of SGS Société Générale de Surveillance SA. In September 1999 we were acquired in a management buyout supported by Candover Investments PLC. As a result of that transaction, Candover Investments PLC and certain of its affiliated entities became our principal stockholders and Inveresk Research Group Limited, a newly created Scottish company, became the ultimate holding company for the Inveresk Research group of companies. In April 2001 we acquired a Nasdaq-traded company, ClinTrials Research Inc., for $115.1 million, net of cash acquired of $5.7 million. ClinTrials provided drug development services, with significant pre-clinical operations in Canada and clinical operations primarily in the United States and Europe. We subsequently implemented a major restructuring of ClinTrials’ clinical business and, since the time we acquired it, its profitability has improved significantly.

      Effective June 25, 2002 we changed our ultimate parent company from a company organized in Scotland to a corporation organized in Delaware.

      We completed our initial public offering of 12 million shares of common stock, at a price of $13 per share, in the third quarter of 2002.

Industry Trends

      The drug development services industry has evolved from providing limited pre-clinical and clinical trial services in the 1970s to a full-service industry today that encompasses broader relationships with clients, covering the entire drug development process, including pre-clinical safety evaluation, pharmacology, study

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      There is a strong demand in the marketplace to treat diseases such as cancer and HIV as well as illnesses associated with aging such as osteoporosis, arthritis and Alzheimer’s disease. The development and testing of some of the compounds that treat such illnesses require complex clinical trials. In addition, the cost of developing therapies for chronic disorders, such as arthritis, Alzheimer’s disease and osteoporosis, is higher because the treatments must be studied for a longer period to demonstrate their effectiveness and to determine any possible long-term side effects. The complexity and expense of these trials prompts pharmaceutical and biotechnology companies to outsource all or a portion of these trials to drug development services organizations to take advantage of the experience and expertise of such organizations in conducting complicated trials.

      Increases in global research and development expenditures by the major pharmaceutical companies have broadly tracked the increase in pharmaceutical revenues over the past ten years. The outsourcing of pre-clinical and clinical trials for pharmaceutical, biotechnology and medical device products is estimated to be growing at least as much as the rate of growth in global research and development expenditures by major pharmaceutical companies.

      The United States, European and Japanese biotechnology industries and the number of drugs produced by them have grown substantially over the past decade. According to the Biotechnology Industry Organization, 35 new biotechnology drugs and vaccines received approval in 2002 compared with seven in 1993. The biotechnology industry is expected to increase its expenditure on drug development in the coming years. Biotechnology companies typically do not have the staff, operating procedures, experience or expertise in-house to conduct their own pre-clinical testing or clinical trials. In addition, while biotechnology companies have historically sought to defray the costs of pre-clinical and clinical development by licensing their products to pharmaceutical companies, they are now increasingly seeking to license out their technology at a later stage of clinical development.

      Over the past 20 years, technological advances have dramatically changed the drug discovery process. New and improved technologies have evolved such as combinatorial chemistry, ultra high-throughput screening, new in vitro and in vivo pre-clinical profiling techniques, and the evolution in genetic-based drug research commonly referred to as genomics and proteomics. The objective of these innovations is to find more drug targets and to screen against targets much more quickly with literally millions of chemical compounds. This process should produce many more molecules having the ability to affect biological activity. The increased numbers of drug candidates will make it imperative that the development and regulatory processes be rapid and cost-effective. Pharmaceutical and biotechnology companies may also find that they do not have sufficient internal development resources or know-how to cope with the increased number of new drug candidates emerging as a consequence of the emergence of new technologies. These resource shortages are expected to increase demand for the services of drug development services companies.

      Pharmaceutical companies face increased pressure and competition to bring new drugs to market in the shortest possible time. The development time of a potential new drug is crucial to the competitive advantage and profitability of that drug because it determines the market exclusivity available to a pharmaceutical

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      Increasingly complex and stringent regulatory requirements throughout the world have increased the volume of high quality data required for regulatory filings and escalated the demand for data collection and analysis during the drug development process. As regulatory requirements become more complex, we believe the pharmaceutical and biotechnology industries will increasingly outsource to drug development services organizations to take advantage of their data management and regulatory expertise, technological capabilities and global presence.

      With the increasing cost of new drug development, pharmaceutical companies are increasingly attempting to maximize returns from a given drug by pursuing regulatory approvals in multiple countries simultaneously rather than sequentially. A pharmaceutical company seeking approval in a country in which it lacks experience or internal resources will frequently turn to a drug development services organization for assistance in interacting with regulators or in organizing and conducting clinical trials.

Strategy

      We believe the increasing demand for outsourced drug development services will provide us with opportunities to continue to grow our pre-clinical and clinical businesses profitably. Our strategy is to build upon our core pre-clinical and clinical development expertise and to further our reputation as a provider of a comprehensive range of high quality, value-added drug development services. Our aim is to become the leading research and development partner to the pharmaceutical and biotechnology industries.

Our Services

      We provide a full range of product development services on a worldwide basis. We derive approximately 88% of our net service revenue from services that we provide to the pharmaceutical and biotechnology industries. We also service the product development needs of the veterinary products, agrochemical and chemical industries. One of our primary objectives is to assist our clients to optimize the time for new product development and provide regulatory advice and direction.

      Our pre-clinical development services business offers pre-clinical safety evaluation and pharmacology services as well as selected laboratory sciences services. Our clinical development services business offers a wide range of drug development services including Phase I clinical safety evaluation, Phase II-IV clinical trials and regulatory services. Our approach is to work in partnership with our clients, providing regulatory advice and direction and tailoring our services to their requirements at every stage of a project.

      Our pre-clinical development services business offers a broad range of services including pre-clinical safety evaluation, pharmacology and laboratory sciences. In 2002 this business segment generated net service revenue of $142.2 million and income from operations of $43.5 million.

      We conduct pre-clinical safety evaluation studies and pharmacological services in our facilities located in Tranent and Montreal. We conduct product development and safety evaluation programs, involving both mammalian and in vitro toxicology and we have the necessary resources in specialist ancillary groups to support fully toxicology studies and provide a complete safety evaluation service. We perform standard or

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      Pre-clinical safety evaluation and pharmacological services that we undertake on behalf of our clients are wide-ranging and include:

	•	pre-clinical toxicology studies
	•	genetic toxicology studies
	•	immunotoxicology studies
	•	bioanalytical chemistry studies
	•	toxicokinetic evaluations

      In addition, we have an established reputation in the field of specialist toxicology safety evaluation services relating to specific routes of administration, including infusion and inhalation studies, highly specialized areas in which we have experienced increasing demands for our services.

      We utilize modern, industry-standard validated software systems wherever possible to assist in the collection, analysis and reporting of toxicology data.

      We provide a wide range of laboratory-based analytical services, primarily to the pharmaceutical and biotechnology industries. These services are provided from our pre-clinical facilities located in Tranent and Montreal. We believe that all of the activities of our laboratory sciences business are conducted in compliance with GLP.

      The laboratory sciences services we offer to our clients include the following:

	•	bioanalytical services
	•	drug metabolism services
	•	clinical support services
	•	product characterization and stability testing

      We also offer a wide range of studies to register new compounds and support existing materials worldwide for the agrochemical, animal health, biocide and chemical industries. In addition to the services described above, we carry out environmental toxicity and related investigations, environmental fate studies, veterinary clinical trials, livestock studies, plant metabolism studies and field trials for agricultural products on behalf of these clients.

      Our clinical development services business offers a broad range of services including Phase I clinical safety evaluation, Phase II-IV clinical trials services (including medical data sciences) and regulatory support. In 2002 this business segment generated net service revenue of $80.3 million and income from operations of $9.0 million.

      Our Phase I clinical safety evaluation service is designed to move lead pharmaceutical candidates rapidly from pre-clinical development through Phase I tolerability assessments to explore the human pharmacology. Blending the experience of our physicians, scientists, project managers and specialist nursing staff, we can

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      We conduct Phase I safety evaluations at our facility in Edinburgh that is capable of housing up to 62 volunteers at any one time. This facility is in close proximity to our laboratory sciences segment in Tranent, which is responsible for performing the analysis of biological samples generated by our Phase I clinic, guaranteeing fast response times. All of our volunteers go through an intensive screening process to ensure suitability for our studies.

      We believe one of our core competencies is our ability to provide in-depth analysis of the results of Phase I clinical safety evaluation and meaningful information for our clients with respect to the product being tested.

      Our clinic in Edinburgh conducts a wide range of Phase I clinical trials and has completed an average of 11 first-in-man studies annually over the past five years.

      We conduct Phase I trials in patients for specific indications at investigational sites throughout the United States. We also have the ability to undertake special population studies, including in groups such as the elderly, post-menopausal women or patients with specific diagnoses, such as renal failure or asymptomatic HIV disease.

      From our 15 offices worldwide, we can manage every aspect of clinical trials from clinical development plans and protocol design to New Drug Applications. In addition to providing small or single site studies, we have the ability to conduct large international multi-center trials. We also have extensive experience in managing small, medium and large trials in many parts of the world. We have a proven track record of managing integrated projects in Europe and North America, as well as single-continent and country specific projects, culminating in regulatory filings. We have supported studies in over 20 countries, working in 17 different languages.

      We offer customized program management to coordinate and manage a clinical trial development program. The design of each study is agreed with the client at the beginning of the study and set out in a protocol.

      As part of conducting clinical trials, we provide the following core services, either on an individual or integrated basis, depending on our clients’ needs:

	•	advice on clinical development strategy
	•	study design
	•	investigator recruitment
	•	project management
	•	quality assurance
	•	patient recruitment services
	•	study monitoring
	•	clinical data management
	•	biostatistical analysis
	•	medical writing services
	•	medical overview

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	•	product safety
	•	Phase IV studies
	•	Rx to OTC switches

      Before a product can be launched in any country, it must be approved by the regulatory agency in that particular country. We offer comprehensive global regulatory product registration services at all stages of development for pharmaceutical and biotechnology products and have particular expertise with the regulations in Europe, North America and Japan. Our regulatory affairs experts review existing published literature, assess the scientific background of a product, assess the competitive and regulatory environment, identify deficiencies and define the steps necessary to obtain registration in the most expeditious manner. Through this service, we help our clients determine the feasibility of developing a particular product or product line.

Clients and Marketing

      We provide product development services on a global basis to, among others, the pharmaceutical and biotechnology industries. In 2002, no single client accounted for more than 7.5% of our net service revenue, and in 2002 our top 20 clients together accounted for less than 45% of our net service revenue.

      Our pre-clinical business has historically been successful in maintaining clients, as is evidenced by the fact that more than 85% of our pre-clinical revenues in 2002 came from repeat clients. Our clinical operations are marketed primarily to our existing pre-clinical clients. In addition, we have appointed a business development manager who, together with a team of business development personnel, markets our clinical operations on a global basis. We also engage in promotional activities including organizing scientific symposia, publishing scientific papers, making presentations and exhibiting at scientific conferences and trade shows in North America, Europe and Japan.

Contractual Arrangements

      Most of our contracts with our clients are fixed priced contracts. Contracts may range from a few weeks to several years depending upon the nature of the work performed. In many cases of multi-year contracts, a portion of the contract fee is paid at the time the study or trial is started with the balance of the contract fee payable in installments over the study or trial duration. Sometimes the installments are tied to meeting performance milestones; for example, in clinical trials, installment payments may be related to investigator recruitment, patient enrollment or delivery of a report.

      We generally bill our clients upon the completion of negotiated performance requirements and, to a lesser extent, on a date certain basis. In cases where our contracts are fixed price, we generally bear the cost of overruns, but we benefit if the costs are lower than we anticipated. Over the past five years the cost of overruns on our fixed price contracts have not had a material adverse impact on our results of operations. Where there are material changes in the scope of review or any study-specific assumptions, we typically negotiate appropriate amendments of the contract price.

      Most of our contracts may be terminated by the client with or without cause upon little or no notice. These contracts typically require payment to us of expenses to wind down and close out a study, payment to us of fees earned to date and payment to us for committed resources that cannot be reallocated to existing studies. Contracts may be terminated for various reasons, including our failure to discharge our obligations properly, the failure of a product to satisfy safety requirements, unexpected or undesired results of the product, inadequate patient enrollment or investigator recruitment, production problems resulting in shortages of the drug being tested or adverse patient reactions to the drug being tested or clients’ decisions to forego or terminate a particular study.

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Backlog

      Our studies and projects are performed over varying times, from a short period of time to extended periods of time, which may be as long as several years. We maintain an order backlog to track anticipated revenue from projects that either have not started, but are anticipated to begin in the near future, or are in process and have not been completed. We only recognize a contract in backlog when it is evidenced by a signed contract or other written evidence of a firm commitment. Cancelled contracts are removed from backlog. Based upon the foregoing, our aggregate backlog at December 31, 2002 was approximately $210 million, compared to approximately $172 million at December 31, 2001.

      We believe our aggregate backlog as of any date is not necessarily a meaningful indicator of our future results for a variety of reasons, including the following. First, studies vary in duration. For instance, some studies that are included in 2002 backlog may be completed in 2003, while others may be completed in later years. Second, the scope of studies may change, which may either increase or decrease their value. Third, studies included in backlog may be subject to bonus or penalty payments. Fourth, studies may be terminated or delayed at any time by the client or regulatory authorities. Terminations or delays can result from a number of reasons. Delayed contracts remain in our backlog until a determination of whether to continue, modify or cancel the study has been made.

Competition

      The competitive landscape for our two core businesses varies. Nevertheless, both businesses primarily compete with in-house departments of pharmaceutical companies, other drug development services organizations, universities and teaching hospitals.

      We believe we are the third largest provider of pre-clinical safety evaluation services in the world, based on net service revenue. Our primary pre-clinical competitor on a global basis is Covance, although we also face competition from publicly traded companies such as Charles River Laboratories, Life Sciences Research and MDS Pharma, as well as from a number of privately-held companies. Certain of these competitors are also expanding their pre-clinical operations.

      The clinical development services market is highly fragmented, with participants ranging from hundreds of small, limited-service providers to a few full service drug development services organizations with global operations. Based on this, we believe that we compete with a number of publicly traded companies, primarily Quintiles, PPD, Covance, MDS Pharma, Parexel, ICON and Kendle, as well as with a number of privately-held companies.

      In contrast to the pre-clinical drug development industry, the clinical drug development industry has few barriers to entry. Newer, smaller companies with specialty focuses, such as those aligned to a specific disease or therapeutic area, may compete aggressively against larger companies for clients. Increased competition might lead to price and other forms of competition that may adversely affect our operating results.

      Providers of outsourced drug development services compete on the basis of many factors, including the following:

	•	reputation for on-time quality performance;
	•	expertise, experience and stability;
	•	scope of service offerings;
	•	how well services are integrated;
	•	strength in various geographic markets;
	•	technological expertise and efficient drug development processes;
	•	ability to acquire, process, analyze and report data in a time-saving, accurate manner; and
	•	ability to manage large-scale clinical trials both domestically and internationally.

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We have traditionally competed effectively on the basis of the factors noted above, but we may not be able to continue to do so. If we fail to compete successfully, our business could be seriously harmed.

United States and Foreign Government Regulation

      Our laboratory services are subject to various regulatory requirements designed to ensure the quality and integrity of the development processes. The industry standards for conducting pre-clinical laboratory testing are embodied in the GLP and Good Manufacturing Practice (“GMP”) regulations. The standards of GLP and GMP are required by the FDA, the U.S. Environmental Protection Agency, the Department of Health in the United Kingdom, the Health Protection Branch of Health Canada, the Japanese Ministry of Health and Welfare, the European Agency for the Evaluation of Medicinal Products and similar regulatory authorities in other parts of the world. Such standards are also the subject of guidance endorsed by the Organisation for Economic Co-operation and Development. GLP and GMP stipulate requirements for facilities, equipment and professional staff. The regulations require standardized procedures for conducting studies, including procedures for recording and reporting data and for managing study materials and records. To help satisfy our compliance obligations, we have established quality assurance and quality control systems at our laboratories that monitor ongoing compliance with GLP and GMP regulations and the Clinical Laboratory Improvement Amendments, as applicable, by auditing development data and conducting inspections of development procedures. In addition, we have obtained FDA approval to conduct Stability and Lot Release Testing in compliance with GMP.

      The industry standards for the conduct of clinical research and development studies are embodied in the regulations for Good Clinical Practice (“GCP”). The FDA and other regulatory authorities require that results of clinical trials that are submitted to such authorities be based on studies conducted in accordance with GCP. These regulations require that we, among other things:

	•	comply with specific requirements governing the selection of qualified investigators;
	•	obtain specific written commitments from the investigators;
	•	verify that appropriate patient informed consent is obtained;
	•	ensure adverse drug reactions are medically evaluated and reported in a timely manner;
	•	monitor the validity and accuracy of data;
	•	verify drug or device accountability;
	•	instruct investigators and studies staff to maintain records and reports; and
	•	permit appropriate governmental authorities access to data for their review.

      We must also maintain reports for each study for specified periods for auditing by the study sponsor and by the FDA or similar regulatory authorities in other parts of the world. As with GLP, noncompliance with GCP can result in the disqualification of data collected and reports issued during the clinical trial. In addition, under certain clinical contracts, we have directly assumed certain obligations of the study sponsor under FDA regulations.

      Our standard operating procedures are written in accordance with regulations and guidelines appropriate to the region and the nation where they will be used. All clinical research is carried out in accordance with the International Conference on Harmonization — Good Clinical Practice Guidelines and the requirements of the applicable country. Although the United States is a signatory to these guidelines, the FDA has not adopted all of the guidelines as statutory regulations, but has currently adopted them only as guidelines. From an international perspective, when applicable, we have implemented common standard operating procedures across regions to assure consistency whenever it is feasible and appropriate to do so.

      Our animal import facilities are subject to a variety of national, regional, and local laws and regulations, including the U.K. Home Office Code of Practice for the Housing and Care of Animals, the U.K. Animals (Scientific Procedures) Act of 1986, the Canadian Health of Animals Act and regulations promulgated under

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      Our pre-clinical laboratories are subject to licensing and regulation under national, regional and local laws relating to the surface and air transportation of laboratory specimens, the handling, storage and disposal of laboratory specimens, hazardous waste and radioactive materials, and the safety and health of laboratory employees, including, but not limited to, the regulations of the U.K. Home Office, the Scottish Environmental Protection Agency, the International Air Transport Association, Environment Canada, the Canadian Nuclear Safety Commission, the Quebec Ministry of the Environment and Health and Social Services Quebec. Although we believe we are currently in compliance in all material respects with such national, regional and local laws, failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions.

      To ensure that we comply with all scientific and medical regulatory matters we are subject to, each division of our business has established an independent quality assurance group that is responsible for monitoring compliance and that reports directly to the relevant division president. In compliance with GCP, we conduct our Phase I clinical trials under the supervision of an Ethics Committee and have undertaken measures to ensure the protection of personal data.

Potential Product Liability and Insurance

      We are liable to our clients for any failure to conduct their studies properly according to the agreed upon protocol and contract. If we fail to conduct a study properly in accordance with the agreed upon procedures, we may have to repeat the study at our expense, reimburse the client for the cost of the study and pay additional damages.

      At our Phase I clinic in Edinburgh, we study the effects of drugs on healthy volunteers. In addition, in our clinical business we, on behalf of our clients, contract with physicians who render professional services, including the administration of the substance being tested, to participants in clinical trials, many of whom are seriously ill and are at great risk of further illness or death as a result of factors other than their participation in a trial. As a result, we could be held liable for bodily injury, death, pain and suffering, loss of consortium, or other personal injury claims and medical expenses arising from a clinical trial.

      To reduce our potential liability, informed consent is sought from each volunteer and we obtain indemnity provisions in our contracts with clients. These indemnities generally do not, however, protect us against certain of our own actions such as those involving negligence or misconduct. Our business, financial condition and operating results could be materially and adversely affected if we were required to pay damages or incur defense costs in connection with a claim that is not indemnified, that is outside the scope of an indemnity or where the indemnity, although applicable, is not honored in accordance with its terms.

      We maintain errors and omissions professional liability insurance in amounts we believe to be appropriate. This insurance provides coverage for vicarious liability due to negligence of the investigators who contract with us, as well as claims by our clients that a clinical trial was compromised due to an error or omission by us. If our insurance coverage is not adequate, or if insurance coverage does not continue to be available on terms acceptable to us, our business, financial condition and operating results could be materially and adversely affected.

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Intellectual Property Rights

      We have developed, and continually develop and update, certain computer software related methodologies intended to maximize the quality and effectiveness of our services. We believe such factors as the technical expertise, knowledge, ability and experience of our professionals are significantly more important to our performance than are any intellectual property rights developed by us.

Employees

      At December 31, 2002, we had 2,556 employees, of whom 124 held a Ph.D. or M.D. degree, 20 held D.V.M. degrees and 172 held master’s degrees. Approximately 13% of our employees are located in the United States, 44% are located in Canada, 42% are located in Europe and less than 1% are located in other international locations. We believe our relations with our employees are good.

      Our performance depends on our ability to attract and retain a qualified management, professional, scientific and technical staff. Competition from both our clients and competitors for skilled personnel is high. While we have not experienced any significant problems in attracting or retaining qualified staff to date, there can be no assurance we will be able to continue to attract and retain personnel in the future.

Suppliers

      We purchase the animals used in our in vivo studies from a number of different suppliers. We do not have long-term contracts with any of these suppliers. However, we believe that we will continue to be able to meet our current supply needs and any increase in these needs resulting from the planned expansion of our pre-clinical operations.

      We own some of our facilities and lease others. We lease our corporate headquarters office space in Cary, North Carolina. Our pre-clinical operations are conducted from our 300,000 square foot facility located in Tranent, Scotland and our 323,000 square foot facility located in Montreal, Canada, both of which we own. Our clinical operations are conducted from our 180,000 square foot leased facility in Cary, North Carolina, our 20,700 square foot owned Phase I facility in Edinburgh, our smaller owned facility in Edinburgh, our pre-clinical facility in Tranent and our leased facilities in Maidenhead (England), Glasgow, Brussels, Milan, Paris, Tel Aviv, Warsaw, Madrid, Prague, and Munich.

      We believe the space we own and lease is adequate for our operations.

      From time to time we are subject to claims, suits and administrative proceedings arising in the ordinary course of business. We do not expect that any of the claims, suits or proceedings of which we have been notified will have a material adverse effect upon our operations or financial condition.

      None.

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PART II

      Our common stock began trading on the Nasdaq Stock Market’s National Market on June 28, 2002 under the symbol “IRGI”. The following table sets forth the high and low sales prices of our common stock as reported by the Nasdaq Stock Market for the periods indicated.

Stockholders

      As of February 12, 2003, there were approximately 25 holders of record of our shares of common stock.

Dividends

      We have not paid any dividends in the past and currently we do not expect to pay cash dividends or make any other distributions in the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon our financial condition, operating results, capital requirements and such other factors as our board deems relevant. In addition, our ability to declare and pay dividends on our shares is restricted by (i) covenants in our credit facilities and (ii) our corporate organizational structure (which imposes a significant tax burden on intercompany dividends and distributions of earnings to us by our operating subsidiaries).

Equity Compensation Plan Information

      You should read the selected consolidated financial information presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes. The financial information presented below for the three years ended December 31, 2002, December 30, 2001 and December 31, 2000 and for the period from September 20, 1999 to December 26, 1999 reflect the results of operations of Inveresk Research Group, Inc. and Inveresk Research Group Limited, which became our direct subsidiary immediately prior to our initial public offering. The financial information for the period from December 28, 1998 to September 19, 1999 and for the year ended December 27, 1998 reflects the results of operations of our business while it operated as a

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      The selected consolidated financial data presented below for each of the three years ended December 31, 2002, December 30, 2001 and December 31, 2000 were derived from the audited consolidated financial statements of Inveresk Research Group, Inc., included herein. The selected consolidated financial data presented below for the periods from September 20, 1999 to December 26, 1999 and from December 28, 1998 to September 19, 1999 were derived from the audited consolidated financial statements of Inveresk Research Group Limited, which are not included herein. The selected consolidated financial data presented below for the year ended December 27, 1998 were derived from unaudited financial statements prepared on the basis of data furnished by SGS Société Générale de Surveillance SA, which are not presented herein.

      As a consequence of the adoption of FAS 142 with effect from January 1, 2002, the amortization expense shown for 2002 in the selected consolidated financial data presented below is not on a consistent basis of accounting with earlier periods. The impact of this is shown in Note 4 of our consolidated financial statements included herein.

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Statement of Operations Data:

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Balance Sheet Data:

(1)	Effective as of the beginning of 2002, our fiscal years end consistently on December 31 and our fiscal quarters end consistently on the last calendar day in the quarter. Before 2002, our fiscal years ended on the last Sunday on or prior to December 31 and our fiscal quarters ended on the last Sunday on or prior to the relevant quarter end.
(2)	Prior to September 20, 1999, our businesses were operated as a division of SGS Société Générale de Surveillance Holdings SA. Share and per share data for these periods is not meaningful and has not been presented.
(3)	As more fully described in Note 4 to the consolidated financial statements, share and earnings per share data for periods prior to the date of our initial public offering in June 2002, have been calculated as if the historical outstanding shares in Inveresk Research Group Limited had been converted to common stock in Inveresk Research Group, Inc. using the conversion ratios applicable to change in ultimate parent company which took place on June 25, 2002.
(4)	We have completed two significant acquisitions during the period covered by the above selected consolidated financial information presented above. These are the management buyout completed on September 20, 1999 and our acquisition of ClinTrials, which was completed on April 5, 2001. A description of these acquisitions is given in the overview to “Management’s Discussion and Analysis of Financial Condition and Results of Operation” section of this document.
(5)	FAS 142 was adopted with effect from January 1, 2002. As a consequence, there is no amortization of goodwill in 2002. The effect of adoption of FAS 142 is shown in Note 4 of our consolidated financial statements included herein.
(6)	Extraordinary items represent the extinguishment of deferred debt costs on debt facilities which were cancelled at the time of the acquisition of ClinTrials in April 2001 and also at the time of our initial public offering in June 2002.

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      The following discussion should be read in conjunction with our consolidated financial statements.

Recent Corporate History and Overview

      On September 20, 1999, we completed a management buyout supported by Candover Investments PLC. In that transaction, Inveresk Research Group Limited, a newly created Scottish company, acquired the businesses that comprise our European pre-clinical operations, our Phase I clinical trials operations located in Edinburgh and the original Inveresk Research Phase II-IV clinical development services operations. As part of the transaction, we also acquired Inveresk Research North America, Inc., which operated a small Phase II-IV clinical development services business located in the United States. The total acquisition cost was $78.8 million, net of cash acquired of $9.1 million. In connection with financing this acquisition we received a $0.8 million equity investment from Candover Investments PLC, Candover (Trustees) Limited (a wholly-owned subsidiary of Candover Investments PLC), certain investment funds indirectly controlled by Candover Investments PLC and management, borrowed $43.8 million from certain of these Candover entities by issuing to them 10% unsecured subordinated loan stock due 2008 and borrowed $41.4 million under bank credit facilities.

      The financial information in this document divides the 1999 financial year into two periods — the period prior to September 20, 1999, when the original Inveresk Research businesses were under the ownership and control of its previous parent company, and the post acquisition period from September 20, 1999 to December 26,1999.

      On April 5, 2001, we completed the acquisition of ClinTrials. The total acquisition cost was $115.1 million, net of cash acquired of $5.7 million. To finance this acquisition we received a $0.4 million additional equity investment from Candover Investments PLC, Candover (Trustees) Limited and certain investment funds indirectly controlled by Candover Investments PLC, borrowed $64.8 million from certain of these Candover entities by issuing to them an additional 10% unsecured subordinated loan stock due 2008 and borrowed $93.7 million under bank credit facilities, $38.3 million of which was used to repay loans under other credit facilities.

      Effective June 25, 2002, we changed our ultimate parent company from a company organized in Scotland to a corporation organized in Delaware.

      On July 3, 2002, we completed our initial public offering of 12 million shares of common stock at a price of $13 per share. The net proceeds from the offering, together with drawings under our new bank credit facility and existing cash resources, were used to repay all of the outstanding principal and interest under our former bank facility and our 10% unsecured subordinated loan stock due 2008.

      We were highly leveraged from the time of our management buyout in 1999 until the completion of our initial public offering. This leverage was due in part to the structure of our management buyout and in part to the incurrence of additional significant indebtedness in connection with our acquisition of ClinTrials in 2001. Our interest expense has therefore been high in relation to our income before taxes. We believe that, because of the size of our interest expense during the period preceding the completion of our initial public offering, our income from operations (i.e., before interest income and interest expenses) is a better measure of the past performance of our businesses than income (or loss) before income taxes or net income (loss).

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      We operate in two segments for financial reporting purposes: pre-clinical and clinical. The following table shows, for the periods indicated, a summary of our financial performance by business segment.

(1)	FAS 142 was adopted with effect from January 1, 2002. As a consequence, there is no amortization of goodwill in 2002. The effect of adoption of FAS 142 is shown in Note 4 to our audited financial statements included herein.

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      The following table summarizes the above results of operations as a percentage of net service revenue:

(1)	Including corporate overhead.

      Net Service Revenue. We recognize revenue as costs are incurred and include estimated earned fees or profits calculated on the basis of the relationship between costs incurred and total estimated costs (cost-to-cost type of percentage-of-completion method of accounting). We recognize revenue related to contract modifications when realization is assured and the amounts can be reasonably determined. When estimated contract costs indicate that a loss will be incurred on a contract, the entire loss is provided for in such period.

      Costs associated with contracting with third party investigators are excluded from net service revenue where they are the direct responsibility of the clients and are passed through to our clients without any mark-up.

      Once a contract for a pre-clinical or clinical trial has been signed, the commencement date may vary depending upon the preparedness of the client’s drug candidate and our capacity availability.

      Direct Costs Excluding Depreciation. These comprise the costs of the direct work force, laboratory consumables and other direct costs associated with the studies we perform for clients.

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      Selling, General and Administrative Expenses. These comprise administration costs, marketing expenditure and overhead costs such as the costs of running our facilities that are not allocated to direct costs. These expenses also include corporate overhead costs that are not directly attributable to our operating businesses and include certain costs related to group management, insurance, marketing, professional fees and property.

      Depreciation and Amortization. Depreciation represents the depreciation charged on our tangible fixed assets in accordance with the accounting policies set out in Note 4 of our consolidated financial statements included herein, Summary of Significant Accounting Policies — Property, Plant and Equipment. Amortization represents the amortization of goodwill and other intangible assets over their estimated useful lives. As described in Note 4 of our consolidated financial statements included herein, Summary of Significant Accounting Policies — Intangible Assets, the accounting policy relating to amortization of goodwill changed with effect from January 1, 2002 such that, unless it is necessary to record an impairment of the goodwill, no amortization of the goodwill is recorded after January 1, 2002.

      Interest Expense (Net). Prior to our initial public offering completed in July 2002 this included interest on our bank debt and our 10% unsecured subordinated loan stock due 2008. The bank debt bore interest at rates that ranged between LIBOR plus 2.25% and LIBOR plus 2.75%. The unsecured subordinated loan stock due 2008 accumulated interest at a fixed rate of 10%. We entered into an interest rate cap and collar transaction in 1999 on borrowings in connection with our management buyout. In 2001 we entered into two interest rate swap arrangements in connection with the incremental borrowings used to fund the ClinTrials acquisition. These swaps had the effect of fixing the LIBOR rate at 6.03% on the pounds sterling borrowings and 5.41% on the Canadian dollar borrowings. In years prior to 2001, interest expense included the amortization of costs associated with the cap and collar transaction, in line with the accounting standards then in force. In 2001, interest expense included the cost of recording the cap and collar transaction and the interest rate swaps at their fair values.

      Shortly after the completion of our initial public offering, we used the net proceeds from the offering, together with borrowings under our new bank credit facility and existing cash resources, to repay all of the outstanding principal and interest under our former bank facility and our 10% unsecured subordinated loan stock due 2008. The interest rate hedges entered into in connection with our previously outstanding bank borrowings were subsequently terminated.

      At February 15, 2003 we had bank borrowings of $65.0 million outstanding under the credit facility that we put in place at the time of our initial public offering. These bank borrowings bear interest at floating LIBOR based rates. We have entered into two interest swap arrangements related to these borrowings. The first arrangement is an interest rate swap that has a notional amount of $50 million and expires on October 5, 2005. Under this arrangement the interest rate on $50 million of our debt due under our credit facility is fixed at 4.23%. The second arrangement is an interest rate swap that has a notional amount of $10 million and expires on October 5, 2004. Under this arrangement the interest rate on $10 million of our debt due under our credit facility is fixed at 3.77%. The interest expense in the fourth quarter of 2002 included the cost of marking the value of these swaps to their market value at December 31, 2002.

Critical Accounting Policies and Estimates

      Our significant accounting policies are described in Note 4 to the consolidated financial statements included in Item 8 of this Form 10-K. We believe our most critical accounting policies include revenue recognition and cost estimation on certain contracts for which we use a percentage-of-completion method of accounting. In addition, the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A discussion of our critical accounting policies and areas where significant estimates are made is set forth in the following paragraphs.

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      The majority of our revenues are recorded from fixed-price contracts on a percentage-of-completion basis based on assumptions regarding the estimated cost of completion of the work. Each month costs are accumulated on each project and compared to the budget for that particular project. This determines the percentage-of-completion on the project. This percentage is multiplied by the contract value to determine the amount of revenue that can be recognized. Each month or each quarter, management reviews the budget on each project to determine if the assumptions within the budget are still correct and budgets are adjusted accordingly. As the work progresses, original estimates might be deemed incorrect due to revisions in the scope of work or other factors and a contract modification might be negotiated with the customer to cover additional costs. We bear the risk of cost overruns. In the past, we have had to commit unanticipated resources to complete projects, resulting in lower gross margins on those projects. We might experience similar situations in the future. Should our estimated costs on fixed price contracts prove to be low in comparison to actual costs, future margins could be reduced, absent our ability to negotiate a contract modification. We accumulate information on each project to refine our bidding process. Historically, the majority of our estimates and assumptions have been materially correct, but these estimates might not continue to be accurate. Clients generally may terminate a study at any time, which might cause unplanned periods of excess capacity and reduced revenues and earnings. To offset the effects of early terminations of significant contracts, we attempt to negotiate the payment of an early termination fee as part of the original contract.

      We have a reserve for losses on contracts which is split between “Unbilled Receivables, net” and “Accrued Expenses” on our Consolidated Balance Sheets. This reflects the fact that our revenue recognition process involves a significant element of judgement in order to estimate the outcome of each contract and that there may be instances where the estimated costs are not covered by the estimated contract revenues. In such instances, we accrue for the whole of the estimated loss on the contract as soon as the estimated loss is identified. We believe our reserve for losses on contracts was adequate as of December 31, 2002 based on our experience of performing contractual work for clients. However, no assurances can be given that actual losses will not exceed the recorded reserve.

      Certain of our U.K. based subsidiaries maintain a defined benefit pension plan. This plan provides benefits to substantially all employees and former employees of these subsidiaries in the U.K. On December 31, 2002 this plan was closed to new entrants but it will continue to provide benefits to existing beneficiaries (including existing employees who have not yet retired).

      The net periodic pension charge for the defined benefit pension plan was $3.5 million for the year ended December 31, 2002, $2.8 million for the 52 weeks ended December 30, 2001 and $2.4 million for the 53 weeks ended December 31, 2000. These charges have been calculated based upon a number of actuarial assumptions. These include an expected long-term rate of return on our plan assets, expected long-term rates of compensation increase, price inflation, expected rates of increase for pensions in payment and the discount rate applicable to the plan liabilities.

      We review these assumptions annually. At December 31, 2002 the assumptions were as follows:

      If experience were to differ from these assumptions there would be an impact on our pension liability.

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      Our pension plan assets are valued at their market value at the end of each year. The allocation of our pension plan assets is approximately 80% equities and 20% fixed interest securities. The expected rate of return established at December 30, 2001 and used during 2002 was 6%. As a result of the negative return on investments actually achieved in 2002 we believe that there is greater potential for growth than was the case a year ago and our long term expected rate of return on plan assets at December 31, 2002 is 7.5%. This change of 1.5% will, in isolation, reduce our 2003 pension expense before taxes by approximately $0.6 million.

      The discount rate is set as the yield on AA- rated corporate bonds. The discount rate was 6.0% at December 30, 2001 and this rate was used to determine the interest cost element of our pension expense in 2002. At December 31, 2002 the discount rate has reduced to 5.6%. This change, in the absence of any other factors, increases our projected benefit obligation by approximately $6.6 million. Such an increase would lead to additional amortization expense in 2003 of approximately $0.4 million. However, there are other factors, including the negative return in 2002 on the pension plan assets which will impact our 2003 amortization expense and the actual anticipated increase in the 2003 amortization expense is described in the following paragraph.

      The projected benefit obligations under our defined benefit plan exceed the fair value of the pension plan assets at December 31, 2002 by $24.3 million. This deficit has increased by $14.9 million during 2002 from $9.4 million at the start of the year. The deficit is of a magnitude that Statement of Financial Accounting Standards (“FAS”) 87 requires us to record additional amortization of the deficit through our income statement in 2003 amounting to $0.8 million. The additional amortization expense through 2002 was $0.1 million and thus we anticipate that in 2003 the amortization of the deficit element of our pension expense will increase by $0.7 million.

      Our actuaries also calculate the accumulated benefit obligation of the plan at the end of each year and we are required to record an additional liability if the value of the plan assets and the net liabilities recognized is less than the accumulated benefit obligation. In consequence, at December 30, 2001 we recorded an additional liability of $1.6 million and at December 31, 2002 we recorded a further $8.0 million to bring the total additional liability recorded to $9.6 million.

      This additional charge is recorded through other comprehensive income net of deferred taxes and does not affect the income statement. However, it does reduce shareholders’ equity. Shareholders’ equity is used as one figure in the covenant calculations set out in our bank facility agreement and while we are currently in compliance with our covenants, if the deterioration of the funding position of the pension plan continues in the future and we are required to record further liabilities in future years, this could impact compliance with our bank covenants.

Implementation of FAS 142 on January 1, 2002

      The statement of operations for the year ended December 31, 2002 does not include any expenses in respect of the amortization of goodwill and intangibles. FAS No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), which became effective on January 1, 2002, altered the treatment of goodwill. Goodwill is no longer subject to amortization through the statement of operations. Instead, goodwill is subject to impairment testing on at least an annual basis. The following table contains a presentation of our income before

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      In accordance with FAS 128 there is no dilution shown in the above table in relation to the share options outstanding in the years ended December 30, 2001 and December 31, 2000. This is because exercise of all the options concerned was conditional upon completion of a listing of our shares on a recognized stock exchange and this condition had not been satisfied at either year end.

Earnings Charges in Respect of the Change in Ultimate Parent Company and in Respect of Equity-Based Compensation

      The transactions through which we changed our ultimate parent company had several effects that required us to take charges against earnings in 2002. These charges comprised:

	(i) Stamp Duty Taxes. As a result of the change in our ultimate parent company we were required to pay stamp duty taxes to the U.K. Inland Revenue. The aggregate amount of the stamp duty taxes paid by us in connection with this transaction was $1.5 million.
	(ii) A Compensation Charge in Respect of a Change in the Relative Equity Ownership of Certain Members of Management. Under the terms of a management incentive scheme originally put in place at the time of our leveraged buy-out in 1999, management’s percentage ownership of our common stock increased as a consequence of the change in our ultimate parent company. We were required under applicable accounting rules to record a compensation expense, or charge, equal to the increase in value of the equity ownership position of management resulting from the increase in their percentage ownership of us. This compensation expense amounted to $29.1 million.
	(iii) A Compensation Charge in Respect of Certain Outstanding Employee Stock Options. Due to certain features of the stock options granted by us prior to the initial public offering, we were required to record a compensation expense in connection with the offering of $19.4 million. In addition, we recorded a further charge of $4.5 million for compensation expense on the amendment and exercise of share options in the first quarter of 2002.

      In addition to the above, we also expect to incur compensation-related charges when certain of our U.K.-based employees exercise stock options issued before the date of our initial public offering. This is because we will be required to pay U.K. National Insurance contributions at the time of exercise based on the profit realized when the option is exercised.

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      If all the relevant options were exercised when our shares were trading at our initial public offering price of $13 per share, the compensation charge would be $1.3 million. If all the relevant options were exercised when our shares were trading at $25 per share, the charge would increase to $1.5 million. In the period from our initial public offering to December 31, 2002, we incurred compensation charges related to U.K. National Insurance Contributions on the exercise of these stock options amounting to $0.1 million.

Exchange Rate Fluctuations

      Our consolidated financial statements are prepared in U.S. dollars. Our principal businesses are based in the United States, the United Kingdom and Canada. Our United Kingdom and Canadian operations record their transactions in local currencies. Accordingly, fluctuations in the pound sterling and Canadian dollar exchange rates will impact the results of operations reported in U.S. dollars.

      The results of our non-U.S. operations have been translated from pounds sterling and Canadian dollars using the following average exchange rates: