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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2002
Commission file number 000-23520
QUINTILES TRANSNATIONAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1714315
- ---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4709 Creekstone Dr., Suite 200
Durham, NC 27703-8411
- ---------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
(919) 998-2000
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No
The number of shares of Common Stock, $.01 par value, outstanding as of
September 30, 2002 was 117,706,316.
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets -
September 30, 2002 and December 31, 2001 3
Condensed consolidated statements of
operations - Three months ended September
30, 2002 and 2001; nine months ended
September 30, 2002 and 2001 4
Condensed consolidated statements of
cash flows - Nine months ended
September 30, 2002 and 2001 5
Notes to condensed consolidated financial
statements - September 30, 2002 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 39
Item 4. Controls and Procedures 39
Part II. Other Information
Item 1. Legal Proceedings 40
Item 2. Changes in Securities and Use of Proceeds 41
Item 3. Defaults upon Senior Securities - Not Applicable 41
Item 4. Submission of Matters to a Vote of Security
Holders - Not applicable 41
Item 5. Other Information - Not Applicable 41
Item 6. Exhibits and Reports on Form 8-K 41
Signatures 42
Certifications 43
Exhibit Index 47
2
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31
2002 2001
------------ -----------
(unaudited) (Note 1)
ASSETS in thousands, except share data)
Current assets:
Cash and cash equivalents $ 617,409 $ 565,063
Trade accounts receivable and unbilled services, net 355,432 426,954
Investments in debt securities 27,232 27,489
Prepaid expenses 29,322 28,085
Other current assets and receivables 38,270 32,147
----------- -----------
Total current assets 1,067,665 1,079,738
Property and equipment 464,602 469,919
Less accumulated depreciation (199,112) (196,144)
----------- -----------
265,490 273,775
Intangibles and other assets:
Investments in debt securities 10,738 9,510
Investments in marketable equity securities 45,073 77,992
Investments in non-marketable equity securities and loans 46,312 37,590
Investments in unconsolidated affiliates 121,057 --
Goodwill 65,138 163,651
Other identifiable intangibles, net 131,347 123,999
Deferred income taxes 157,403 136,686
Deposits and other assets 146,509 44,799
----------- -----------
723,577 594,227
----------- -----------
Total assets $ 2,056,732 $ 1,947,740
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 267,464 $ 223,573
Credit arrangements, current 20,424 16,116
Unearned income 218,749 205,783
Income taxes 27,471 14,811
Other current liabilities 1,621 1,903
----------- -----------
Total current liabilities 535,729 462,186
Long-term liabilities:
Credit arrangements, less current portion 20,481 21,750
Other liabilities 5,050 8,716
----------- -----------
25,531 30,466
----------- -----------
Total liabilities 561,260 492,652
Shareholders' equity:
Preferred stock, none issued and outstanding
at September 30, 2002 and December 31, 2001 -- --
Common stock and additional paid-in capital,
117,706,316 and 118,623,669 shares issued
and outstanding at September 30, 2002 and
December 31, 2001, respectively 877,758 897,075
Retained earnings 648,208 589,142
Accumulated other comprehensive loss (30,494) (31,129)
----------- -----------
Total shareholders' equity 1,495,472 1,455,088
----------- -----------
Total liabilities and shareholders' equity $ 2,056,732 $ 1,947,740
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
statements.
3
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2002 2001 2002 2001
--------- ----------- ----------- -----------
(in thousands, except per share data)
Revenues:
Gross service revenues $ 458,839 $ 462,540 $ 1,402,058 $ 1,393,194
Commercial rights and royalties 28,671 10,472 65,866 16,264
Investment 3,455 (7,691) 14,570 (6,323)
--------- ----------- ----------- -----------
Total gross revenues 490,965 465,321 1,482,494 1,403,135
Less: reimbursed service costs 94,058 65,909 297,130 193,585
--------- ----------- ----------- -----------
396,907 399,412 1,185,364 1,209,550
Costs of revenues (excluding general, administrative, depreciation and
amortization expenses shown below):
Service 186,110 232,771 589,735 710,056
Commercial rights and royalties 29,065 10,718 69,914 16,526
Investment 38 61 217 408
--------- ----------- ----------- -----------
215,213 243,550 659,866 726,990
--------- ----------- ----------- -----------
Contribution 181,694 155,862 525,498 482,560
General, administrative and other:
General and administrative 128,842 127,598 381,970 391,243
Depreciation and amortization 20,837 24,345 63,504 70,387
Restructuring charges -- 52,023 -- 54,169
Write-off of goodwill and other assets -- 20,120 -- 20,120
Interest (income) expense, net (3,256) (3,825) (9,954) (14,258)
Other (income) expense, net 1,473 183 344 (585)
Impairment on investment in WebMD common stock -- 334,023 -- 334,023
--------- ----------- ----------- -----------
147,896 554,467 435,864 855,099
--------- ----------- ----------- -----------
Income (loss) before income taxes 33,798 (398,605) 89,634 (372,539)
Income tax expense (benefit) 11,602 (132,694) 30,028 (124,093)
--------- ----------- ----------- -----------
Income (loss) before equity in (losses) earnings of
unconsolidated affiliates 22,196 (265,911) 59,606 (248,446)
Equity in (losses) earnings of unconsolidated affiliates (1,017) -- (540) --
--------- ----------- ----------- -----------
Income (loss) from continuing operations 21,179 (265,911) 59,066 (248,446)
Extraordinary gain from sale of discontinued operation, net of
income taxes -- 142,030 -- 142,030
--------- ----------- ----------- -----------
Net income (loss) $ 21,179 $ (123,881) $ 59,066 $ (106,416)
========= =========== =========== ===========
Basic net income (loss) per share:
Income (loss) from continuing operations $ 0.18 $ (2.22) $ 0.50 $ (2.11)
Extraordinary gain from sale of discontinued operation -- 1.19 -- 1.21
--------- ----------- ----------- -----------
Basic net income (loss) per share $ 0.18 $ (1.03) $ 0.50 $ (0.90)
========= =========== =========== ===========
Diluted net income (loss) per share:
Income (loss) from continuing operations $ 0.18 $ (2.22) $ 0.50 $ (2.11)
Extraordinary gain from sale of discontinued operation -- 1.19 -- 1.21
--------- ----------- ----------- -----------
Diluted net income (loss) per share $ 0.18 $ (1.03) $ 0.50 $ (0.90)
========= =========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated
statements.
4
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30
2002 2001
--------- ---------
(in thousands)
OPERATING ACTIVITIES
Net income (loss) $ 59,066 $(106,416)
Gain on the sale of discontinued operation, net of income taxes -- (142,030)
--------- ---------
Net income (loss) from continuing operations 59,066 (248,446)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 65,387 71,143
Restructuring charge (payments) accrual, net (18,953) 32,872
(Gain) loss from sales and impairments of investments, net (14,609) 340,346
Benefit from deferred income tax expense (7,432) (229,256)
Change in operating assets and liabilities 83,475 134,445
Other 1,967 1,332
--------- ---------
Net cash provided by operating activities 168,901 102,436
INVESTING ACTIVITIES
Acquisition of property and equipment (30,608) (59,769)
Proceeds from disposition of property and equipment 4,022 7,460
Acquisition of businesses, net of cash acquired (25,450) (6,620)
(Purchases of) proceeds from debt securities, net (1,148) 71,882
Purchases of equity securities and other investments (15,028) (30,674)
Proceeds from sale of equity securities and other investments 24,803 4,838
Purchases of commercial rights (41,435) --
Advances to unconsolidated affiliates (10,328) --
--------- ---------
Net cash used in investing activities (95,172) (12,883)
FINANCING ACTIVITIES
Decrease in lines of credit, net -- (44)
Principal payments on credit arrangements, net (11,081) (12,466)
Issuance of common stock, net 7,730 46,050
Repurchase of common stock (27,024) (7,709)
--------- ---------
Net cash (used in) provided by financing activities (30,375) 25,831
Effect of foreign currency exchange rate changes on cash 8,992 (3,686)
--------- ---------
Increase in cash and cash equivalents 52,346 111,698
Cash and cash equivalents at beginning of period 565,063 330,214
--------- ---------
Cash and cash equivalents at end of period $ 617,409 $ 441,912
========= =========
The accompanying notes are an integral part of these condensed consolidated
statements.
5
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
September 30, 2002
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the nine-month period ended September
30, 2002 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2002. For further information, refer to the
Consolidated Financial Statements and Notes thereto included in the Annual
Report on Form 10-K for the year ended December 31, 2001 of Quintiles
Transnational Corp. (the "Company").
The balance sheet at December 31, 2001 has been derived from the audited
consolidated financial statements of the Company. Certain amounts in the 2001
financial statements have been reclassed or modified to conform with the 2002
financial statement presentation. The reclassifications and modifications had
no effect on previously reported net income, shareholders' equity or net income
per share.
2. Commercial Rights and Royalties
The Company has entered into financial transactions and other arrangements with
customers and other parties in which a portion of the Company's revenues and
operating income depends on the performance of a specific pharmaceutical
product. These transactions may include providing product development and/or
commercialization services to customers, as well as the funding of such
services, in return for royalties or commissions based on the sales of the
customer's product. Below is a brief description of these agreements:
In May 1999, the Company entered into an agreement with CV Therapeutics, Inc.
("CVTX") to commercialize Ranolazine for angina in the United States and Canada.
Under the terms of this agreement, the Company purchased 1,043,705 shares of
CVTX's common stock for $5 million of which the Company owns 256,705 shares as
of September 30, 2002, and has made available a $10 million credit line for
pre-launch sales and marketing activities. Once Ranolazine, which has completed
Phase III studies, is approved, the Company will provide a $10 million milestone
payment to CVTX which will be used to pay off any outstanding balances on the
credit line. The Company will also make available an additional line of credit
to help fund a portion of the first year sales and marketing expenses.
Additionally, the Company has committed to provide a minimum of approximately
$14.4 million per year of commercialization services and to fund a minimum of
$7.8 million per year of marketing activities, for a period of five years. In
return it will receive payment for services rendered by the Company in year one
and royalties based on the net sales of Ranolazine in years two through five
subject to a cap not to exceed 300% of funding by the Company in any year or
over the life of the contract. In addition, the Company will also receive
royalties in years six and seven.
6
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
In December 1999, the Company obtained the distribution rights to market four
pharmaceutical products in the Philippines from a large pharmaceutical customer
in exchange for providing certain commercialization services amounting to
approximately $5.1 million during the two-year period ended December 31, 2001.
As of September 30, 2002, the Company has capitalized 251.8 million philippino
pesos (approximately $4.8 million) related to these commercial rights, and is
amortizing these costs over seven years. Under the terms of the agreement, the
customer has the option to reacquire the rights to the four products from the
Company after seven years for a price to be determined at the exercise date.
In January 2001, the Company entered into an agreement with Scios Inc. ("SCIO")
to market Natrecor(R) for acute congestive heart failure in the United States
and Canada. Under the terms of the agreement, the Company agreed to provide $30
million in funding over a two and one-half year period for sales and marketing
activities following product launch. The $30 million in payments will be
capitalized and amortized ratably as a reduction of revenue over the 24-month
service period. As of September 30, 2002, $20.3 million has been paid by the
Company. The Company also received warrants to purchase 700,000 shares of
SCIO's common stock at $20 per share, exercisable in installments over two and
one-half years. In addition to receiving payments on a fee for service basis
for providing commercialization services through May 2003, the Company will
receive royalties based on net sales of the product from 2002 through 2008. The
royalty payments are subject to minimum and maximum amounts of $50 million and
$65 million, respectively, over the life of the agreement.
In June 2001, the Company entered into an agreement with Pilot Therapeutics,
Inc. ("PLTT") to commercialize a natural therapy for asthma, AIROZIN(TM), in
the United States and Canada. Under the terms of the agreement, the Company
will provide commercialization services for AIROZIN(TM) and a milestone-based
$6 million line of credit which is convertible into PLTT's common stock, of
which $4 million was funded by the Company as of September 30, 2002. Further,
based on achieving certain milestones, the Company has committed to funding 50%
of sales and marketing activities for AIROZIN(TM) over five years with a $6
million limit per year. Following product launch, the Company will receive
royalties based on the net sales of AIROZIN(TM). The royalty percentage will
vary to allow the Company to achieve a minimum rate of return.
In December 2001, the Company entered into an agreement with Discovery
Laboratories, Inc. ("DSCO") to commercialize, in the United States, DSCO's
humanized lung surfactant, Surfaxin(R), which is currently in Phase III
studies. Under the terms of the agreement, the Company acquired 791,905 shares
of DSCO's common stock and a warrant to purchase 357,143 shares of DSCO's
common stock at $3.48 per share for a total of $3 million, and has agreed to
make available a line of credit up to $10 million for pre-launch
commercialization services as certain milestones are achieved by DSCO. As of
September 30, 2002, the Company has made $2.8 million available under the line
of credit, of which $1.3 million has been funded. In addition, the Company
receives warrants to purchase approximately 38,000 shares of DSCO common stock
at an exercise price of $3.03 per share for each million dollars made available
by the Company under the line of credit as milestones are achieved. The Company
has agreed to fund the sales and marketing activities of this product up to $10
million per year for seven years. In return, the Company will receive
commissions based on net sales of Surfaxin(R) for meconium aspiration syndrome,
infant respiratory distress
7
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
syndrome and all "off-label" uses for 10 years.
In December 2001, the Company acquired the license to market SkyePharma's
Solaraze(TM) skin treatment in the United States, Canada and Mexico for 15
years from Bioglan Pharma Plc for a total consideration of $26.7 million. The
Company will amortize the rights ratably over 15 years. The Company has a
commitment to pay royalties to SkyePharma based on a percentage of net sales of
Solaraze(TM). Pursuant to the license, the Company may pursue additional
indications for the compound, which will be facilitated through the Company's
ownership rights in the Solaraze(TM) New Drug Application and Investigational
New Drug.
In January 2002, the Company entered into an agreement with Kos
Pharmaceuticals, Inc. ("KOSP") to commercialize, in the United States, KOSP's
treatments for cholesterol disorders, Advicor(R) and Niaspan(R). Advicor(R) was
launched in January 2002 and Niaspan(R) is also on the market. Under the terms
of the agreement, the Company will provide, at its own expense, a dedicated
sales force of 150 cardiovascular-trained representatives who, in combination
with KOSP's sales force of 300 representatives, will commercialize Advicor(R)
and Niaspan(R) for two years. In return, the Company also received warrants to
purchase 150,000 shares of KOSP's common stock at $32.79 per share, exercisable
in installments over two years. Further, the Company will receive commissions
based on net sales of the product from 2002 through 2006. The commission
payments are subject to minimum and maximum amounts of $45 million and $75
million, respectively, over the life of the agreement.
In March 2002, the Company acquired certain assets of Bioglan Pharma, Inc.
("Bioglan") for a total consideration of approximately $27.9 million. The
assets included distribution rights to market ADOXA(TM) in the United States for
10 years along with other products and product rights that Bioglan had
previously marketed, as well as approximately $1.6 million in cash. Under the
purchase method of accounting, the results of operations of Bioglan are
included in the Company's results of operations as of March 22, 2002 and the
assets and liabilities of Bioglan were recorded at their respective fair
values. The fair values are preliminary and are subject to refinement as
information relative to the fair values as of March 22, 2002 becomes available.
The acquisition did not have a material impact on the financial position or
results of operations for the Company. The acquisition resulted in total
intangible assets of $27.5 million. The Company will amortize the intangible
assets ratably over the lives of these products. Under certain of the contracts
acquired, the Company has commitments to pay royalties based on a percentage of
net sales of the acquired products.
During the second quarter of 2002, the Company finalized the arrangements under
its previously announced letter of intent with a large pharmaceutical customer
to market pharmaceutical products in Belgium, Germany and Italy. The Company
will provide, at its own expense, sales and marketing resources over the
five-year life of the agreement. As of September 30, 2002, the Company
estimates the cost of its minimum obligation over the remaining contract life
to be approximately $46 million, in return for which the customer will pay the
Company royalties on product sales in excess of certain baselines. The royalty
is comprised of a minimal royalty on the baseline sales targets for these
products plus a share of incremental net sales above these baselines. Either
party may cancel the contract at six-month intervals in the event that sales
are not above certain levels specified. Based on the terms of the letter of
intent in place at March 31, 2002, the Company deferred $0.9 million of costs;
with the final execution of these agreements during the second quarter of 2002,
these costs were expensed. Future revenues under these agreements will be
recognized as they are earned and
8
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
costs expensed as incurred.
In July 2002, the Company entered into an agreement with Eli Lilly and Company
("LLY") to support LLY in its commercialization efforts for Cymbalta(TM) in the
United States. LLY has submitted a New Drug Application ("NDA") for
Cymbalta(TM), which is currently under review by the United States Food and
Drug Administration ("FDA") for the treatment of depression. Under the terms of
the agreement, the Company will provide, at its expense, more than 500 sales
representatives to supplement the extensive LLY sales force in the promotion of
Cymbalta(TM) for the five years following product launch. The sales force will
promote Cymbalta(TM) in its primary, or P1, position within sales calls. During
the first three years LLY will pay for the remainder of the capacity of this
sales force, referred to as the P2 and P3 positions, on a fee-for-service
basis. The Company will make marketing and milestone payments to LLY totaling
$110 million; payments totaling $30 million were paid during the third quarter
of 2002, $40 million was paid during the fourth quarter of 2002 and the
remaining $40 million is due throughout the four quarters following FDA
approval. The $70 million in payments made by the Company is on an at-risk
basis, and is not refundable in the event the FDA does not grant final approval
for Cymbalta(TM). However, if any such non-approval occurs solely as a result
of regulatory issues the FDA cites with respect to LLY's manufacturing
processes and facilities, the Company will be entitled to recoup its
pre-approval outlays, plus interest at the prime rate plus five percent, from a
percentage of any revenues or royalties LLY derives from the sales of
Cymbalta(TM) by LLY or sublicense of Cymbalta(TM) to third parties, if any. The
$110 million in payments will be capitalized and amortized ratably as a
reduction of revenue over the five-year service period. The sales force costs
will be expensed as incurred. The payments are reported in the accompanying
statement of cash flows as an Investing Activity - Purchases of Commercial
Rights. In return for the P1 position for Cymbalta(TM) and the marketing and
milestone payments, LLY will pay to the Company 8.25% of U.S. Cymbalta(TM)
sales for depression and other neuroscience indications over the five year
service period followed by a 3% royalty over the subsequent three years. In
addition to the Company's obligations, LLY is obligated to spend at specified
levels. The Company or LLY has the ability to cancel this agreement if
Cymbalta(TM) is not approved by January 31, 2005, in which case the Company
would write-off any payments made through that date, unless the FDA had failed
to grant approval for Cymbalta(TM) based on concerns over LLY's manufacturing
processes and facilities.
In July 2002, the Company entered into an agreement with Columbia Laboratories,
Inc. ("COB") to assist COB in the U.S. commercialization of the following
women's health products: Prochieve(TM) 8%, Prochieve(TM) 4%, Advantage-S(R) and
RepHresh(TM). Under the terms of the agreement, the Company purchased 1,121,610
shares of COB common stock for $5.5 million. The Company will also pay to COB
four quarterly payments of $1.125 million each commencing in the third quarter
of 2002 in exchange for royalties of 5% on the sales of the four COB products
for a five-year period beginning in the first quarter of 2003. The Company has
funded $1.125 million as of September 30, 2002. The aggregate royalties are
subject to a contractual minimum of $8.0 million and a maximum of $12.0
million. In addition, the Company will provide to COB, at COB's expense on a
fee-for-service basis, a sales force to commercialize the products.
The Company has firm commitments under the above arrangements to provide
funding of approximately $257.4 million in exchange for various commercial
rights. As of September 30, 2002, the Company has funded approximately $130.6
million of these commitments and has accrued the $40 million payment due to LLY
as of September 30, 2002. Further, the Company has additional future funding
commitments that are
9
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
contingent upon satisfaction of certain milestones being met by the third party
such as receiving FDA approval, obtaining funding from additional third
parties, agreement of a marketing plan and other similar milestones. Due to the
uncertainty of the amounts and timing, these contingent commitments are not
included in the firm commitment amounts.
Below is a summary of the remaining firm commitments with pre-determined
payment schedules under such arrangements, including the $40 million payment
due to LLY during the fourth quarter of 2002 (in thousands):
Commitments
-----------
2002 $ 55,171
2003 37,793
2004 10,027
2005 10,010
2006 9,914
2007 3,834
--------
$126,749
========
3. Investments - Marketable Equity Securities
The Company has entered into financial arrangements with various customers and
other parties in which the Company provides funding in the form of an equity
investment. The equity investments may be subject to certain trading
restrictions including "lock-up" agreements. The Company's portfolio in such
investments as of September 30, 2002 is as follows (in thousands except share
data):
Number of Cost Fair Market
Company Trading Symbol Shares Basis Value
- ------- -------------- --------- ------- -----------
Common Stock:
Triangle Pharmaceuticals Inc. VIRS 3,775,000 $15,029 $10,196
The Medicines Company MDCO 2,059,221 8,978 22,606
CV Therapeutics, Inc. CVTX 256,705 1,250 5,368
Columbia Laboratories, Inc. COB 1,121,610 5,500 5,047
Other 3,145 1,856
------- -------
Total marketable equity securities $33,902 $45,073
======= =======
The Company may from time to time acquire warrants of companies in which a
current market value is not readily available. As such, these investments are
included in Deposits and Other Assets.
10
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
4. Investments - Non-marketable Equity Securities and Loans
The Company has entered into financial arrangements with various customers and
other parties in which the Company provides funding in the form of an equity
investment in non-marketable securities or loans. These financial arrangements
are comprised of direct and indirect investments. The indirect investments are
made through eight venture capital funds in which the Company is an investor.
The Company's portfolio in such investments as of September 30, 2002 is as
follows (in thousands):
Remaining Funding
Company Cost Basis Commitment
------- ---------- -----------------
Venture capital funds $26,957 $25,004
Equity investments (eight companies) 11,546 --
Convertible loans (five companies) 6,552 2,447
Loans (two companies) 1,257 18,744
------- -------
Total non-marketable equity securities and loans $46,312 $46,195
======= =======
Below is a table representing management's best estimate as of September 30,
2002 of the amount and timing of the above commitments (in thousands):
Total
-----
2002 $ 5,499
2003 30,935
2004 9,761
--------
$ 46,195
========
The Company also has future loan commitments that are contingent upon
satisfaction of certain milestones by the third party such as receiving FDA
approval, obtaining funding from additional third parties, agreement of a
marketing plan and other similar milestones. Due to the uncertainty of the
amounts and timing, these contingent commitments are not included in the
commitment amounts described above.
The Company has determined that it is not practicable at each reporting date to
estimate the fair value of its investments in non-marketable equity securities;
however, the carrying values are reviewed if the facts and circumstances
suggest that a potential impairment may have occurred. During the third quarter
of each of 2002 and 2001, the Company recognized $1.0 million and $7.9 million,
respectively, of losses due to such impairments mainly due to declining
financial condition of certain investees.
11
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
5. Investments in Unconsolidated Affiliates
In May 2002, the Company and McKesson Corporation ("McKesson") completed the
formation of a previously announced healthcare informatics joint venture named
Verispan, L.L.C. ("Verispan"). The Company and McKesson are equal co-owners of
a majority of the equity of Verispan, with a portion of the equity of Verispan
owned by or to be issued to key providers of de-identified healthcare data in
exchange for the data. The Company contributed the net assets of its
informatics group and funded $10 million to Verispan. Accordingly, the Company
has recorded its investment in Verispan, approximately $120.7 million at
September 30, 2002, as an investment in unconsolidated affiliates. Verispan
will license data products to the Company and McKesson for use in their
respective core businesses. Under the license arrangement, the Company's
product development and commercial services groups continue to have access to
Verispan's products to enhance their service delivery to the Company's
customers.
The Company's pro rata share of Verispan's earnings, since the date of
formation, is included in equity in (losses) earnings of unconsolidated
affiliates. Results of operations for the informatics group prior to formation
of Verispan are included in the Company's revenues and expenses as appropriate.
In January 2002, the Company acquired an equity interest in a sales and
marketing organization in France for approximately $328,000. The Company's pro
rata share of earnings is included in (losses) earnings of unconsolidated
affiliates.
6. Goodwill and Identifiable Intangible Assets
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." As such,
all goodwill is no longer amortized but reviewed at least annually for
impairment. Other intangible assets continue to be amortized over their useful
lives. The Company completed the required transitional impairment test as of
January 1, 2002 and the annual impairment test as of July 31, 2002 and no
goodwill impairment was deemed necessary.
Through December 2001, goodwill was amortized on a straight-line basis over
periods from five to 40 years. The following is a summary of reported net loss
and net loss per share, adjusted to exclude goodwill amortization expense (in
thousands, except per share amounts):
Three months ended September 30, 2001 Nine months ended September 30, 2001
------------------------------------- ------------------------------------
Net loss $(123,881) $(106,416)
Add: goodwill amortization 1,957 5,864
Less: income tax benefit (651) (1,953)
--------- ---------
Adjusted net loss $(122,575) $(102,505)
========= =========
Adjusted net loss per share:
Basic $ (1.02) $ (0.87)
Diluted (1.02) (0.87)
12
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
As of September 30, 2002, the Company had approximately $65.1 million of
goodwill. The decrease in goodwill during 2002 is a result of the formation of
the Verispan joint venture. The following is a summary of goodwill by segment
(in thousands):
Product Commercial
Development Services Informatics Consolidated
----------- ---------- ----------- ------------
Balance as of December 31, 2001 $31,746 $30,168 $ 101,737 $ 163,651
Add: acquisition 202 -- -- 202
Less: impairment -- -- -- --
contribution to joint venture -- -- (101,737) (101,737)
Impact of foreign currency fluctuations 2,324 698 -- 3,022
------- ------- --------- ---------
Balance as of September 30, 2002 $34,272 $30,866 $ -- $ 65,138
======= ======= ========= =========
In conjunction with the adoption of SFAS No. 142, the Company has reclassed
capitalized software and related accumulated amortization to other identifiable
intangible assets from property and equipment for all periods presented.
Identifiable assets consist primarily of software, which are amortized over the
estimated useful life ranging from three to five years, and commercial rights,
which are amortized ratably, based on estimated cash flows, over the life of
the rights ranging from five to 15 years. Amortization expense associated with
identifiable intangible assets was $6.6 million and $7.1 million for the three
months ended September 30, 2002 and 2001, respectively, and $19.0 million and
$19.3 million for the nine months ended September 30, 2002 and 2001,
respectively. The following is a summary of identifiable intangible assets (in
thousands):
As of September 30, 2002 As of December 31, 2001
--------------------------------------- ------------------------------------------
Gross Accumulated Net Gross Accumulated Net
Amount Amortization Amount Amount Amortization Amount
-------- ------------ -------- -------- ------------ --------
Identifiable intangible assets:
Software and related assets $148,109 $ 77,113 $ 70,996 $156,806 $ 63,938 $ 92,868
Commercial rights 64,304 3,953 60,351 33,475 2,344 31,131
-------- -------- -------- -------- -------- --------
$212,413 $ 81,066 $131,347 $190,281 $ 66,282 $123,999
======== ======== ======== ======== ======== ========
Estimated amortization expense for existing identifiable intangible assets is
targeted to be approximately $25 million to $26.5 million per year for each of
the years in the five-year period ended December 31, 2006, respectively.
Estimated amortization expense can be affected by various factors including
future acquisitions of product and/or commercial rights.
7. Stock Repurchase
The Company was authorized by its Board of Directors to repurchase up to $100
million of the Company's Common Stock until March 1, 2002. On February 7, 2002,
the Board of Directors extended this authorization until March 1, 2003. During
the nine months ended September 30, 2002, the Company entered into agreements
to repurchase 1,570,000 shares of its Common Stock for an aggregate price of
approximately $22.2 million.
13
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
8. Significant Customers
One customer accounted for 10.9%, 11.7%, 10.3% and 10.7% of consolidated gross
service revenues less reimbursed service costs for the three and nine months
ended September 30, 2002 and 2001, respectively. The revenues were derived from
the product development, commercial services and informatics groups.
9. Investment Revenues
The following table is a summary of investment revenues for the three and nine
months ended September 30, 2002 and 2001(in thousands):
Three months ended September 30 Nine months ended September 30
-------------------------------- ------------------------------
2002 2001 2002 2001
------- -------- -------- --------
Marketable equity securities:
Gross realized gains $ 5,163 $ 235 $ 17,352 $ 2,505
Gross realized losses (602) -- (1,879) --
Impairment losses -- -- -- (3,099)
Non-marketable equity securities and loans:
Gross realized gains -- -- -- 2,197
Gross realized losses -- -- (400) --
Impairment losses (1,000) (7,926) (1,000) (7,926)
Other (106) -- 497 --
------- -------- -------- --------
$ 3,455 $ (7,691) $ 14,570 $ (6,323)
======= ======== ======== ========
10. Restructuring Charge
During the second quarter of 2002, the Company revised its estimates of the
restructuring plan adopted during 2001 ("2001 Plan") which resulted in a
reduction of $9.1 million in accruals for the 2001 Plan. The reduction included
approximately $5.7 million in severance payments and $3.4 million of exit
costs. The reductions are primarily the result of a higher than expected number
of voluntary terminations and the reversal of restructuring accruals due to the
Company's contribution of its informatics segment to the Verispan joint
venture.
Also during the second quarter of 2002, the Company recognized $9.1 million of
restructuring charges as a result of the continued implementation of the
strategic plan announced during 2001. This restructuring charge included
revisions to 2001 and 2000 restructuring plans of approximately $2.5 million
and $1.9 million, respectively, due to a revision in the estimates for the exit
costs relating to the abandoned leased facilities. In addition, the adopted
follow-on restructuring plan ("2002 Plan") consisted of $4.3 million related to
severance payments, $310,000 related to exit costs and $112,000 of asset
write-offs. As part of this plan, approximately 99 positions are to be
eliminated mostly in the Europe and Africa region. As of September 30, 2002, 66
individuals have been terminated.
14
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Activity during the first nine months of 2002 was as follows for the 2002 Plan
(in thousands):
Balance at Write-Offs/ Balance at
December 31, 2001 Accruals Payments September 30, 2002
----------------- -------- ----------- ------------------
Severance and related costs $ -- $ 4,241 $(1,778) $2,463
Exit costs -- 310 (152) 158
Asset write-offs -- 112 (112) --
---- ------- ------- ------
$ -- $ 4,663 $(2,042) $2,621
==== ======= ======= ======
During the third quarter of 2001, the Company adopted a restructuring plan that
resulted in the recognition of a restructuring charge of $50.9 million. Of the
approximately 1,000 positions to be eliminated under this plan, 873 individuals
have been terminated as of September 30, 2002.
Activity during the first nine months of 2002 was as follows for the 2001 Plan
(in thousands):
Revisions to 2001 Plan
----------------------
Balance at Write-Offs/ Balance at
December 31, 2001 Payments Reversals Accruals September 30, 2002
----------------- ----------- -------- -------- ------------------
Severance and related costs $ 19,323 $(10,824) $(5,725) $ -- $2,774
Exit costs 8,806 (3,852) (3,347) 2,472 4,079
-------- -------- ------- ------ ------
$ 28,129 $(14,676) $(9,072) $2,472 $6,853
======== ======== ======= ====== ======
The Company adopted a restructuring plan in January 2000 ("January 2000 Plan")
and a follow-on restructuring plan which resulted in the recognition of a
restructuring charge of $58.6 million. Of the approximately 990 positions that
were to be eliminated under these plans, 921 positions have been terminated as
of September 30, 2002, which includes 770 positions under the January 2000
Plan.
Activity during the first nine months of 2002 was as follows for the 2000 plans
(in thousands):
Revisions to
Balance at Write-Offs/ January Balance at
December 31, 2001 Payments 2000 Plan September 30, 2002
----------------- ----------- ----------- ------------------
Severance and related costs 894 (742) $ -- $ 152
Exit costs 1,714 (1,606) 1,937 2,045
------ ------- ------ ------
$2,608 $(2,348) $1,937 $2,197
====== ======= ====== ======
15
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
As a result of the restructuring plans, the Company has approximately 285,000
square feet of abandoned leased facilities as of September 30, 2002. A portion
of these facilities has been subleased and the Company is pursuing disposition
of the remaining abandoned facilities. Below is a summary of the total lease
obligations for the abandoned facilities (in thousands):
Remainder of 2002 $ 1,634
2003 5,587
2004 3,516
2005 2,764
2006 2,707
Thereafter 7,544
--------
Gross abandoned lease obligations 23,752
Less: sublease/restructuring accrual (11,761)
--------
Total obligation in excess of existing subleases
and related restructuring accrual balances $ 11,991
========
11. Net Income Per Share
The following table sets forth the computation of the weighted-average shares
used when calculating the basic and diluted net income per share (in thousands):
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
2002 2001 2002 2001
------- ------- ------- -------
Weighted average shares:
Basic weighted average shares 117,694 119,838 118,240 117,786
Effect of dilutive securities:
Stock options 151 -- 280 --
------- ------- ------- -------
Diluted weighted average shares 117,845 119,838 118,520 117,786
======= ======= ======= =======
Options to purchase approximately 29.8 million shares and 20.4 million shares of
the Company's Common Stock were outstanding during the three and nine months
ended September 30, 2002, respectively, but were not included in the computation
of diluted net income per share because the option's exercise price was greater
than the average market price of the Company's Common Stock and, therefore, the
effect would be antidilutive.
12. Comprehensive Income
The following table represents the Company's comprehensive income for the three
and nine months ended September 30, 2002 and 2001, respectively (in thousands):
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
2002 2001 2002 2001
---------- ---------- -------- -------------
Net income (loss) $21,179 $(123,881) $59,066 $(106,416)
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities, net of income taxes 1,382 (89,109) (9,796) (116,354)
Reclassification adjustment, net of income taxes (5,364) 206,155 (13,114) 206,155
Foreign currency adjustment (932) 13,722 23,545 (7,622)
------- --------- ------- ---------
Comprehensive income (loss) $16,265 $ 6,887 $59,701 $ (24,237)
======= ========= ======= =========
16
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
13. Segments
The following table presents the Company's operations by reportable segment. The
Company is managed through three reportable segments, namely, the product
development group, the commercial services group, and the PharmaBio group. The
informatics group was transferred to a joint venture in May 2002. Management has
distinguished these segments based on the normal operations of the Company. The
product development group is primarily responsible for all phases of clinical
research and outcomes research consulting. The commercial services group is
primarily responsible for sales force deployment and strategic marketing
services. Before being transferred to the joint venture, the informatics group
was primarily responsible for providing market research solutions and strategic
analysis to support healthcare decisions. The PharmaBio group is primarily
responsible for facilitating non-traditional customer alliances and consists
primarily of product revenues, royalties and commissions and investment revenues
relating to the financial arrangements with customers and other third parties.
During 2002, the Late Phase, primarily Phase IV, operations previously included
in the commercial services group were reclassified to the product development
group in order to consolidate the operational and business development
activities. These changes are reflected in all periods presented. The Company
does not include general and administrative expenses, depreciation and
amortization except amortization of commercial rights, interest income
(expense), other income (expense) and income tax expense (benefit) in segment
profitability. Significant intersegment revenues have been eliminated. (in
thousands):
Three months ended September 30, 2002
-------------------------------------------------
Product Commercial
Development Services Informatics PharmaBio Eliminations Consolidated
----------- ---------- ----------- --------- ------------ ------------
Net services:
External $242,333 $122,448 $ -- $ -- $ -- $364,781
Intersegment -- 13,194 -- -- (13,194) --
-------- -------- ------- ------- -------- --------
Total net services 242,333 135,642 -- -- (13,194) 364,781
Commercial rights and royalties -- -- -- 28,671 -- 28,671
Investment -- -- -- 3,455 -- 3,455
-------- -------- ------- ------- -------- --------
Total net revenues $242,333 $135,642 $ -- $32,126 $(13,194) $396,907
======== ======== ======= ======= ======== ========
Contribution $125,912 $ 52,759 $ -- $ 3,023 $ -- $181,694
======== ======== ======= ======= ======== ========
Three months ended September 30, 2001
-------------------------------------------------
Product Commercial
Development Services Informatics PharmaBio Eliminations Consolidated
----------- ---------- ----------- --------- ------------ ------------
Net services:
External $230,679 $152,955 $12,997 $ -- $ -- $396,631
Intersegment -- 5,397 -- -- (5,397) --
-------- -------- ------- ------- -------- --------
Total net services 230,679 158,352 12,997 -- (5,397) 396,631
Commercial rights and royalties -- -- -- 10,472 -- 10,472
Investment -- -- -- (7,691) -- (7,691)
-------- -------- ------- ------- -------- --------
Total net revenues $230,679 $158,352 $12,997 $ 2,781 $ (5,397) $399,412
======== ======== ======= ======= ======== ========
Contribution $109,966 $ 48,426 $ 5,468 $(7,998) $ -- $155,862
======== ======== ======= ======= ======== ========
17
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Nine months ended September 30, 2002
-----------------------------------------------------
Product Commercial
Development Services Informatics PharmaBio Eliminations Consolidated
----------- ---------- ----------- --------- ------------ ------------
Net services:
External $704,021 $380,560 $20,347 $ -- $ -- $1,104,928
Intersegment -- 36,748 -- -- (36,748) --
-------- -------- ------- ------- -------- ----------
Total net services 704,021 417,308 20,347 -- (36,748) $1,104,928
Commercial rights and royalties -- -- -- 65,866 -- 65,866
Investment -- -- -- 14,570 -- 14,570
-------- -------- ------- ------- -------- ----------
Total net revenues $704,021 $417,308 $20,347 $80,436 $(36,748) $1,185,364
======== ======== ======= ======= ======== ==========
Contribution $354,024 $153,144 $ 8,024 $10,306 $ -- $ 525,498
======== ======== ======= ======= ======== ==========
Nine months ended September 30, 2001
-----------------------------------------------------
Product Commercial
Development Services Informatics PharmaBio Eliminations Consolidated
----------- ---------- ----------- --------- ------------ ------------
Net services:
External $688,528 $467,958 $43,123 $ -- $ -- $1,199,609
Intersegment -- 5,397 -- -- (5,397) --
-------- -------- ------- ------- -------- ----------
Total net services 688,528 473,355 43,123 -- (5,397) 1,199,609
Commercial rights and royalties -- -- -- 16,264 -- 16,264
Investment -- -- -- (6,323) -- (6,323)
-------- -------- ------- ------- -------- ----------
Total net revenues $688,528 $473,355 $43,123 $ 9,941 $ (5,397) $1,209,550
======== ======== ======= ======= ======== ==========
Contribution $326,823 $143,235 $19,492 $(6,990) $ -- $ 482,560
======== ======== ======= ======= ======== ==========
14. Commitments and Contingencies
On January 26, 2001, a purported class action lawsuit was filed in the State
Court of Richmond County, Georgia, naming Novartis Pharmaceuticals Corp.,
Pharmed Inc., Debra Brown, Bruce I. Diamond and Quintiles Laboratories Limited,
a subsidiary of the Company, on behalf of 185 Alzheimer's patients who
participated in drug studies involving an experimental drug manufactured by
defendant Novartis and their surviving spouses. The complaint alleges claims for
breach of fiduciary duty, civil conspiracy, unjust enrichment,
misrepresentation, Georgia RICO violations, infliction of emotional distress,
battery, negligence and loss of consortium as to class member spouses. The
complaint seeks unspecified damages, plus costs and expenses, including
attorneys' fees and experts' fees. The Company believes the claims to be without
merit and intends to defend the suit vigorously.
18
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
On January 22, 2002, Federal Insurance Company ("Federal") and Chubb Custom
Insurance Company ("Chubb") filed suit against the Company, Quintiles Pacific,
Inc. and Quintiles Laboratories Limited, two of the Company's subsidiaries, in
the United States District Court for the Northern District of Georgia. In the
suit, Chubb, the Company's primary commercial general liability carrier, and
Federal, the Company's excess liability carrier, seek to rescind the policies
issued to the Company for coverage years 2000-2001 and 2001-2002 based on an
alleged misrepresentation by the Company on the policy application.
Alternatively, Chubb and Federal seek a declaratory judgment that there is no
coverage under the policies for some or all of the claims asserted against the
Company and its subsidiaries in the litigation described in the prior paragraph
and, if one or more of such claims is determined to be covered, Chubb and
Federal request an allocation of the defense costs between the claims they
contend are covered and non-covered claims. The Company has filed an answer with
counterclaims against Federal and Chubb in response to their complaint. The
Company believes their allegations are without merit and intends to defend this
case vigorously.
Since October 15, 2002, several purported class action lawsuits have been filed
in Superior Court, Durham County, North Carolina by shareholders seeking to
enjoin the consummation of the transaction contemplated by the non-binding
proposal made by Pharma Services Company, a newly formed company wholly owned by
Dennis B. Gillings, Ph.D., to acquire all of the outstanding shares of the
Company for $11.25 per share in cash. In response to the proposal, which was
received by the Company on October 13, 2002, the Company's Board of Directors
established a special committee of independent directors to act on behalf of the
Company with respect to the proposal or any alternatives in the context of
evaluating what is in the best interest of the Company and its shareholders. On
November 11, 2002, the special committee announced its rejection of the proposal
and its intention to investigate strategic alternatives available to the Company
for purposes of enhancing shareholder value, including the possibility of a sale
of the Company and alternatives that would keep the Company independent and
publicly owned. The lawsuits name as defendants Dr. Gillings, other members of
the Company's Board of Directors, the Company and, in some cases, Pharma
Services Company. The complaints allege, among other things, that the directors
breached their duties with respect to the proposal. The complaints seek to
enjoin the transaction proposed by Pharma Services Company, and the plaintiffs
seek to recover damages. The Company is currently in the process of reviewing
the complaints and considering an appropriate response. Based upon its
preliminary review, the Company believes the lawsuits are without merit and
intends to defend them vigorously.
The Company is also a party to certain other pending litigation arising in the
normal course of our business. In the opinion of management, based on
consultation with its legal counsel, the outcome of such litigation currently
pending will not have a material effect on the Company's consolidated financial
statements.
15. Recently Adopted Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment on Disposal of Long-Lived Assets." This statement
supersedes SFAS No. 121, "Accounting for Long-Lived Assets to Be Disposed Of"
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The Company adopted SFAS No. 144 as required to do so on January
1, 2002. The adoption of SFAS No. 144 did not have a material impact on the
Company's results of operations and/or financial position.
19
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
In November 2001, the Emerging Issues Task Force ("EITF") released EITF Issue
01-14, "Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred," requiring companies to report reimbursed
costs as part of gross revenues. The Company adopted the provisions of EITF
01-14 as required to do so on January 1, 2002 and, as such, reimbursed service
costs have been reclassified to gross service revenues for all periods
presented. However, it was impracticable to identify and reclassify certain
prior period commercialization reimbursed service costs and, accordingly,
historical results have not been restated for these costs. During the three and
nine months ended September 30, 2002, these commercialization reimbursed service
costs totaled approximately $10.1 million and $45.8 million, respectively.
16. Subsequent Event
On October 14, 2002, the Company announced that Pharma Services Company, a newly
formed company owned by the Company's Chairman of the Board and Founder, made a
non-binding proposal to acquire all of the Company's outstanding shares for a
cash price of $11.25 per share. In response to the proposal, the Company's Board
of Directors has established a special committee of independent directors to act
on behalf of the Company with respect to the proposal or alternatives in the
context of evaluating what is in the best interest of the Company and its
shareholders. On November 11, 2002, the special committee announced its
rejection of the proposal.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CAUTIONARY STATEMENT FOR FORWARD LOOKING INFORMATION
Information set forth in this Form 10-Q, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Forward looking statements represent our judgment concerning the
future and are subject to risks and uncertainties that could cause our actual
operating results and financial position to differ materially. Such forward
looking statements can be identified by the use of forward looking terminology
such as "may," "will," "expect," "anticipate," "estimate," "believe,"
"continue," or "target" or the negative thereof or other variations thereof or
comparable terminology.
We caution you that any such forward looking statements are further qualified by
important factors that could cause our actual operating results to differ
materially from those in the forward looking statements, including without
limitation, uncertainties arising in connection with the proposed acquisition
transaction, such as the possibility that neither the proposed transaction nor
any other transaction will be approved or completed, the risk that the market
for our products and services will not grow as we expect, the risk that our
PharmaBio transactions will not generate revenues, profits or return on
investment at the rate or levels we expect or that royalty revenues under our
PharmaBio arrangements may not be adequate to offset our upfront and on-going
expenses in providing sales and marketing services or in making milestone and
marketing payments, risks associated with entering into a new line of business
such as those being entered into by PharmaBio, our ability to distribute backlog
among project management groups and match demand to resources, our actual
operating performance, the actual savings and operating improvements resulting
from our restructuring activities, our
20
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
ability to maintain large customer contracts or to enter into new contracts,
changes in trends in the pharmaceutical industry, the risk that our joint
venture with McKesson Corporation relating to the informatics business will not
be successful, and liability risks associated with our business which could
result in losses or indemnity to others not covered by insurance. See "Risk
Factors" below for additional factors that could cause actual results to differ.
Results of Continuing Operations
We adopted Emerging Issues Task Force Issue 01-14 on January 1, 2002, as
required. This new accounting guidance requires us to report reimbursed service
costs as part of gross service revenues. Our reimbursed service costs include
such items as payments to investigators and travel expenses for our clinical
monitors and sales representatives. Historically, we have not reported these
reimbursed service costs as service revenues since we do not earn a profit on
these costs. In accordance with this new accounting guidance, we have
reclassified reimbursed service costs to gross service revenues for all periods
presented. However, it was impracticable to identify and reclassify certain
prior period commercialization reimbursed service costs and, accordingly,
historical results have not been restated for these costs. These
commercialization reimbursed service costs totaled approximately $10.1 million
and $45.8 million for the three and nine months ended September 30, 2002,
respectively.
Three Months Ended September 30, 2002 and 2001
Gross service revenues, which are total service fees accrued to our customers
including reimbursed service costs, were $458.8 million for the third quarter of
2002 versus $462.5 million for the third quarter of 2001. Reimbursed service
expenses, which are pass-through expenses that are to be reimbursed by our
customers, were $94.1 million for the third quarter of 2002 as compared to $65.9
million for the third quarter of 2001.
Gross service revenues accrued to our customers less reimbursed service costs,
or net service revenues, for the third quarter of 2002 were $364.8 million, a
decrease of $31.9 million or (8.0%) over the third quarter of 2001 net service
revenues of $396.6 million. Included in net service revenues for the third
quarter of 2001 is $13.0 million from our informatics group which was
transferred to a joint venture in May 2002. Net service revenues were positively
impacted in the third quarter of 2002 by approximately $11.0 million due to the
effect of foreign currency fluctuations related to the weakening of the US
Dollar relative to the euro, the British pound and Japanese yen. This was
partially offset by the strengthening of the US Dollar relative to the South
African Rand. Using a constant exchange rate for each period, net service
revenues decreased $42.8 million or (10.8%). Net service revenues increased in
the Asia Pacific region $7.4 million or 17.2% to $50.6 million, which was
positively impacted by $1.2 million due to the effect of foreign currency
fluctuations. Net service revenues increased $22.7 million or 16.0% to $164.5
million in the Europe and Africa region, which was positively impacted by $10.1
million due to the effect of foreign currency fluctuations. Net service revenues
decreased $62.0 million or (29.3%) to $149.7 million in the Americas region
primarily as a result of the decline in the commercial services segment due to
continued difficult business conditions for large fee-for-service contracts in
the United States.
21
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Commercial rights and royalties revenues, which include product revenues,
royalties and commissions, were $28.7 million for the third quarter of 2002, an
increase of $18.2 million over commercial rights and royalties revenues of $10.5
million for the third quarter of 2001. Commercial rights and royalties revenues
were positively impacted in the third quarter of 2002 by approximately $868,000
due to the effect of foreign currency fluctuations related to the weakening of
the US Dollar relative to the euro. These revenues include revenues from
products for which we have acquired certain commercial rights, such as the
dermatology products, Solaraze(TM) and ADOXA(TM). Also included are product
revenues that we receive in exchange for providing commercial or product
development services. The $18.2 million increase is primarily the result of our
acquisition of certain assets of Bioglan Pharma, Inc., or Bioglan, and its suite
of dermatology products, a new risk sharing contract in Europe with a large
pharmaceutical customer and our contracts with Scios Inc. and Kos
Pharmaceuticals, Inc. For the three months ended September 30, 2002,
approximately 46.7% of our commercial rights and royalties revenues was
attributable to the contracts with Scios and Kos, approximately 25.4% was
attributable to the risk sharing contract in Europe, approximately 22.0% was
attributable to our suite of dermatology products and the remaining 5.9% was
attributable to miscellaneous contracts and other activities.
Investment revenues, which include gains and losses on the sale of equity
securities and impairment of investment instruments, for the third quarter of
2002 were $3.5 million versus a loss of $7.7 million for the third quarter of
2001. The third quarter of 2002 and 2001 included $1.0 million and $7.9 million,
respectively, of impairment losses whose decline in fair value was other than
temporary primarily due to the declining financial condition of certain
investees.
Total net revenues decreased $2.5 million or (0.6%) to $396.9 million for the
third quarter of 2002 from $399.4 million for the third quarter of 2001.
Service costs, which include compensation and benefits for billable employees,
and certain other expenses directly related to service contracts, were $186.1
million or 51.0% of net service revenues for the third quarter of 2002 versus
$232.8 million or 58.7% of net service revenues for the third quarter of 2001.
The reduction as a percentage of net revenue is primarily a result of the
continued effect of our process enhancements and cost reduction efforts.
Commercial rights and royalties costs, which include compensation and related
benefits for employees, amortization of commercial rights, infrastructure costs
of the PharmaBio group and other expenses directly related to commercial rights
and royalties, were $29.1 million for the third quarter of 2002 versus $10.7
million for the third quarter of 2001. These costs include services and products
provided by third parties, as well as services provided by our other service
groups, totaling approximately $13.2 million and $5.4 million for the third
quarter of 2002 and 2001, respectively. The profit for these internal services
is reported within the service group providing the services. The third quarter
of 2002 also includes costs to market Solaraze(TM) and ADOXA(TM) and expenses
relating to the risk sharing contract in Europe.
Investment costs, which include costs directly related to direct and indirect
investments in our customers or other third parties as part of the PharmaBio
financing arrangements, were $38,000 for the third quarter of 2002 versus
$61,000 for the third quarter of 2001.
22
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Revenue less certain direct costs, or contribution, was $181.7 million or 45.8%
of total net revenues for the third quarter of 2002 versus $155.9 million or
39.0% of total net revenues for the third quarter of 2001.
General and administrative expenses, which include compensation and benefits for
administrative employees, non-billable travel, professional services, and
expenses for advertising, information technology and facilities, were $128.8
million or 32.5% of total net revenues for the third quarter of 2002 versus
$127.6 million or 31.9% of total net revenues for the third quarter of 2001.
General and administrative expenses decreased $1.2 million primarily due to
realization of the benefits from our restructurings including efficiencies
created through the implementation of our shared service centers, as well as
global cost reduction efforts.
Depreciation and amortization, which include depreciation of our property and
equipment and amortization of our definite-lived intangible assets except
commercial rights, decreased to $20.8 million for the third quarter of 2002
versus $24.3 million for the third quarter of 2001. This decrease is primarily
due to the adoption of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," which requires all goodwill and
indefinite-lived intangible assets no longer be amortized but reviewed at least
annually for impairment. During the third quarter of 2002, we completed the
annual goodwill impairment test, in which no goodwill impairment was deemed
necessary.
In connection with the implementation of our strategic plan, we recognized a
$50.9 million restructuring charge during the third quarter of 2001. In
addition, we recognized a $1.1 million restructuring charge as a revision of an
estimate to a 2000 restructuring plan.
Also in the third quarter of 2001, we recognized a $20.1 million charge to
write-off goodwill and other operating assets primarily relating to goodwill
recorded in four separate acquisitions in our commercial services segment. The
goodwill was deemed impaired and written-off due to changing business conditions
and strategic direction.
Net interest income, which represents interest income received from bank
balances and investments in debt securities net of interest expense incurred on
lines of credit, notes and capital leases, was $3.3 million for the third
quarter of 2002 versus $3.8 million for the third quarter of 2001. Although our
investable funds for the third quarter of 2002 were greater than the investable
funds for the same period in 2001, we experienced a $569,000 decrease in net
interest income primarily due to a decline in interest rates.
Other expense was $1.5 million for the third quarter of 2002 versus $183,000 for
the third quarter of 2001. The $1.3 million variation was primarily the result
of losses on the disposal of assets.
During the third quarter of 2001 we recognized a $334.0 million loss as a result
of the write-down of our cost basis in our investment in WebMD Corporation
common stock due to an other than temporary decline in fair value.
Income before income taxes was $33.8 million or 8.5% of total net revenues for
the third quarter of 2002 versus a loss of $398.6 million for the third quarter
of 2001. Excluding the $52.0 million restructuring charge,
23
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
the $20.1 million write-off of goodwill and other operating assets, and the
$334.0 million impairment on investment in WebMD in the third quarter of 2001,
income before income taxes was $7.6 million or 1.9% of total net revenue for the
third quarter of 2001.
The effective income tax rate was 34.3% for the third quarter of 2002 versus
33.3% for the third quarter of 2001. As is customary, we filed our 2001 United
States Federal income tax return in September 2002 and re-evaluated our
estimated income tax rate for 2002. As a result, we estimated our income tax
rate for 2002 to be approximately 33.5%. Since we conduct operations on a global
basis, our effective income tax rate may vary.
In the third quarter of 2002, we recognized $1.0 million of losses from equity
in unconsolidated affiliates which represents our pro rata share of net losses
of unconsolidated affiliates, primarily the Verispan L.L.C. joint venture.
Verispan continues to execute its data product strategy; however, the sales of
the data products have been slower than expected due to difficult market
conditions.
Analysis by Segment:
In the first quarter of 2002, we transferred the portion of the operations of
our Late Phase, primarily Phase IV, clinical group that was in the commercial
services group to the product development group. All historical information
presented has been restated to reflect this change.
The following table summarizes the operating activities for our four reportable
segments for the three months ended September 30, 2002 and 2001, respectively.
We do not include general and administrative expenses, depreciation and
amortization except amortization of commercial rights, interest income
(expense), other income (expense) and income tax expense (benefit) in our
segment analysis. Significant intersegment revenues have been eliminated,
(dollars in millions).
Total Net Revenues Contribution
------------------------------------- -----------------------------------------------
% of Net % of Net
2002 2001 Growth % 2002 Revenues 2001 Revenues
------ ------ ------ ------ ---- ------ ------
Product development $242.3 $230.7 5.1% $125.9 52.0% $110.0 47.7%
Commercial services 135.6 158.4 (14.3) 52.8 38.9 48.4 30.6
Informatics -- 13.0 (100.0) -- -- 5.5 42.1
PharmaBio 32.1 2.8 1055.2 3.0 9.4 (8.0) (287.6)
Eliminations (13.2) (5.4) 144.5 -- -- -- --
------ ------ ------ ------ ---- ------ ------
$396.9 $399.4 (0.6)% $181.7 45.8% $155.9 39.0%
The product development group's financial performance improvement was a result
of the continued effect of process enhancements and increased revenues in early
development and laboratory services.
The commercial services group's financial performance was negatively impacted by
continued difficult business conditions for large fee-for-service contracts
especially in the United States. The negative impact was offset by the effects
of our cost reduction efforts.
24
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
The third quarter of 2002 includes no revenues and contribution for the
informatics group as a result of the formation of Verispan in May of 2002.
The PharmaBio group's increase in net revenues, which consist of commercial
rights and royalties and investments, was primarily the result of our
acquisition of certain assets of Bioglan and its suite of dermatology products,
the risk sharing contract in Europe and our contracts with Scios Inc. and Kos
Pharmaceuticals, Inc. The performance of this group was negatively impacted by
the costs associated with the marketing of Solaraze(TM) and ADOXA(TM) and
expenses relating to the risk sharing contract in Europe. We believe the costs
of marketing these products and the expenses for the risk sharing contract will
exceed related revenues during the first year.
Nine Months Ended September 30, 2002 and 2001
Gross service revenues for the nine months ended September 30, 2002 were $1.40
billion versus $1.39 billion for the nine months ended September 30, 2001.
Reimbursed service expenses were $297.1 million for the nine months ended
September 30, 2002 as compared to $193.6 million for the nine months ended
September 30, 2001.
Net service revenues for the first nine months of 2002 were $1.10 billion, a
decrease of $94.7 million or (7.9%) over net service revenues of $1.20 billion
in the first nine months of 2001 . Included in net revenues for the first nine
months of 2002 was $20.3 million from informatics group as compared to $43.1
million for the same period in 2001. Our informatics group was transferred to a
joint venture during May 2002, therefore revenues for this group are not
included in our net service revenues since the date of transfer. Net service
revenues in the first nine months of 2002 were positively impacted by
approximately $599,000 due to the effect of foreign currency fluctuations
related to the weakening of the US Dollar relative to the euro and the British
pound. This was partially offset by the strengthening of the US Dollar relative
to the South African Rand and the Japanese yen. Using a constant exchange rate
for each period, net service revenues decreased $95.3 million or (7.9%). Net
service revenues increased in the Asia Pacific region $21.6 million or 18.5% to
$138.7 million, which was negatively impacted by $3.2 million due to the effect
of foreign currency fluctuations. Net service revenues increased $35.4 million
or 8.1% to $470.7 million in the Europe and Africa region, which was positively
impacted by $4.2 million due to the effect of foreign currency fluctuations. Net
service revenues decreased $151.7 million or (23.4%) to $495.5 million in the
Americas region primarily as a result of the decline in the commercial services
group revenues.
Commercial rights and royalties revenues, which include product revenues,
royalties and commissions, for the first nine months of 2002 were $65.9 million,
an increase of $49.6 million over the first nine months of 2001 commercial
rights and royalties revenues of $16.3 million. Commercial rights and royalties
revenues were positively impacted by approximately $1.1 million due to the
effect of foreign currency fluctuations related to the weakening of the US
Dollar relative to the euro. These revenues include products for which we have
acquired the rights, such as the dermatology products, Solaraze(TM) and
ADOXA(TM). Also included are product revenues that we receive in exchange for
providing commercial or product development services. The $49.6 million increase
is primarily the result of our acquisition of certain assets of Bioglan and its
suite of dermatology products, a new risk sharing contract in Europe with a
large pharmaceutical customer and our
25
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
contracts with Scios Inc. and Kos Pharmaceuticals, Inc. For the nine months
ended September 30, 2002, approximately 58.2% of our commercial rights and
royalties revenues was attributable to the contracts with Scios and Kos,
approximately 18.3% was attributable to the risk sharing contract in Europe,
approximately 15.6% was attributable to our suite of dermatology products and
the remaining 7.9% was attributable to miscellaneous contracts and other
activities.
Investment revenues, which include gains and losses on the sale of equity
securities and impairment of investment instruments, for the first nine months
of 2002 were $14.6 million versus a loss of $6.3 million for the first nine
months of 2001. The first nine months of 2002 and 2001 included $1.0 million and
$11.0 million, respectively, of impairment losses on investments whose decline
in fair value was considered to be other than temporary.
Total net revenues decreased $24.2 million or (2.0%) to $1.19 billion for the
first nine months of 2002 from $1.21 billion for the first nine months of 2001.
Service costs, which include compensation and benefits for billable employees,
and other certain expenses directly related to service contracts, were $589.7
million or 53.4% of net service revenues for the first nine months of 2002
versus $710.1 million or 59.2% of net service revenues for the first nine months
of 2001. This reduction is primarily a result of the continued effect of our
process enhancements and cost reduction efforts.
Commercial rights and royalties costs, which include compensation and related
benefits for employees, amortization of commercial rights, infrastructure costs
of the PharmaBio group and other expenses directly related to commercial rights
and royalties, were $69.9 million for the first nine months of 2002 versus $16.5
million for the first nine months of 2001. These costs include services and
products provided by third parties, as well as services provided by our other
service groups, totaling approximately $36.7 million for the first nine months
of 2002 and $5.4 million for the first nine months of 2001. The profit for these
internal services is reported within the service group providing the services.
The first nine months of 2002 also includes costs to launch and market
Solaraze(TM) and ADOXA(TM) and expenses relating to the risk sharing contract in
Europe.
Investment costs, which include costs directly related to direct and indirect
investments in our customers or other third parties as part of the financing
PharmaBio arrangements, were $217,000 for the first nine months of 2002 versus
$408,000 for the first nine months of 2001.
Revenue less certain direct cost, or contribution, was $525.5 million or 44.3%
of total net revenues for the first nine months of 2002 versus $482.6 million or
39.9% of total net revenues for the first nine months of 2001.
General and administrative expenses, which include compensation and benefits for
administrative employees, non-billable travel, professional services, and
expenses for advertising, information technology and facilities, were $382.0
million or 32.2% of total net revenues for the first nine months of 2002 versus
$391.2 million or 32.3% of total net revenues for the first nine months of 2001.
General and administrative expenses decreased $9.3 million primarily due to
realization of the benefits from our restructurings, including
26
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
efficiencies created through the implementation of our shared service centers,
as well as global cost reduction efforts.
Depreciation and amortization, which include depreciation of our property and
equipment and amortization of our definite-lived intangible assets except
commercial rights, decreased to $63.5 million for the first nine months of 2002
versus $70.4 million for the first nine months of 2001. This decrease is
primarily due to the adoption of Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets," which requires all goodwill and
indefinite-lived intangible assets no longer be amortized but reviewed at least
annually for impairment. During the first nine months of 2002, we completed the
goodwill transitional impairment test as of January 1, 2002, as required, and
the annual impairment test as of July 31, 2002, in which no goodwill impairment
was deemed necessary at either date.
In the first nine months of 2001, we recognized $54.2 million of restructuring
charges which included approximately $1.1 million relating to a 2000
restructuring plan.
In the third quarter of 2001, we recognized a $20.1 million charge to write-off
goodwill and other operating assets primarily relating to goodwill recorded in
four separate acquisitions in our commercial services segment. The goodwill was
deemed impaired and written-off due to changing business conditions and
strategic direction.
Net interest income, which represents interest income received from bank
balances and investments in debt securities net of interest expense incurred on
lines of credit, notes and capital leases, was $10.0 million for the first nine
months of 2002 versus $14.3 million for the first nine months of 2001. The $4.3
million decrease was due to a decline in interest rates.
Other expense was $344,000 for the first nine months of 2002 versus other income
of $585,000 for the first nine months of 2001. The $929,000 variation was a
result of several factors, including effects of foreign currency translations,
disposal of assets and transaction costs associated with the formation of the
Verispan joint venture.
During the first nine months of 2001, we recognized a $334.0 million impairment
due to the write-down of our cost basis in our investment in WebMD whose decline
in fair value was considered to be other than temporary.
Income before income taxes was $89.6 million or 7.6% of total net revenues for
the first nine months of 2002 versus a loss of $372.5 million for the first nine
months of 2001. Excluding the $54.2 million restructuring charge, the $20.1
million write-off of goodwill, and the $334.0 million impairment on investment
in WebMD in the first nine months of 2001, income before income taxes was $35.8
million or 3.0% of total net revenue for the first nine months of 2001.
The effective income tax rate was 33.5% for the first nine months of 2002 versus
33.3% for the first nine months of 2001. Since we conduct operations on a global
basis, our effective income tax rate may vary.
27
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
We recognized $540,000 of losses from equity in unconsolidated affiliates which
represents our pro rata share of net losses of unconsolidated affiliates,
primarily Verispan's net loss since its formation in May 2002.
Analysis by Segment:
During the first quarter of 2002, we transferred the portion of the operations
of our Late Phase, primarily Phase IV, clinical group that was in the commercial
services group to the product development group. All historical information
presented has been restated to reflect this change.
The following table summarizes the operating activities for our four reportable
segments for the nine months ended September 30, 2002 and 2001, respectively. We
do not include general and administrative expenses, depreciation and
amortization except amortization of commercial rights, interest income
(expense), other income (expense) and income tax expense (benefit) in our
segment analysis. Significant intersegment revenues have been eliminated,
(dollars in millions).
Total Net Revenues Contribution
----------------------------------------- -----------------------------------------------
% of Net % of Net
2002 2001 Growth % 2002 Revenues 2001 Revenues
-------- -------- -------- ------ -------- ------ --------
Product development $ 704.0 $ 688.5 2.3% $354.0 50.3% $326.8 47.5%
Commercial services 417.3 473.4 (11.8) 153.1 36.7 143.2 30.3
Informatics 20.3 43.1 (52.8) 8.0 39.4 19.5 45.2
PharmaBio 80.4 9.9 709.1 10.3 12.8 (7.0) (70.3)
Eliminations (36.7) (5.4) (581.0) -- -- -- --
-------- -------- ------ ------
$1,185.4 $1,209.6 (2.0)% $525.5 44.3 $482.6 39.9%
The product development group's financial performance improvement was a result
of several factors, including an increase in revenues and the continued effect
of process enhancements.
The commercial services group's financial performance was negatively impacted by
difficult business conditions for large fee-for-service contracts in the United
States, as well as the completion of several contracts in the United States. The
negative impact was offset by the effects of our cost reduction efforts.
The informatics group's performance was impacted by the pending transfer of this
group into a joint venture with McKesson which was completed in May 2002. The
2002 results include only five months of revenues and contribution for the
informatics group.
The PharmaBio group's increase in net revenues, which consist of commercial
rights and royalties and investments, was primarily the result of our
acquisition of certain assets of Bioglan and its suite of dermatology products,
the risk sharing contract in Europe and our contracts with Scios Inc. and Kos
Pharmaceuticals, Inc. This group was negatively impacted by the costs associated
with the launch and marketing of Solaraze(TM) and ADOXA(TM). We believe the
costs of marketing these products and expenses for the risk sharing contract
will exceed related revenues during the first year.
28
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Liquidity and Capital Resources
Cash and cash equivalents were $617.4 million at September 30, 2002 as compared
to $565.1 million at December 31, 2001.
Cash provided by operations was $168.9 million for the nine months ended
September 30, 2002 versus $102.4 million for the comparable period of 2001.
Increasing cash from operations for the nine months ended September 30, 2001 was
an income tax refund of $47.6 million. Investing activities during the first
nine months of 2002 consisted primarily of the acquisition of certain assets of
Bioglan, purchases of commercial rights, purchases and sales of equity
securities and other investments and capital asset purchases. Purchases of
equity securities and other investments required an outlay of cash of $15.0
million for the nine months ended September 30, 2002 compared to an outlay of
$30.7 million for the same period in 2001. We received $24.8 million of proceeds
from the sale of equity securities and other investments during the nine months
ended September 30, 2002 as compared to $4.8 million for the same period in
2001. Capital asset purchases required an outlay of cash of $30.6 million for
the nine months ended September 30, 2002 compared to an outlay of $59.8 million
for the same period in 2001.
On March 22, 2002, we acquired certain assets of Bioglan, including
approximately $1.6 million in cash, for approximately $27.9 million. As part of
the agreement, we also acquired Bioglan's rights to certain dermatology products
already on the market in the United States, including ADOXA(TM).
During the nine months ended September 30, 2002, purchases of commercial rights
were $41.4 million. These purchases included the $30.0 million payment under our
PharmaBio agreement with Eli Lilly and Company, also referred to as LLY. We have
recorded an additional $40.0 million payable to LLY as a result of LLY receiving
the approvable letter for Cymbalta(TM) during September 2002. We made this
payment to LLY during October 2002.
The following table is a summary of our net service receivables outstanding
(dollars in thousands):
September 30, 2002 December 31, 2001
------------------ -----------------
Trade service accounts receivable, net $ 209,054 $ 258,917
Unbilled services 143,097 166,754
Unearned income (217,998) (205,783)
--------- ---------
Net service receivables outstanding $ 134,153 $ 219,888
========= =========
Number of days of service revenues outstanding 27 43
The decrease in the number of days of service revenues outstanding is a result
of our continued focus on the fundamentals of our business and efficiencies
generated by our shared service centers.
Investments in debt securities were $38.0 million at September 30, 2002 as
compared to $37.0 million at December 31, 2001. Our investments in debt
securities consist primarily of U.S. Government Securities, which are callable
by the issuer at par, and money funds.
29
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Investments in marketable equity securities at September 30, 2002 were $45.1
million, a decrease of $32.9 million, as compared to $78.0 million at December
31, 2001. This decrease is due primarily to unrealized losses on the portfolio
as a result of stock price declines and sales of marketable equity securities.
Investments in non-marketable equity securities and loans at September 30, 2002
were $46.3 million, an increase of $8.7 million, as compared to $37.6 million at
December 31, 2001.
In May 2002, we completed the formation of our previously announced healthcare
informatics joint venture, Verispan, with McKesson which is designed to leverage
the operational strengths of the healthcare information businesses of each
company. We are equal co-owners of a majority of the equity of Verispan with
McKesson, with a portion of the equity in Verispan owned or to be issued to key
providers of de-identified healthcare data in exchange for the data. We
contributed the net assets of our informatics group to the joint venture and
funded $10.0 million to Verispan. Accordingly, we have recorded our investment
in Verispan, which is approximately $120.7 million at September 30, 2002, as an
investment in unconsolidated affiliates. Verispan will license data products to
McKesson and us for use in our core businesses. Under the license arrangement,
our product development and commercial services groups continue to have access
to Verispan's products, at no license fee, to enhance their service delivery to
our customers.
We have available to us a (pound)10.0 million (approximately $15.6 million)
unsecured line of credit and a (pound)1.5 million (approximately $2.3 million)
general banking facility with a U.K. bank. At September 30, 2002, we did not
have any outstanding balances on these facilities.
Shareholders' equity at September 30, 2002 was $1.495 billion versus $1.455
billion at December 31, 2001.
In March 2001, the Board of Directors authorized us to repurchase up to $100
million of our common stock until March 1, 2002. In February 2002, the Board
extended this authorization until March 1, 2003. During the first nine months of
2002, we entered into agreements to repurchase approximately 1.6 million shares
for an aggregate price of $22.2 million. We did not enter into any agreements to
repurchase our common stock during the quarter ended September 30, 2002.
Based on our current operating plan, we believe that our available cash and cash
equivalents, together with future cash flows from operations and borrowings
under our line of credit agreements will be sufficient to meet our foreseeable
cash needs in connection with our operations. As part of our business strategy,
we review many acquisition candidates in the ordinary course of business, and in
addition to acquisitions already made, we are continually evaluating new
acquisition and expansion possibilities. In addition, as part of our business
strategy going forward, we intend to review and consider opportunities to
acquire additional product rights, as appropriate. We may from time to time seek
to obtain debt or equity financing in our ordinary course of business or to
facilitate possible acquisitions or expansion.
30
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Subsequent Event
On October 14, 2002, we announced that Pharma Services Company, a newly formed
company owned by our Chairman of the Board and Founder, has made a non-binding
proposal to acquire all of our outstanding shares for a cash price of $11.25 per
share. In response to the proposal, our Board of Directors has established a
special committee of independent directors to act on our behalf with respect to
the proposal or alternatives in the context of evaluating what is in our best
interest and the best interest of our shareholders. On November 11, 2002, the
special committee announced its rejection of the proposal.
Backlog and Net New Business Reporting
We report backlog, $1.783 billion at June 30, 2002, based on anticipated net
revenue from uncompleted projects that our customers have authorized. Backlog at
June 30, 2002 includes approximately $77 million of backlog related to services
contracted from our service groups, primarily commercial services, in connection
with the strategic alliances forged by our PharmaBio group.
Net new business, which is anticipated net revenue from contracts which we
entered into during the period and adjusted for contracts which were cancelled
during the period, for the six months ended June 30, 2002 was $580 million,
including $54 million of internal service contracts. Net new business for our
product development and commercial services groups during this same period was
$360 million and $220 million, respectively.
We do not include product revenue or commercial rights-related revenue
(royalties and commissions) in backlog or net new business. Our backlog and net
new business is calculated based upon our estimate of forecasted currency
exchange rates. Annually, we adjust the beginning balance of our backlog to
reflect changes in our forecasted currency exchange rates. Our backlog and net
new business at any time can be affected by:
- - the variable size and duration of projects,
- - the loss or delay of projects, and
- - a change in the scope of work during the course of a project.
If customers delay projects, the projects will remain in backlog, but will not
generate revenue at the rate originally expected. Accordingly, historical
indications of the relationship of backlog to revenues may not be indicative of
the future relationship.
The reporting of revenue backlog and net new business is not authoritatively
prescribed, therefore practices tend to vary among companies in our industry and
reported amounts are not necessarily comparable among competitors.
31
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
RISK FACTORS
In addition to the other information provided in this report, you should
consider the following factors carefully in evaluating our business and us.
Additional risks and uncertainties not presently known to us, that we currently
deem immaterial or that are similar to those faced by other companies in our
industry or business in general, such as competitive conditions, may also impair
our business operations. If any of the following risks occur, our business,
financial condition, or results of operations could be materially adversely
affected.
Changes in outsourcing trends in the pharmaceutical and biotechnology industries
could adversely affect our operating results and growth rate.
Economic factors and industry trends that affect our primary customers,
pharmaceutical and biotechnology companies, also affect our business. For
example, the practice of many companies in these industries has been to hire
outside organizations like us to conduct large clinical research and sales and
marketing projects. This practice grew substantially during the 1990's and we
benefited from this trend. Some industry commentators believe that the rate of
growth of outsourcing will tend to decrease. If these industries reduce their
tendency to outsource those projects, our operations, financial condition and
growth rate could be materially and adversely affected. Recently, we also
believe we have been negatively impacted by mergers and other factors in the
pharmaceutical industry, which appear to have slowed decision making by our
customers and delayed certain trials. A continuation of these trends would have
an ongoing adverse effect on our business. In addition, numerous governments
have undertaken efforts to control growing healthcare costs through legislation,
regulation and voluntary agreements with medical care providers and
pharmaceutical companies. If future regulatory cost containment efforts limit
the profits which can be derived on new drugs, our customers may reduce their
research and development spending, which could reduce the business they
outsource to us. We cannot predict the likelihood of any of these events or the
effects they would have on our business, results of operations or financial
condition.
If we are unable to successfully develop and market potential new services, our
growth could be adversely affected.
Another key element of our growth strategy is the successful development and
marketing of new services that complement or expand our existing business. If we
are unable to succeed in (1) developing new services and (2) attracting a
customer base for those newly developed services, we will not be able to
implement this element of our growth strategy, and our future business, results
of operations and financial condition could be adversely affected.
Our plan to web-enable our product development and commercialization services
may negatively impact our results in the short term.
We are currently developing an Internet platform for our product development and
commercialization services. We have entered into agreements with certain vendors
for them to provide web-enablement services to help us develop this platform. If
such vendors fail to perform as required or if there are substantial delays in
developing and implementing this platform, we may have to make substantial
further investments, internally or with third parties, to achieve our
objectives. Meeting our objectives is dependent on a number
32
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
of factors which may not take place as we anticipate, including obtaining
adequate web-enablement services, creating web-enablement services which our
customers will find desirable and implementing our business model with respect
to these services. Also, these expenditures are likely to negatively impact our
profitability, at least until our web-enabled products are operationalized. Over
time, we envision continuing to invest in extending and enhancing our Internet
platform in other ways to further support and improve our services. We cannot
assure you that any improvements in operating income resulting from our Internet
capabilities will be sufficient to offset our investments in the Internet
platform. Our results could be further negatively impacted if our competitors
are able to execute their services on a web-based platform before we can launch
our Internet services or if they are able to structure a platform that attracts
customers away from our services.
We may not be able to derive the benefits we hope to achieve from our joint
venture with McKesson.
In May 2002, we completed the formation of a joint venture with McKesson
Corporation designed to leverage the operational strengths of the healthcare
information business of each party. As part of the formation of the joint
venture, we contributed our former informatics business. As a result, the joint
venture remains subject to the risks to which our informatics business was
exposed. If the joint venture is not successful or if it experiences any of the
difficulties described below, there could be an adverse effect on our results of
operations and financial condition, as the joint venture is a pass-through
entity and, as such, its results are reflected in our financial statements to
the extent of our interest in the joint venture. We may not achieve the intended
benefits of the joint venture if it is not able to secure additional data in
exchange for equity. Although the joint venture currently is in discussions with
several major data providers to become equity participants in the joint venture
in exchange for de-identified healthcare data, it is possible that these or
other data providers will prefer to receive cash as payment for such data,
instead of equity in the joint venture, or will not want to participate at all.
Such a trend could have a material adverse effect on the joint venture's
operations and financial condition. The joint venture also could encounter other
difficulties, including:
- - its ability to obtain continuous access to de-identified healthcare
data from third parties in sufficient quantities to support its
informatics products;
- - its ability to process and use the volume of data received from a
variety of data providers;
- - its ability to attract customers, besides Quintiles and McKesson, to
purchase its products and services;
- - the risk of changes in healthcare information privacy laws and
regulations that could create a risk of liability, increase the cost of
the joint venture's business or limit its service offerings;
- - the risk that industry regulation may restrict the joint venture's
ability to analyze and disseminate pharmaceutical and healthcare data;
and
- - the risk that it will not be able to effectively and cost-efficiently
replace services previously provided to the contributed businesses by
the former parent corporations.
33
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Although we have a license to the joint venture company's data products for use
by our product development and commercial services groups, if the joint venture
is unable to provide us with the quality and character of data products that we
need to support those services, we will not be able to fully realize the
benefits of the joint venture and will need to seek other strategic alternatives
to achieve our goals.
The potential loss or delay of our large contracts could adversely affect our
results.
Many of our customers can terminate our contracts upon 15-90 days' notice. In
the event of termination, our contracts often provide for fees for winding down
the project, but these fees may not be sufficient for us to maintain our
margins, and termination may result in lower resource utilization rates. Thus,
the loss or delay of a large contract or the loss or delay of multiple contracts
could adversely affect our net revenue and profitability. We believe that this
risk has potentially greater effect as we pursue larger outsourcing arrangements
with global pharmaceutical companies. Also, over the past two years we have
observed that customers may be more willing to delay, cancel or reduce contracts
more rapidly than in the past. If this trend continues, it could become more
difficult for us to balance our resources with demands for our services and our
financial results could be adversely affected.
Underperformance of our commercial rights strategies could have a negative
impact on our financial performance.
As part of our PharmaBio Development business strategy, we enter into
arrangements with customers in which we take on some of the risk of the
potential success or failure of the customer's product. These transactions may
include making a strategic investment in a customer, providing financing to a
customer, or taking an interest in the revenues from a customer's product. For
example, we may build or provide a sales organization for a biotechnology
customer to commercialize a new product in exchange for a share in the revenues
of the product. We anticipate that in the early periods of many of these
relationships, our expenses will exceed revenues from these arrangements,
particularly where we are providing a sales force for the product at our own
cost. Aggregate royalty or other payments made to us under these arrangements
may not be adequate to offset our total expenditure in providing a sales force
or in making milestone or marketing payments to our customers. We must carefully
analyze and select the customers and products with which we are willing to
structure our risk-based deals. Products underlying our commercial rights
strategies may not complete clinical trials, receive FDA approval or achieve the
level of market acceptance or customer demand that we expect, in which case we
might not be able to earn a profit or recoup our investment with regard to a
particular arrangement. The potential negative effect to us could increase
depending on the nature and timing of our investments and the length of time
before it becomes apparent that the product will not achieve commercial success.
Our financial results would be adversely affected if our customers or their
products do not achieve the level of success that we anticipate and/or our
return or payment from the product investment or financing is less than our
costs of performance, investment or financing.
34
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Our rights to market and sell certain pharmaceutical products expose us to
product risks typically associated with pharmaceutical companies.
Our recent acquisition of the rights to market and sell Solaraze(TM) and the
rights to other dermatology products acquired from Bioglan, as well as any other
product rights we may hold at any time, subject us to a number of risks typical
to the pharmaceutical industry. For example, we could face product liability
claims in the event users of these products, or of any other pharmaceutical
product rights we may acquire in the future, experience negative reactions or
adverse side effects or in the event it causes injury, is found to be unsuitable
for its intended purpose or is otherwise defective. While we believe we
currently have adequate insurance in place to protect against these risks, we
may nevertheless be unable to satisfy any claims for which we may be held liable
as a result of the use or misuse of products which we manufacture or sell, and
any such product liability claim could adversely affect our business, operating
results or financial condition. In addition, like pharmaceutical companies, our
commercial success in this area will depend in part on our obtaining, securing
and defending our intellectual property rights covering our pharmaceutical
products.
These risks may be augmented by certain risks relating to our outsourcing of the
manufacturing and distribution of these products or any pharmaceutical product
rights we may acquire in the future. For example, as a result of our decision to
outsource the manufacturing and distribution of Solaraze(TM), we are unable to
directly monitor quality control in the manufacturing and distribution
processes.
Our plans to market and sell Solaraze(TM) and other pharmaceutical products also
subject us to risks associated with entering into a new line of business. We
have limited experience operating in this line of business. If we are unable to
operate this new line of business as we expect, the financial results from this
new line of business could have a negative impact on our results of operations
as a whole. The risk that our results may be affected if we are unable to
successfully operate our pharmaceutical operations may increase in proportion
with (1) the number of products we license in the future, (2) the applicable
stage of the drug approval process of the products and (3) the levels of
outsourcing involved in the development, manufacture and commercialization of
such products.
If we lose the services of Dennis Gillings, Pamela Kirby or other key personnel,
our business could be adversely affected.
Our success substantially depends on the performance, contributions and
expertise of our senior management team, led by Dennis B. Gillings, Ph.D., our
Chairman, and Pamela J. Kirby, Ph.D., our Chief Executive Officer. Our
performance also depends on our ability to attract and retain qualified
management and professional, scientific and technical operating staff, as well
as our ability to recruit qualified representatives for our contract sales
services. The departure of Dr. Gillings, Dr. Kirby, or any key executive, or our
inability to continue to attract and retain qualified personnel could have a
material adverse effect on our business, results of operations or financial
condition. The uncertainty associated with the special committee's investigation
of strategic alternatives may increase this risk.
35
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Our product development services create a risk of liability from clinical trial
participants and the parties with whom we contract.
We contract with drug companies to perform a wide range of services to assist
them in bringing new drugs to market. Our services include supervising clinical
trials, data and laboratory analysis, patient recruitment and other services.
The process of bringing a new drug to market is time-consuming and expensive. If
we do not perform our services to contractual or regulatory standards, the
clinical trial process could be adversely affected. Additionally, if clinical
trial services such as laboratory analysis do not conform to contractual or
regulatory standards, trial participants could be affected. These events would
create a risk of liability to us from the drug companies with whom we contract
or the study participants. Similar risks apply to our product development
services relating to medical devices.
We also contract with physicians to serve as investigators in conducting
clinical trials. Such testing creates risk of liability for personal injury to
or death of volunteers, particularly to volunteers with life-threatening
illnesses, resulting from adverse reactions to the drugs administered during
testing. It is possible third parties could claim that we should be held liable
for losses arising from any professional malpractice of the investigators with
whom we contract or in the event of personal injury to or death of persons
participating in clinical trials. We do not believe we are legally accountable
for the medical care rendered by third party investigators, and we would
vigorously defend any such claims. For example, we are among the defendants
named in a purported class action by participants in an Alzheimer's study
seeking to hold us liable for alleged damages to the participants arising from
the study. Nonetheless, it is possible we could be found liable for those types
of losses.
In addition to supervising tests or performing laboratory analysis, we also own
a number of labs where Phase I clinical trials are conducted. Phase I clinical
trials involve testing a new drug on a limited number of healthy individuals,
typically 20 to 80 persons, to determine the drug's basic safety. We also could
be liable for the general risks associated with ownership of such a facility.
These risks include, but are not limited to, adverse events resulting from the
administration of drugs to clinical trial participants or the professional
malpractice of Phase I medical care providers.
We also could be held liable for errors or omissions in connection with our
services. For example, we could be held liable for errors or omissions or breach
of contract if one of our laboratories inaccurately reports or fails to report
lab results. Although, we maintain insurance to cover ordinary risks, insurance
would not cover the risk of a customer deciding not to do business with us as a
result of poor performance.
Our insurance may not cover all of our indemnification obligations and other
liabilities associated with our operations.
We maintain insurance designed to cover ordinary risks associated with our
operations and our ordinary indemnification obligations. This insurance might
not be adequate coverage or may be contested by our carriers. For example, our
insurance carrier, to whom we paid premiums to cover risks associated with our
product development services, has filed suit against us seeking to rescind the
insurance policies or to have coverage denied for some or all of the claims
arising from class action litigation involving an Alzheimer
36
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
study. The availability and level of coverage provided by our insurance could
have a material impact on our profitability if we suffer uninsured losses or are
required to indemnify third parties for uninsured losses.
In connection with our contribution to our joint venture with McKesson, the
joint venture company assumed our obligation under our settlement agreement with
WebMD to indemnify WebMD for losses arising out of or in connection with the
cancelled Data Rights Agreement with WebMD, our data business that we
contributed to the joint venture, the collection, accumulation, storage or use
of data by ENVOY for the purpose of transmitting or delivering data to us, any
transmission or delivery by ENVOY of data to us or violations of law or contract
attributable to any such event. This indemnity obligation is limited to 50% for
the first $20 million in aggregate losses, subject to exceptions for certain
indemnity obligations that were not transferred to the joint venture. Although
the joint venture company has assumed our indemnity obligations to WebMD
relating to our data business, WebMD may seek indemnity from us and we would
have to proceed against the joint venture. In addition, we remain subject to
other indemnity obligations to WebMD, including for losses arising out of the
settlement agreement itself or out of the sale of ENVOY to WebMD, including a
class action lawsuit filed against ENVOY prior to its purchase by us and
subsequent sale to WebMD. Our indemnification obligation with regard to losses
arising from the sale of ENVOY to WebMD is not subject to the limitation on the
first $20 million of losses described above.
Relaxation of government regulation could decrease the need for the services we
provide.
Governmental agencies throughout the world, but particularly in the United
States, highly regulate the drug development/approval process. A large part of
our business involves helping pharmaceutical and biotechnology companies through
the regulatory drug approval process. Any relaxation in regulatory approval
standards could eliminate or substantially reduce the need for our services,
and, as a result, our business, results of operations and financial condition
could be materially adversely affected. Potential regulatory changes under
consideration in the United States and elsewhere include mandatory substitution
of generic drugs for patented drugs, relaxation in the scope of regulatory
requirements or the introduction of simplified drug approval procedures. These
and other changes in regulation could have an impact on the business
opportunities available to us.
Failure to comply with existing regulations could result in a loss of revenue.
Any failure on our part to comply with applicable regulations could result in
the termination of ongoing clinical research or sales and marketing projects or
the disqualification of data for submission to regulatory authorities, either of
which could have a material adverse effect on us. For example, if we were to
fail to verify that informed consent is obtained from patient participants in
connection with a particular clinical trial, the data collected from that trial
could be disqualified, and we could be required to redo the trial under the
terms of our contract at no further cost to our customer, but at substantial
cost to us.
37
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Our services are subject to evolving industry standards and rapid technological
changes.
The markets for our services are characterized by rapidly changing technology,
evolving industry standards and frequent introduction of new and enhanced
services. To succeed, we must continue to:
- enhance our existing services;
- introduce new services on a timely and cost-effective basis to meet
evolving customer requirements;
- integrate new services with existing services;
- achieve market acceptance for new services; and
- respond to emerging industry standards and other technological changes.
Exchange rate fluctuations may affect our results of operations and financial
condition.
We derive a large portion of our net revenue from international operations. Our
financial statements are denominated in U.S. dollars; thus, factors associated
with international operations, including changes in foreign currency exchange
rates and any trends associated with the transition to the euro, could
significantly affect our results of operations and financial condition. Exchange
rate fluctuations between local currencies and the U.S. dollar create risk in
several ways, including:
- Foreign Currency Translation Risk. The revenue and expenses of our
foreign operations are generally denominated in local currencies.
- Foreign Currency Transaction Risk. Our service contracts may be
denominated in a currency other than the currency in which we incur
expenses related to such contracts.
We try to limit these risks through exchange rate fluctuation provisions stated
in our service contracts, or we may hedge our transaction risk with foreign
currency exchange contracts or options. Although we may hedge our transaction
risk, there were no open foreign exchange contracts or options relating to
service contracts at September 30, 2002. Despite these efforts, we may still
experience fluctuations in financial results from our operations outside the
United States, and we cannot assure you that we will be able to favorably reduce
our currency transaction risk associated with our service contracts.
We may be adversely affected by customer concentration.
We have one customer that accounted for 10.9% and 11.7% of our net service
revenues for the three and nine months ended September 30, 2002, respectively.
These revenues resulted from services provided by the product development and
commercial services groups. If any large customer decreases or terminates its
relationship with us, our business, results of operations or financial condition
could be materially adversely affected.
If we are unable to submit electronic records to the FDA according to FDA
regulations, our ability to service our customers during the FDA approval
process could be adversely affected.
If we were unable to submit electronic records to the United States Food and
Drug Administration, also referred to as the FDA, according to FDA regulations,
our ability to service our customers during the FDA
38
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
approval process could be adversely affected. The FDA published 21 CFR Part 11
"Electronic Records; Electronic Signatures; Final Rule" ("Part 11") in 1997.
Part 11 became effective in August 1997 and defines the regulatory requirements
that must be met for FDA acceptance of electronic records and/or electronic
signatures in place of the paper equivalents. Part 11 requires that those
utilizing such electronic records and/or signatures employ procedures and
controls designed to ensure the authenticity, integrity and, as appropriate,
confidentiality of electronic records and, in certain circumstances, Part 11
requires those utilizing electronic records to ensure that a person appending an
electronic signature cannot readily repudiate the signed record. Pharmaceutical
and biotechnology companies are increasing their utilization of electronic
records and electronic signatures and are requiring their service providers and
partners to do likewise. Many of our customers, or potential customers, are
targeting 2003 for full compliance of all their affected systems. Becoming
compliant with Part 11 involves considerable complexity and cost. Our ability to
provide services to our customers in full compliance with applicable regulations
includes a requirement that, over time, we become compliant with the
requirements of Part 11. If we are unable to achieve this objective, our ability
to provide services to our customers which meet FDA requirements may be
adversely affected.
The transaction proposed by our founder creates uncertainties for us.
Pharma Services Company, a company wholly owned by Dennis B. Gillings, Ph.D.,
our chairman and founder, made a non-binding proposal to acquire all of the
outstanding shares of our stock for a cash price of $11.25 per share. A special
committee of our board was established to act on behalf of our company with
respect to the proposal or alternatives in the context of evaluating what is in
the best interests of our company and our shareholders. On November 11, 2002,
the special committee announced its rejection of the proposal and its intention
to investigate strategic alternatives available to us for purposes of enhancing
shareholder value, including the possibility of a sale of the Company and
alternatives that would keep us independent and publicly owned. It is possible
that no other potential transaction will emerge, or if so, be approved or
completed. In addition, the process of considering the proposal or alternatives
and its effect on management and employees could have a disruptive effect on our
business. Several shareholders have filed purported class action lawsuits
against us, our directors and, in some cases, Pharma Services Company, seeking
to block the proposal. Even though the transaction has been rejected, we may not
prevail in this litigation.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company did not have any material changes in market risk from December 31,
2001.
Item 4. Controls and Procedures
Based on the Company's most recent evaluation, which was completed within 90
days of the filing of this Form 10-Q, the Company's Chairman (principal
executive officer) and Chief Financial Officer believe the Company's disclosure
controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities
Exchange Act of 1934, as amended) are effective. There have been no significant
changes in internal controls or in other factors that could significantly affect
these controls subsequent to the date of the most recent evaluation of the
Company's internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
39
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
PART II. Other Information
Item 1. Legal Proceedings
On January 26, 2001, a purported class action lawsuit was filed in the State
Court of Richmond County, Georgia, naming Novartis Pharmaceuticals Corp.,
Pharmed Inc., Debra Brown, Bruce I. Diamond and Quintiles Laboratories Limited,
one of our subsidiaries, on behalf of 185 Alzheimer's patients who participated
in drug studies involving an experimental drug manufactured by defendant
Novartis and their surviving spouses. The complaint alleges claims for breach of
fiduciary duty, civil conspiracy, unjust enrichment, misrepresentation, Georgia
RICO violations, infliction of emotional distress, battery, negligence and loss
of consortium as to class member spouses. The complaint seeks unspecified
damages, plus costs and expenses, including attorneys' fees and experts' fees.
We believe the claims to be without merit and intend to defend the suit
vigorously.
On January 22, 2002, Federal Insurance Company and Chubb Custom Insurance
Company filed suit against us and two of our subsidiaries, Quintiles Pacific,
Inc. and Quintiles Laboratories Limited, in the United States District Court for
the Northern District of Georgia. In the suit, Chubb, our primary commercial
general liability carrier, and Federal, our excess liability carrier, seek to
rescind the policies issued to us for coverage years 2000-2001 and 2001-2002
based on an alleged misrepresentation by us on our policy application.
Alternatively, Chubb and Federal seek a declaratory judgment that there is no
coverage under the policies for some or all of the claims asserted against us
and our subsidiaries in the litigation described in the prior paragraph, and, if
one or more of such claims is determined to be covered, Chubb and Federal
request an allocation of the defense costs between the claims they contend are
covered and non-covered claims. We have filed an answer with counterclaims
against Federal and Chubb in response to their complaint. We believe their
allegations are without merit and intend to defend this case vigorously.
Since October 15, 2002, several purported class action lawsuits have been filed
in Superior Court, Durham County, North Carolina by shareholders seeking to
enjoin the consummation of the transaction contemplated by the non-binding
proposal made by Pharma Services Company, a newly formed company wholly owned by
Dennis B. Gillings, Ph.D., to acquire all of our outstanding shares for $11.25
per share in cash. In response to the proposal, which was received by us on
October 13, 2002, our Board of Directors established a special committee of
independent directors to act on our behalf with respect to the proposal or any
alternatives in the context of evaluating what is in our best interest and the
best interest of our shareholders. On November 11, 2002, the special committee
announced its rejection of the proposal and its intention to investigate
strategic alternatives available to us for purposes of enhancing shareholder
value, including the possibility of a sale of the Company and alternatives that
would keep us independent and publicly owned. The lawsuits name as defendants
Dr. Gillings, other members of our Board of Directors, us and, in some cases,
Pharma Services Company. The complaints allege, among other things, that the
directors breached their duties with respect to the proposal. The complaints
seek to enjoin the transaction proposed by Pharma Services Company, and the
plaintiffs seek to recover damages. We are currently in the process of reviewing
the complaints and considering an appropriate response. Based upon our
preliminary review, we believe the lawsuits are without merit and intend to
defend them vigorously.
40
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
We are also a party to certain other pending litigation arising in the normal
course of our business. While the final outcome of such litigation cannot be
predicted with certainty, it is the opinion of management, based on consultation
with legal counsel, that the outcome of these other matters would not materially
affect our consolidated financial position or results of operations.
Item 2. Changes in Securities and Use of Proceeds
During the three months ended September 30, 2002, options to purchase 14,000
shares of our common stock were exercised at an average exercise price of
$2.9621 per share in reliance on Rule 701 under the Securities Act of 1933. We
granted such options prior to becoming subject to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended, pursuant to our
Non-qualified Employee Incentive Stock Option Plan.
Item 3. Defaults upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
(b) During the three months ended September 30, 2002, the Company furnished
one report on Form 8-K.
The Company furnished a Form 8-K to the Securities and Exchange Commission
("SEC"), dated August 13, 2002, including copies of the sworn statements of
Dennis B. Gillings, the Company's Chairman, and James L. Bierman, the Company's
Chief Financial Officer, as required by the SEC's Order 4-460 issued on June 27,
2002. The report on Form 8-K dated August 13, 2002 was furnished pursuant to
Regulation FD. This report shall not be deemed to be incorporated by reference
into this Form 10-Q or filed hereunder for purposes of liability under the
Securities Exchange Act of 1934.
No other reports on Form 8-K were filed or furnished during the three months
ended September 30, 2002.
41
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Quintiles Transnational Corp.
-----------------------------
Registrant
Date November 14, 2002 /s/ Dennis B. Gillings
-------------------------- -----------------------------------------
Dennis B. Gillings, Chairman
Date November 14, 2002 /s/ Pamela J. Kirby
-------------------------- -----------------------------------------
Pamela J. Kirby, Chief Executive Officer
Date November 14, 2002 /s/ James L. Bierman
-------------------------- -----------------------------------------
James L. Bierman, Chief Financial Officer
42
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CERTIFICATIONS
I, Dennis B. Gillings, Ph.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Quintiles
Transnational Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
43
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date November 14, 2002
-----------------------------
/s/ Dennis B. Gillings
-----------------------------
Dennis B. Gillings, Ph.D.
Chairman
44
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
I, James L. Bierman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Quintiles
Transnational Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
45
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date November 14, 2002
-----------------------------
/s/ James L. Bierman
----------------------------
James L. Bierman
Chief Financial Officer
46
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Description
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of The Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of The Sarbanes-Oxley Act of 2002
47