Securities and Exchange Commission

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

QUINTILES TRANSNATIONAL CORP.

(919) 998-2000

N/A

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 o No

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

The number of shares of Common Stock, $.01 par value, outstanding as of September 30, 2004 was 125,000,000.

Index

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Part I. Financial Information

Item 1.

Quintiles Transnational Corp. and Subsidiaries

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Quintiles Transnational Corp. and Subsidiaries

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Quintiles Transnational Corp. and Subsidiaries

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Quintiles Transnational Corp. and Subsidiaries

September 30, 2004

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 periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. 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, 2003 of Quintiles Transnational Corp. (the “Company”).

The balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements of the Company. Certain amounts in the 2003 financial statements have been reclassified to conform with the 2004 financial statement presentation.

In August 2004, the Company completed the sale of certain assets related to its Bioglan Pharmaceuticals business (“Bioglan”) as further described in Note 10. Accordingly, the operating results and balance sheet items of Bioglan have been reflected separately in the accompanying financial statements as a discontinued operation.

On September 25, 2003, the Company completed its merger transaction with Pharma Services Holding, Inc. (“Pharma Services”) pursuant to which Pharma Services Acquisition Corp. (“Acquisition Corp.”) was merged with and into the Company, with the Company continuing as the surviving corporation and an indirect wholly owned subsidiary of Pharma Services (the “Transaction” or “Pharma Services Transaction”). As a result of the Transaction, the Company’s results of operations, financial position and cash flows prior to the date of the Transaction are presented as the “Predecessor.” The financial effects of the Transaction and the Company’s results of operations, financial position and cash flows as the surviving corporation following the Transaction are presented as the “Successor.” To clarify and emphasize that the Successor Company has been presented on an entirely new basis of accounting, the Company has separated Predecessor and Successor operations with a vertical black line, where appropriate.

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2. Employee Stock Compensation

Pharma Services granted options to purchase 492,500 shares of its common stock to certain of the Company’s employees during the nine months ended September 30, 2004, 280,000 of which were granted during the quarter ended September 30, 2004. As of September 30, 2004, there were options to acquire 3,805,000 shares of Pharma Services common stock outstanding.

In addition, Pharma Services issued restricted common stock to certain of the Company’s employees, other than executive officers, for full recourse notes with a fixed interest rate. As of September 30, 2004, there are approximately 4.2 million shares of such restricted stock outstanding.

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” during the third quarter of 2004 utilizing the modified prospective approach as described in SFAS No. 148. Under the modified prospective approach, the Company has restated its 2004 financial statements to reflect the effect of the adoption of SFAS No. 123 as of January 1, 2004. The stock compensation expense recognized as a result of the adoption was $43,000 for each of the first and second quarters of 2004, such that the net loss as restated for the adoption of SFAS No. 123 is $15,707 and $10,128 for the first and second quarters of 2004, respectively. The results for prior years have not been restated.

Information regarding net (loss) income is required by SFAS No. 123, as amended by SFAS No. 148, and has been determined as if the Company had accounted for the stock options granted and the restricted stock issued for recourse notes by its parent company, Pharma Services, to the Company’s employees under the fair value method of SFAS No. 123 for the periods not restated (i.e., periods prior to January 1, 2004).

There were no outstanding stock options or restricted stock for the period from September 26, 2003 through September 30, 2003.

The following table illustrates the effect on net (loss) income if the Company had adopted SFAS No. 123 as amended by SFAS No. 148 the first day of the periods presented (in thousands):

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Quintiles Transnational Corp. and Subsidiaries

3. Commercial Rights and Royalties

Commercial rights and royalties related assets are classified either as commercial rights and royalties, accounts receivable – unbilled, or advances to customers in the non-current asset section of the accompanying balance sheets. As of September 30, 2004, the amounts paid to Eli Lilly and Company (“LLY”) under the Cymbalta^TM contract have been classified as a commercial rights and royalties asset as a result of Cymbalta^TM receiving the United States Food and Drug Administration (“FDA”) approval during the third quarter of 2004. Below is a summary of the commercial rights and royalties related assets (in thousands):

Below is a brief description of these agreements:

In May 1999, the Company entered into an agreement with CV Therapeutics, Inc. (“CVTX”) to commercialize Ranexa™ for angina in the United States and Canada. In July 2003, CVTX and the Company entered into a new agreement that superseded the prior agreement. Under the terms of the July 2003 agreement, all rights to Ranexa^TM reverted back to CVTX, and CVTX will owe no royalty payments to the Company. Under the July 2003 agreement, the Company received a warrant to purchase 200,000 shares of CVTX common stock at $32.93 per share during the five-year term commencing July 9, 2003. CVTX also is obligated to purchase from the Company, within six months of the approval of Ranexa^TM, services of at least $10.0 million in aggregate value or to pay the Company a lump sum amount equal to 10% of any shortfall from $10.0 million in purchased services.

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, 2004, the Company has capitalized 251.8 million Philippine pesos (approximately $4.5 million) related to the cost of acquiring these commercial rights and is amortizing these costs over five 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.

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In June 2001, the Company entered into an agreement with Pilot Therapeutics, Inc. (“PLTT”) to commercialize a natural therapy for asthma, AIROZIN™, in the United States and Canada. Under the terms of the agreement, the Company will provide commercialization services for AIROZIN™ and a milestone-based $6.0 million line of credit which is convertible into PLTT’s common stock, of which $4.0 million has been funded by the Company. Further, based on achieving certain milestones, the Company committed to funding 50% of sales and marketing activities for AIROZIN™ over five years with a $6.0 million limit per year. Following product launch, the agreement provides for the Company to receive royalties based on the net sales of AIROZIN™. The royalty percentage will vary to allow the Company to achieve a minimum rate of return. The Form 10-QSB filed by PLTT on September 5, 2003 indicated that PLTT will need significant additional financing to continue operations beyond September 15, 2003, and PLTT has not made any additional filings with the Securities and Exchange Commission since that time. As such, the Company recorded an impairment of $4.0 million during 2003 on the loan receivable from PLTT and reduced its five-year contingent commitment for the sales force and marketing activities to zero at December 31, 2003. In 2004, PLTT ceased active operations and is pursuing a recapitalization strategy. During September 2004, the Company signed a non-binding letter of intent with PLTT’s banker to convert the Company’s debt to equity in PLTT as part of PLTT's recapitalization plan.

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®, 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 $3.0 million, and agreed to make available to DSCO a line of credit up to $10.0 million for pre-launch commercialization services as certain milestones are achieved by DSCO. As of September 30, 2004, the Company has made $8.5 million available under the line of credit, of which $5.7 million has been funded. In addition, the Company has received warrants to purchase approximately 320,000 shares of DSCO common stock as milestones were achieved and will receive 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 in excess of $8.5 million. The Company has also agreed to pay the sales and marketing activities of this product up to $10.0 million per year for seven years. In return, the Company will receive commissions based on net sales of Surfaxin® for meconium aspiration syndrome, infant respiratory distress syndrome and all “off-label” uses for 10 years. The subscription agreements under which the Company acquired its shares of DSCO common stock included participation rights to acquire additional shares of DSCO. The Company exercised its participation rights in two such transactions with DSCO. During November 2002, the Company purchased an additional 266,246 shares of DSCO common stock along with a detachable warrant to purchase 119,811 shares of DSCO common stock for $517,000. Using the cashless exercise feature, the Company exercised the November 2002 warrant and received 83,357 shares of DSCO common stock. During July 2003, the Company purchased an additional 218,059 shares of DSCO common stock along with a detachable warrant to purchase 43,612 shares of DSCO common stock for $1.2 million. In February 2004, the Company used the cashless feature to exercise warrants to purchase 357,143 shares of common stock and received 249,726 shares of DSCO common stock. In April 2004, the Company used the cashless feature to purchase 213,334 shares of common stock and received 160,318 shares of DSCO common stock. In July 2004, the Company used the cashless feature to purchase 106,666 shares of common stock and received 68,084 shares of DSCO common stock. During November 2004, the Company and DSCO agreed to restructure its commercialization arrangements to allow DSCO to assume the entire commercialization program for Surfaxin®. As part of this new arrangement, the Company will not pay for the sales and marketing

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activities of Surfaxin®, nor will the Company receive commissions on the net sales of Surfaxin®. Further, the Company has extended the $8.5 million line of credit through December 31, 2006. In return for these modifications, the Company will receive a warrant to purchase 850,000 shares of DSCO common stock at an exercise price of $7.19 per share and will also continue to have a preferred provider relationship with DSCO.

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® and Niaspan®. Advicor® was launched in January 2002 and Niaspan® is also on the market. Under the terms of the agreement, the Company provided, at its own expense, a dedicated sales force of 150 cardiovascular-trained representatives who, in combination with KOSP’s sales force of 300 representatives, commercialized Advicor® and Niaspan® for the first two years after launch (January 2002 to December 2003). In return, the Company received a warrant 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, as amended September 30, 2003, of $50.0 million and $65.0 million, respectively, over the life of the agreement. Through September 30, 2004, the Company has received payments totaling approximately $19.4 million. The proceeds are reported in the statement of cash flows as an operating activity – change in operating assets and liabilities.

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. Either party may cancel the contract at six-month intervals in the event that sales are not above certain levels specified. In the first quarter of 2003 and the third quarter of 2003, the agreements in Germany and Belgium, respectively, were terminated. For the remaining portion of the contract in 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, 2004, the Company estimates the cost of its minimum obligation over the remaining contract life for the remaining territory of Italy to be approximately $12 million, in return for which the customer will pay the Company royalties on product sales in excess of certain baselines. The total 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.

In July 2002, the Company entered into an agreement with LLY to support LLY in its commercialization efforts for Cymbalta™ in the United States. LLY has submitted a New Drug Application, or NDA, for Cymbalta™, which was approved in the third quarter of 2004 by the 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™ for the five years following product launch. The Company’s sales force will promote Cymbalta™ 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 $110.0 million of which $70.0 million was paid in 2002 and the remaining $40.0 million is due throughout the four quarters following FDA approval, which occurred on August 10, 2004. Accordingly, the Company paid a further $10 million to LLY in the third quarter of 2004, bringing its cumulative payments to $80 million. In addition, the Company will pay LLY an additional $5 million for the approval of Cymbalta^TM for diabetic peripheral neuropathic pain. The revenues related to this indication will be included in the basis for the royalties paid to the Company.

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Quintiles Transnational Corp. and Subsidiaries

The $80 million in payments made and the $35 million in payments the Company is liable for have been capitalized and will be amortized in proportion to the estimated revenues as a reduction of revenue over the five-year service period. The sales force costs are being expensed as incurred. The payments are reported in the statement of cash flows as an investing activity — acquisition of commercial rights and royalties. Prior to FDA approval, the $70 million payment was classified as an advance to customer on the balance sheet. Following the FDA approval, this amount and subsequent payments are classified as a commercial rights and royalties asset. In return for the P1 position for Cymbalta™ and the marketing and milestone payments, LLY will pay to the Company 8.25% of U.S. Cymbalta™ sales for depression and other neuroscience indications over the five-year service period followed by a 3% royalty over the subsequent three years. During the quarter ended September 30, 2004, the Company recorded revenue of $2.9 million for the P2 and P3 positions. The Company has not recorded any revenue related to the royalty on Cymbalta^TM as the amount is not fixed and determinable until the Company receives documentation from LLY for the Cymbalta^TM net sales during the quarter ended September 30, 2004. In addition to the Company’s obligations, LLY is obligated to spend at specified levels.

In July 2002, the Company entered into an agreement with Columbia Laboratories, Inc. (“CBRX”) to commercialize, in the United States, the following women’s health products: Prochieve™ 8%, Prochieve™ 4%, Advantage-S® and RepHresh™. Under the terms of the agreement, the Company purchased 1,121,610 shares of CBRX common stock for $5.5 million. The Company also paid to CBRX four quarterly payments of $1.125 million totaling $4.5 million. The payments are reported in the statement of cash flows as an investing activity – acquisition of commercial rights and royalties. In return, the Company will receive royalties of 5% on the sales of the four CBRX women’s healthcare products in the United States for a five-year period beginning in the first quarter of 2003. The royalties are subject to minimum and maximum amounts of $8.0 million and $12.0 million, respectively, over the life of the agreement. Through September 30, 2004, the Company has received payments totaling approximately $589,000. The proceeds are reported in the statement of cash flows as an operating activity – change in operating assets and liabilities. In addition, the Company will provide to CBRX, at CBRX’s expense on a fee-for-service basis, a sales force to commercialize the products. In January 2004, the Company and CBRX agreed to restructure the fee-for-service agreement to allow for an accelerated transfer of the sales force management responsibility to CBRX. The purchase of the CBRX common stock included participation rights to acquire additional shares of CBRX. During July 2003, the Company exercised its participation rights and purchased an additional 56,749 shares of CBRX for $664,000. The Company has continued to monitor the revenue performance of the women’s health products, described above, as well as the ability of CBRX to meet its minimum royalty obligations to the Company under this agreement and under its March 2003 agreement to market CBRX’s Striant^TM product. The Company recognized an impairment on its commercial rights and royalties asset relating to the Striant^TM product in the third quarter of 2004, as described below.

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Quintiles Transnational Corp. and Subsidiaries

In December 2002, the Company entered into an agreement with a large pharmaceutical customer to market two products in Belgium. Under the terms of an asset purchase agreement, the Company will have the rights to one product in Belgium in exchange for payments of 5.5 million euros (approximately $6.8 million). The customer will continue to manufacture the product through 2005. Under the terms of a distribution agreement, the Company will have the rights to market the other product in Belgium for a period of six years in exchange for payments of 6.9 million euros (approximately $8.5 million) of which 2.2 million euros (approximately $2.7 million) are in the form of services to be completed by December 31, 2008, based on the Company’s standard pricing. The Company has paid 7.5 million euros (approximately $9.2 million) as of September 30, 2004. The payments are reported in the statement of cash flows as an investing activity — acquisition of intangible assets. The Company has also provided all of the services to the customer under the 2.2 million euros service component. The Company’s service obligation is recorded as a cost of the distribution rights and is being amortized over the six-year distribution agreement. The customer will continue to manufacture the product for the six years of the distribution agreement.

In March 2003, the Company entered into an agreement with CBRX to commercialize CBRX’s Striant^TM testosterone buccal bioadhesive product in the United States. Striant^TM was approved in June 2003 by the FDA for the treatment of hypogonadism. Under the terms of the agreement, the Company has paid five quarterly payments of $3.0 million each totaling $15.0 million. The payments are reported in the statement of cash flows as an investing activity – acquisition of commercial rights and royalties. In return, the Company will receive a 9% royalty on the net sales of Striant^TM in the United States up to agreed levels of annual sales revenues, and a 4.5% royalty of net sales above those levels. The royalty term is seven years. Royalty payments are subject to minimum and maximum amounts of $30.0 million and $55.0 million, respectively, over the life of the agreement. Through September 30, 2004, the Company has received payments totaling approximately $319,000. The proceeds are reported in the statement of cash flows as an operating activity – change in operating assets and liabilities. In addition, the Company will provide to CBRX, at CBRX’s expense on a fee-for-service basis, a sales force to commercialize the products for a two-and-a-half year term. In January 2004, the Company and CBRX agreed to restructure the fee-for-service agreement to allow for an accelerated transfer of the sales force management responsibility to CBRX. The Company has continued to monitor the revenue growth of CBRX’s Striant^TM product and CBRX’s women’s health products, which are subject to separate agreements with the Company. The Company has continued to monitor the ability of CBRX to meet its minimum obligations under these agreements. Based upon the financial prospects of CBRX and the Company’s assessment of various potential outcomes it might realize under its agreements with CBRX, during the third quarter of 2004, the Company recognized an impairment of $7.8 million in its commercial rights and royalties asset relating to the Striant^TM product.

In February 2004, the Company entered into an agreement with a large pharmaceutical customer to provide services in connection with the customer’s development and U.S. launch of a Phase III product, or the new product, which is related to one of the customer’s currently marketed pharmaceutical products, or the existing product. The existing product has historically achieved multi-hundred million dollars in sales annually. Under the agreement, the Company will provide, at its expense, up to $90.0 million of development and commercialization services for the new and existing products. The customer has agreed that at least $67.5 million of those services will be performed by the Company, at agreed upon rates. The customer, though, may direct the Company to use third parties to perform up to $22.5 million of the $90.0 million of services. The agreement contains quarterly limits on the Company’s service obligations with a

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maximum of $10.0 million of services in any quarter. Without revising the overall limits of the agreement, the agreement was amended to allow increased spending for the second, third and fourth quarters of 2004. The revised quarterly limits are $11 million for the second quarter of 2004 and $13 million for each of the third and fourth quarters of 2004. The Company’s service obligations are anticipated to occur through the end of 2006, but may run longer depending on the customer’s actual use of services and when, and if, FDA approval of the new product occurs. Until the FDA approves the new product, the Company is obligated to provide no more than $57.5 million in services. In return for performing the obligations, the Company will receive (1) beginning in the first quarter of 2005, a low, single-digit royalty on U.S. net sales of the existing product and (2) beginning on the U.S. launch of the new product, a declining tiered royalty (beginning in the low teens) on U.S. net sales of the new product. The Company’s royalty period under the agreement lasts for approximately nine years; however, the agreement limits the amount of royalties the Company receives each year and also caps the aggregate amount of royalties the Company can receive under the agreement at $180.0 million. The Company will also receive a $20.0 million payment from the customer upon the U.S. launch of the new product. If the new product is not approved by the FDA or a significant delay occurs in its approval process, the Company may terminate its remaining service obligations and continue to receive the royalty on the existing product subject to a return ceiling of no less than 8%. The agreement also provides for royalty term extensions, in the event of certain other specified unfavorable circumstances such as product shortages or recalls. The customer may terminate the agreement at any time subject to the customer’s payment to the Company of the then-present value of its remaining expected royalties. The Company has provided and expensed $14.4 million of services under this agreement through September 30, 2004.

In September 2004, the Company entered into an agreement with Solvay Pharmaceuticals B.V. (“Solvay”) to provide clinical development services valued at $25 million for ten Solvay clinical Phase II projects, thereby sharing the costs and uncertainties of the outcomes for these projects. The agreement specifies project and annual spending limits. Spending beneath these limits may be carried over to one of the other ten projects or another year, but may not exceed the overall $25 million limit. The Company will expense the costs related to these projects as the expenses are incurred. In return, the Company will receive a milestone payment from Solvay for each of the compounds reaching positive clinical proof-of-principle and moving into further development. The agreement terminates upon the final determination of the successful or unsuccessful completion of the ten projects.

The Company has firm commitments under the arrangements described above to provide funding of approximately $735.0 million in exchange for various commercial rights. As of September 30, 2004, the Company has funded approximately $208.6 million. Further, the Company has additional future funding commitments that are contingent upon satisfaction of certain milestones by the third party such as receiving FDA approval, obtaining funding from additional third parties, agreeing to 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. If all of these contingencies were satisfied over approximately the same time period, the Company estimates these commitments to be a minimum of approximately $15-20 million per year for a period of five to six years, subject to certain limitations and varying time periods.

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Quintiles Transnational Corp. and Subsidiaries

Below is a summary of the remaining firm commitments with pre-determined payment schedules under such arrangements (in thousands):

4. 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 transactions as of September 30, 2004 is as follows (in thousands except share data):

In accordance with its policy to continually review declines in fair value of the marketable equity securities for declines that may be other-than-temporary, the Company recognized losses due to the impairment of marketable equity securities of $10.2 million and $282,000 during the nine months ended September 30, 2004 and the period from January 1, 2003 through September 25, 2003, respectively. The Company did not recognize any such losses during the three months ended September 30, 2004.

5. 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 transactions as of September 30, 2004 is as follows (in thousands):

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Quintiles Transnational Corp. and Subsidiaries

Below is a table representing management’s best estimate as of September 30, 2004 of the amount and timing of the above remaining funding commitments (in thousands):

The amount and timing of such funding events are subject to a number of different variables and may differ materially from management’s estimates.

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 commitments are not included in the commitment amounts described above.

The Company reviews the carrying value of each individual investment at each balance sheet date to determine whether or not an other-than-temporary decline in fair value has occurred. The Company employs alternative valuation techniques including: (1) the review of financial statements including assessments of liquidity, (2) the review of valuations available to the Company prepared by independent third parties used in raising capital, (3) the review of publicly available information including press releases and (4) direct communications with the investee’s management, as appropriate. If the review indicates that such a decline in fair value has occurred, the Company adjusts the carrying value to the estimated fair value of the investment and recognizes a loss for the amount of the adjustment. The Company recognized $7.8 million, $205,000 and $10.3 million of losses due to such impairments during the period from July 1, 2003 through September 25, 2003, during the nine months ended September 30, 2004 and during the period from January 1, 2003 through September 30, 2003, respectively, relating to non-marketable equity securities and loans mainly due to declining financial condition of investees that were deemed by management to be other-than-temporary. There were no such losses due to impairments during the three months ended September 30, 2004.

6. Derivatives

As of September 30, 2004, the Company had the following derivative positions in securities of other issuers: (1) conversion option positions that are embedded in financing arrangements, (2) freestanding warrants to purchase shares of common stock and (3) put and call instruments to hedge the cash flow from the sale of certain marketable securities.

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As of September 30, 2004, the Company had funded three convertible loans with a carrying value of approximately $644,000. Loans that are convertible into an equity interest have an embedded option contract because the value of the equity interest is based on the market price of another entity’s common stock and thus is not clearly and closely related to the value of the interest-bearing note. The Company has not accounted for these embedded conversion features as mark-to-market derivatives because the terms of conversion do not allow for cash settlement and the Company believes that the equity interest delivered upon conversion would not be readily convertible to cash since these entities are privately held or have limited liquidity and trading of their equity interest.

As of September 30, 2004, the Company has several freestanding warrants to purchase common stock of various customers and other third parties. These freestanding warrants primarily were acquired as part of the financial arrangements with such customers and third parties. No quoted price is available for the Company’s freestanding warrants to purchase shares of common stock. The Company uses various valuation techniques including the present value of estimated expected future cash flows, option-pricing models and fundamental analysis. Factors affecting the valuation include the current price of the underlying asset, exercise price, time to expiration of the warrant, estimated price volatility of the underlying asset over the life of the warrant and restrictions on the transferability or ability to exercise the warrant. At September 30, 2004, the Company held warrants from various contracts valued at $3.8 million which are included in the accompanying balance sheet as deposits and other assets. The Company recognized investment losses of $2.2 million and $17,000 during the three and nine months ended September 30, 2004, respectively. The Company recognized investment revenues of $2.5 million and $14.9 million during the period from July 1, 2003 through September 25, 2003 and the period from January 1, 2003 through September 25, 2003, respectively, related to changes in the fair values of the warrants.

In 2003, the Company had entered into three zero-cost-collar transactions to hedge certain future cash flows occurring in 2004. As these transactions were entered into to hedge the risk of the potential volatility in the cash flows resulting from sales of the underlying security during the first three quarters of 2004, these transactions are accounted for as a cash flow hedge. As such, the effective portion of the gain or loss on the derivative instrument is recorded as unrealized holding gains (losses) on marketable equity securities included as a separate component of shareholders’ equity. This hedge is deemed to be perfectly effective under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as defined. As of September 30, 2004, these contracts have expired unexercised. Upon expiration of the hedging instruments, all amounts recorded as unrealized holding gains (losses) on marketable equity securities included as a separate component of shareholders’ equity were reclassified into income. As each of these zero-cost-collar transactions expired unexercised, the zero-cost-collar contract had no value; therefore, there were no amounts reclassified into income. The underlying equity security was sold generating approximately $22.2 million in cash and a gain of approximately $2.0 million for the nine months ended September 30, 2004.

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7. Goodwill and Identifiable Intangible Assets

The Company has approximately $285.2 million of identifiable intangible assets, of which approximately $109.7 million is deemed to be indefinite-lived and, accordingly, is not being amortized. Amortization expense associated with definite-lived identifiable intangible assets were as follows:

Estimated amortization expense for existing identifiable intangible assets is targeted to be approximately, $71.8 million, $56.2 million, $25.8 million, $15.1 million and $10.8 million for each of the years in the five-year period ended December 31, 2008, respectively. Estimated amortization expense can be affected by various factors including future acquisitions or divestitures of product and/ or licensing and distribution rights.

The following is a summary of identifiable intangible assets as of September 30, 2004 (in thousands):

The following is a summary of goodwill by segment for the nine months ended September 30, 2004 (in thousands):

In connection with the Pharma Services Transaction, the Company prepared an allocation of the purchase price to the assets acquired and liabilities assumed based upon their respective fair values. During the third quarter of 2004, the Company evaluated the pre-acquisition contingencies. As part of this review, the Company adjusted accruals relating to its restructuring plans, acquisition costs relating to the Pharma

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Services Transaction, as well as related income tax effects. The adjustments resulted in a net decrease of approximately $1.4 million in goodwill.

8. Investment Revenues

The following table is a summary of investment revenues (in thousands):

9. Gain on Portion of Sale in an Investment in a Subsidiary and Change in Interest Transactions

In June 2004, Mitsui & Co., Ltd. (“Mitsui”) acquired a 20% voting interest in one of the Company’s subsidiaries, Quintiles Transnational Japan K.K. (“QJPN”) through two transactions. Mitsui acquired 3,556 shares of QJPN’s ordinary shares from the Company for approximately 4.0 billion yen (approximately $37.0 million). As part of its sale of 3,556 ordinary shares, the Company may receive up to an additional 2.0 billion yen (approximately $18.5 million) based on QJPN’s future financial performance. Due to the uncertainty associated with the contingent consideration, the Company has not included this amount in its gain on the sale of a portion of an investment in a subsidiary. During the second quarter of 2004, the Company recorded a gain on the sale of a minority interest in a subsidiary of $24.7 million related to this transaction.

In addition, QJPN issued 1,778 shares of its Class A preference shares and 1,778 ordinary shares to Mitsui for approximately 4.7 billion yen (approximately $42.9 million). The issuance by QJPN of the additional ordinary shares further reduced the ownership interest by the Company in QJPN. As the proceeds from the issuance of preference shares are not considered realized until the preference shares are converted into ordinary shares, the Company did not include such proceeds in its non-operating gain on the change in interest transaction. The Company recorded a non-operating gain on the change in interest transaction of approximately $10.0 million.

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Quintiles Transnational Corp. and Subsidiaries

As the preference shares are substantially the same as the ordinary shares since the holders participate equally in dividends, voting rights and liquidation of residual assets, the Company included the preference shares in determining the minority ownership interest in QJPN. Therefore, the percentage used by the Company in calculating the minority interest will be 20%.

10. Discontinued Operation

In August 2004, the Company completed its previously announced sale of certain assets related to its Bioglan business to Bradley Pharmaceuticals, Inc. for approximately $188.3 million in cash including approximately $5.3 million of direct costs for transferred inventory. Further, based on certain purchase price adjustment provisions in the asset purchase agreement, the Company paid Bradley approximately $1.9 million in October 2004. The assets disposed of were part of the PharmaBio Development group’s strategic investment portfolio, which is routinely analyzed to evaluate the return potential of the assets within the portfolio.

The components of the gain on sale of discontinued operation are as follows (in thousands):

The Bioglan business consisted primarily of a number of dermatology products, including Solaraze® and ADOXA®, that the Company acquired in 2001 and 2002. In March 2002, the Company acquired certain assets of Bioglan Pharma, Inc. for a total consideration of approximately $27.9 million. The assets included distribution rights to market ADOXA® in the United States for nine years along with other products and product rights that Bioglan Pharma, Inc. had previously marketed, as well as approximately $1.6 million in cash. Until the Company entered into a plan to dispose of the Bioglan assets in May 2004, the Company amortized the intangible assets in proportion to the estimated revenues over the lives of these product rights. As a result of the discontinued operation, these assets were reclassified as assets “held for sale” in the Company’s balance sheet as of December 31, 2003. Under certain of the contracts acquired, the Company had commitments to pay royalties based on a percentage of net sales of the acquired product rights.

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Quintiles Transnational Corp. and Subsidiaries

In December 2001, the Company acquired the license to market SkyePharma’s Solaraze® skin treatment in the United States, Canada and Mexico for 14 years from Bioglan Pharma Plc for a total consideration of $26.7 million. Until the Company entered into a plan to dispose of the Bioglan assets in May 2004, the Company amortized the rights in proportion to the revenues earned over the 14-year life of the license. Until the completion of the sale of Bioglan, the Company had a commitment to pay royalties to SkyePharma based on a percentage of net sales of Solaraze®.

The results of the Bioglan business have been reported separately as a discontinued operation in the condensed consolidated statements of operations. The results of the discontinued operation do not reflect any corporate costs or management fees allocated by the Company.

The following is a summary of the operations of the Bioglan business included in discontinued operation (in thousands):

The assets and liabilities of the Bioglan operations are reported separately in the accompanying condensed consolidated balance sheets as assets and liabilities of discontinued operation. The following is a summary of the assets and liabilities of discontinued operation (in thousands):

In May 2000, the Company completed its sale of its electronic data interchange unit, ENVOY Corporation (“ENVOY”). The Company recorded an extraordinary gain on the sale of ENVOY in the amount of $436.3 million, net of income taxes of $184.7 million. In 2001, the Company adjusted its estimate of its tax basis in ENVOY resulting in a $142.0 million reduction in income taxes on the sale of ENVOY which resulted in an increase in the extraordinary gain in the same amount.

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Quintiles Transnational Corp. and Subsidiaries

In January 2004, the Company received a communication from the Internal Revenue Service proposing an increase in its income taxes owed for 2000 by approximately $153.1 million. After further discussions, the Internal Revenue Service revised and reissued its prior communication, reducing the proposed assessment to $84.6 million. The proposed increase relates to the Internal Revenue Service challenging the Company’s method for determining the basis it applied to the sale of ENVOY. The Company is contesting the proposed increase and is presently in the appeals process with the Internal Revenue Service.

11. Restructuring

As part of the Company’s evaluation of the contingencies in the Pharma Services Transaction, the Company reviewed the restructuring accruals. This review resulted in a decrease of $1.6 million and $11,000 of severance payments for the plans in 2003 and 2000, respectively, and a decrease of $34,000, $105,000, $72,000 and $2,000 of exit related costs for the plans in 2003, 2002, 2001 and 2000, respectively. The accrual adjustments have been recorded as a decrease in goodwill recorded in the Pharma Services Transaction as part of the purchase price adjustment.

In connection with the Pharma Services Transaction, the Company adopted a restructuring plan. As part of this plan, approximately 211 positions are to be eliminated mostly in Europe and the United States. The number of positions to be eliminated was reduced to approximately 130 as a result of (1) an increase in voluntary terminations and (2) affected individuals transferring into other positions within the Company. As of September 30, 2004, 87 positions were eliminated. Delays in certain of the Company’s systems implementation in Europe have caused the terminations to extend beyond one year.

During the period from July 1, 2003 through September 25, 2003 in connection with the Pharma Services Transaction, the Company reviewed its estimates of restructuring plans adopted during 2002, 2001 and 2000. This review resulted in a decrease of $1.0 million and $310,000 in severance payments for plans adopted in 2002 and 2001, respectively. In addition, there was an increase of $6.4 million and $421,000 in exit costs for abandoned leased facilities for plans adopted in 2001 and 2000, respectively.

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.

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 the 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 certain 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 the 2002 Plan, approximately 99 positions were to be eliminated mostly in the Europe and Africa region. As of September 30, 2004, 89 individuals have been terminated pursuant to the 2002 Plan.

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Quintiles Transnational Corp. and Subsidiaries

During the second quarter of 2001, the Company recognized a $2.1 million restructuring charge relating primarily to severance costs from the reorganization of the Company’s Internet initiative and the commercial services group in the United States. All of the 40 positions to be eliminated as part of this restructuring were terminated as of June 30, 2001.

During the third quarter of 2001, the Company recognized a $50.9 million restructuring charge. In addition, the Company recognized a restructuring charge of approximately $1.1 million as a revision of an estimate to a 2000 restructuring plan. The restructuring charge consisted of $31.1 million related to severance payments, $8.2 million related to asset impairment write-offs and $12.7 million of exit costs. As part of this restructuring, approximately 1,000 positions worldwide were to be eliminated and as of December 31, 2003, all individuals who were to be terminated under this plan had been terminated. In certain circumstances, international regulations and restrictions have caused the terminations to extend beyond one year. Positions were eliminated in each of the Company’s segments.

In January 2000, the Company announced the adoption of a restructuring plan (“January 2000 Plan”). In connection with this plan, the Company recognized a restructuring charge of $58.6 million. The restructuring charge consisted of $33.2 million related to severance payments, $11.3 million related to asset impairment write-offs and $14.0 million of exit costs. As part of the January 2000 Plan, approximately 770 positions worldwide were eliminated as of December 31, 2001. Although positions eliminated were across all functions, most of the eliminated positions were in the product development group.

In the fourth quarter of 2000, the Company revised its estimates of the January 2000 Plan. This revision resulted in a reduction of the January 2000 Plan of $6.9 million. This reduction included $6.3 million in severance payments and $632,000 in exit costs.

Also, during the fourth quarter of 2000, management conducted a detailed review of the resource levels within each business group. Based on this review, the Company adopted a follow-on restructuring plan resulting in a restructuring charge of $7.1 million. The restructuring charge consisted of $5.8 million related to severance payments and $1.3 million related to exit costs. As part of a 2000 Follow-On Plan, approximately 220 positions were to be eliminated mostly in the commercial services group. As of December 31, 2003, all individuals who were to be terminated under this plan had been terminated. In certain circumstances, international regulations and restrictions have caused the terminations to extend beyond one year.

As of September 30, 2004, the following amounts were recorded for the restructuring plans discussed above (in thousands):

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Quintiles Transnational Corp. and Subsidiaries

On November 10, 2004, the Company’s Board of Directors approved the first phase of a new initiative to review aspects of the Company’s current operating structure and future strategic directions regarding certain corporate initiatives, including utilization of shared services and strategic sourcing initiatives. This review occurs in the context of substantial growth in the Company’s backlog, primarily in its clinical business, and expected strategic headcount additions, following the 1000+ additions in the past nine months. In conjunction with this review, the Company will incur costs to restructure or exit certain business activities. The Company expects that these costs will be incurred in both its product development and commercial services segments. The Company expects to incur during the fourth quarter of 2004 a restructuring charge totaling $7.7 million. The estimated cash expenditures total approximately $7.6 million and include termination benefits of approximately $7.4 million to eliminate approximately 230 positions globally, and exit costs of approximately $0.2 million. The estimated non-cash charges total approximately $0.1 million and consist primarily of asset impairments. The Company anticipates that additional costs will be incurred in later quarters, as subsequent phases of our review are completed. The Company will provide supplemental information when those costs are defined. The Company has targeted completion of the cash expenditures relating to this first phase for the first half of 2005.

12. Comprehensive Income

The following table represents the Company’s comprehensive (loss) income (in thousands):

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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 Development group. 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. The PharmaBio Development group is primarily responsible for facilitating non-traditional customer alliances and its results consist primarily of product revenues, royalties and commissions and investment revenues relating to the financial arrangements with customers and other third parties. In August 2004, the Company completed its previously announced sale of certain assets related to its Bioglan business. The results of operations for the Bioglan business have been separately reported as a discontinued operation and are no longer included in the PharmaBio Development group. All historical periods presented herein have been restated to reflect the Bioglan business as a discontinued operation. 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 determining segment profitability. Contribution is defined as gross revenues less costs of revenues, excluding depreciation and amortization expense as indicated below. When the Company enters into strategic agreements whereby its commercial services or product development groups provide services to customers, service revenues are presented based upon market rates and are eliminated in consolidation. Intersegment revenues have been eliminated (in thousands):

Three months ended September 30, 2004 — Successor

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Quintiles Transnational Corp. and Subsidiaries

September 26, 2003 through September 30, 2003 — Successor