As filed with the Securities and Exchange Commission on October 1, 2010

Registration No. 333-167617

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Amendment No. 1

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

ReSearch Pharmaceutical Services, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

 

520 Virginia Drive

Fort Washington, Pennsylvania 19034

(215) 540-0700

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Offices)

 

 

 

 

Steven Bell

Executive Vice President of Finance and Chief Financial Officer

520 Virginia Drive

Fort Washington, Pennsylvania 19034

(215) 540-0700

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

 

 

Copy to:

 

 

 

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement.

 

If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box  o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

SUBJECT TO COMPLETION, DATED OCTOBER 1, 2010

 

Preliminary Prospectus

 

           Shares

 

 

Common Stock

 

 

We are offering           shares of our common stock and the selling stockholders identified in this prospectus are offering           shares of our common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is the initial public offering of our common stock in the United States, and no public market currently exists for our common stock. We expect the initial public offering price to be between $      and $      per share. We have applied to list our common stock on The NASDAQ Global Market under the symbol “RPSE.”

 

 

Investing in our common stock involves a high degree of risk. Please read “Risk Factors” beginning on page 10.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

 

Delivery of the shares of common stock is expected to be made on or about          , 2010. We and the selling stockholders have granted the underwriters an option for a period of 30 days to purchase, on the same terms and conditions set forth above, up to an additional           shares of our common stock to cover overallotments. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us and the selling stockholders will be $      and the total proceeds to us and the selling stockholders, before expenses, will be $     .

 

Jefferies & Company

 

 

 

 

Prospectus dated          , 2010

 

Table of Contents

 

 

RPS and the RPS logo are our service marks. All other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners.

 

We intend to effectuate a          for           reverse stock split of our common stock prior to the consummation of this offering. As of the date of this preliminary prospectus, we have not yet effectuated a reverse stock split.

 

You should rely only on the information contained in this prospectus. Neither we, the selling stockholders nor the underwriters, have authorized anyone to provide you with additional information or information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Prospectus Summary

	•	Continued growth in outsourced research and development spending—Growth in our industry derives both from growth in the research and development budgets of the biopharmaceutical industry and from increases in the proportion of those budgets directed to outsourced service providers. According to Frost and Sullivan, research and development spending by the biopharmaceutical industry is expected to grow at a rate of approximately 7.7% per year from 2009 to 2015. This growth is expected to be driven by increased competition, product

		innovation, advances in research and clinical analysis, and the desire to fill the pipelines of many large biopharmaceutical companies, which are facing patent expirations of a significant portion of their drug portfolios. As biopharmaceutical companies have limited internal resources to conduct additional clinical trials, or seek to more efficiently manage their internal resources, we believe this results in a growing demand for outsourced services.

	•	Increasing cost pressures and need for enhanced efficiencies—With greater pressure on biopharmaceutical companies to reduce fixed costs and better manage drug development resources, outsourcing provides a mechanism to shift from fixed to variable costs, which can improve a biopharmaceutical company’s cost structure and return on investment. In addition, biopharmaceutical companies are increasingly adopting creative solutions that allow them to reduce costs and enhance the efficiency and quality of clinical trial execution while maintaining control of the clinical development process.
	•	Increasing complexity of industry needs driven by tougher regulatory environment—Global drug regulators, including the U.S. Food and Drug Administration, or FDA, are increasingly requiring more clinical trials, longer trial periods and greater amounts of clinical data before granting approval to market a drug. According to the Pharmaceutical Research and Manufacturers of America, a trade group for the pharmaceutical and biotechnology industry, the average time to take a new drug from discovery to market in the United States ranges from approximately 10 to 15 years. This lengthy drug development timeline has led many companies to increase their pipelines of drugs in development in order to maximize their chances of identifying successful products. Outsourcing can allow biopharmaceutical companies to manage the increased complexity of a growing drug development pipeline in a cost-effective manner.
	•	Increased globalization of clinical trials—Biopharmaceutical companies are increasingly seeking to access additional patient populations and trial participants, identify new markets for their products, shorten development times and reduce costs by conducting trials in multiple countries. These trends require that biopharmaceutical companies have access to outsourcing solutions on a global basis.
	•	Priorities of smaller and emerging biopharmaceutical companies—Smaller and emerging biopharmaceutical companies commonly elect not to build their own in-house clinical development capabilities, instead focusing their resources on early-stage drug discovery or on sales and marketing. Outsourcing clinical development functions enables smaller biopharmaceutical companies to focus on developing their drugs by providing access to necessary clinical development services, without the high fixed costs of developing such capabilities internally.

	•	Integrated, flexible approach and a true partnership with our clients—Our integrated solutions emphasize close collaboration with our clients, allowing our clients to realize efficiencies and cost savings, while permitting them to maintain control over key medical and regulatory decision-making processes. We believe that this approach helps to maximize the effective use of our clients’ existing resources, processes and systems, while enhancing real-time communication and coordination between us and our clients and avoiding duplicative infrastructure costs. Through our integrated solutions, we create a strategic and interdependent relationship that embeds our services within our clients’ clinical development operations. In some cases, we convert our clients’ employees into members of our professional staff.
	•	Greater visibility into our clients’ product pipeline and needs—We have developed integrated solutions that

		have a wider scope and product pipeline coverage than the project-based services provided by traditional CROs. Our integrated solutions can potentially cover all aspects of a client’s clinical development programs. We believe this deeper and more expansive level of involvement with our clients allows us to better foresee potential client needs, which can lead to strategic solutions that directly involve us in our clients’ clinical development requirements and planning.

	•	Demonstrated ability to identify, recruit, deploy, re-resource and retain a specialized professional staff—We believe that our resourcing and re-resourcing capabilities, combined with our clinical expertise, represent a significant competitive advantage in attracting and retaining the high-quality personnel required to successfully execute our innovative business model and differentiate our service offerings from those of traditional project-based CROs. We can rapidly identify and deploy highly experienced professionals to staff our engagements, which is an essential part of delivering our integrated solutions. The key driver of this core expertise has been the development of our resourcing engines, with dedicated in-house teams that leverage our broad and deep networks to proactively resource and re-resource experienced professionals across key functional and therapeutic areas within the clinical development field. We have built an extensive database consisting of approximately 188,000 experienced professionals available to join our professional staff. Through our resourcing and re-resourcing processes, we can maximize our professional staff’s expertise, capacity and job satisfaction, allowing them to more efficiently and effectively meet our clients’ needs.
	•	Broad range of differentiated, cost-saving services, designed for large, mid-sized and small biopharmaceutical companies—We believe we are well-positioned to meet the differing needs of our broad client base. Our large biopharmaceutical clients typically prefer our integrated solutions, which provide the flexibility for our clients to cost-effectively expand their clinical research capabilities across their entire pipeline of drug candidates and across multiple clinical development functions without adding permanent headcount and additional support infrastructure. The more tactical needs of our smaller biopharmaceutical clients typically require project-based solutions. For mid-sized clients, we are also able to offer the flexibility of a hybrid approach, combining integrated and project-based solutions within a single engagement.
	•	High level of flexibility—Our ability to quickly deploy and redeploy a specialized workforce, combined with a lack of duplication of infrastructure, allows us to rapidly scale our programs in accordance with variations in our clients’ research and development pipeline. With our integrated solutions, by utilizing a client’s existing clinical systems and processes, we eliminate the need to build a separate infrastructure for new projects, thereby reducing costs and accelerating the drug development process.

	•	Leader in integrated clinical development solutions—We built RPS to be the first CRO to approach the biopharmaceutical industry with integrated solutions. Our integrated solutions allow us to build strategic working relationships with our clients, which we believe has helped us to establish our brand name and develop recognition in the industry as a leader and an innovator.
	•	Business model validation from a diverse client base—We believe our next-generation model is validated by our client base, including many large biopharmaceutical clients globally. Our client base includes 14 of the 15 largest biopharmaceutical companies worldwide.
	•	Integrated relationships enhance high customer retention and revenue visibility—In our integrated engagements, we create strategic and interdependent relationships with our clients, which we believe promote long-term customer relationships with stable revenue streams and enhance our visibility into future revenue opportunities. We believe the depth and interconnected nature of our relationships with our clients helps to maximize customer retention.
	•	Global platform to meet the needs of our clients—Over the last several years, we have been building our global infrastructure. We began this process in 2005 with the opening of our Canadian and Latin American operations and have continued our global expansion with acquisitions in Europe in 2008 and China in 2009. With our

		global infrastructure that is now in place, we believe we are well positioned to service the growing global needs of our clients.

	•	Strong financial track record—Our service revenue grew at a compound annual growth rate of 33.7% from 2005 to 2009. We continue to expand our business through organic growth supplemented with selective acquisitions. Our growth has continued in 2010, with service revenue of $122.4 million for the first six months, representing a 30.6% increase over the same period in 2009. Our EBITDA has grown from $308,000 in 2005 to $10.0 million in 2009. Our net income has improved from a loss of $1.7 million in 2005 to income of $2.6 million in 2009. For a reconciliation of EBITDA to net income, see the section of this prospectus summary entitled “Summary Consolidated Financial Data.”
	•	Experienced management—Our senior management team is composed of highly experienced veterans of public companies and the CRO, biopharmaceutical, staffing and outsourcing industries. Daniel M. Perlman, our Chief Executive Officer, has over 20 years of experience in outsourcing services to the biopharmaceutical industry, and Dr. Harris Koffer, our President and Chief Operating Officer, has 30 years of experience in clinical drug development. Steven Bell, our Chief Financial Officer, has over 30 years of public accounting and chief financial officer experience.

	•	Leverage our global capabilities to enhance and expand our ability to execute global programs—We have built a global infrastructure with operations in North America, Latin America, Europe and Asia. We plan to continue to evaluate acquisition opportunities, with a particular focus on Eastern Europe and Asia. We anticipate that increasing our global capabilities will drive the expansion of existing engagements and new program awards with global requirements.
	•	Develop further opportunities from our existing integrated accounts—Our current integrated solutions have allowed us to grow multiple, long-term engagements by cross-selling and expanding into other functional areas once we have begun working with a client. We believe there are opportunities for continued and accelerated growth by focusing on this strategy. As an example, we began site management responsibilities for a client initially and then successfully expanded our responsibilities into study management, data management, medical writing and other clinical areas.
	•	Continue to add new accounts—We plan to leverage the growing demand for outsourced clinical development services to reach new clients. We see opportunity in the large pipeline of drugs in development to further drive our growth strategy. We believe that continued growth in research and development spending, along with increased demand for outsourced solutions, represents a significant opportunity for us to add new accounts.
	•	Leverage our infrastructure to enhance profitability—Our historical investment in our global expansion provides us with the opportunity to capitalize on our investment as we grow our revenue. We believe that this historical investment, along with our ability to leverage our clients’ existing infrastructure through our integrated solutions, could mean that with less additional investment in our own infrastructure, we would be able to expand the services we provide our clients. By leveraging our innovative model and current cost structure as our revenues grow, we expect to enhance our profitability.
	•	Expand suite of services offered—We are expanding our suite of service offerings to include both non-clinical services, such as analytical chemistry, and clinical services, such as Phase IV post-marketing surveillance services. We believe this will enhance our ability to provide services tailored to our clients’ needs.

Common stock offered by us		shares
Common stock offered by the selling stockholders		shares
Common stock to be outstanding immediately after the offering		shares

	•	2,908,393 shares of common stock issuable upon exercise of outstanding options with a weighted average exercise price of $2.07 per share; and
	•	3,788,452 shares of common stock reserved for future grants under the ReSearch Pharmaceutical Services, Inc. 2007 Equity Incentive Plan.

	•	our sale of           shares of common stock in this offering at an assumed initial public offering price of $      per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us; and
	•	the repayment in full of the outstanding balance of approximately $10.9 million under our working capital line of credit.

														Six Months
		Year Ended December 31,												Ended June 30,
		2007				2008				2009				2009				2010
														(unaudited)
		(in thousands, except per share data)
Consolidated Statement of Operations Data:
Service revenue		$	120,459			$	156,967			$	200,472			$	93,705			$	122,409
Reimbursement revenue			13,924				18,086				23,696				10,940				15,500
Total revenue			134,383				175,052				224,168				104,646				137,909
Direct costs			87,650				117,707				145,209				68,160				88,732
Reimbursable out-of-pocket costs			13,924				18,086				23,696				10,940				15,500
Selling, general, and administrative expenses			26,787				31,290				44,798				21,091				25,671
Depreciation and amortization			1,144				1,750				3,723				1,671				2,202
Income from operations			4,879				6,219				6,742				2,784				5,804
Interest and other income (expense), net			(5,786	)			42				(562	)			(303	)			(396	)
Income (loss) before provision for income taxes			(907	)			6,261				6,180				2,481				5,409
Provision for income taxes			1,508				2,518				3,559				1,492				3,953
Net income (loss)			(2,415	)			3,743				2,620				989				1,456
Accretion of preferred stock			(321	)			—				—				—				—
Net income (loss) applicable to common shares		$	(2,736	)		$	3,743			$	2,620			$	989			$	1,456
Net income (loss) per common share:
Basic		$	(0.19	)		$	0.11			$	0.07			$	0.03			$	0.04
Diluted		$	(0.19	)		$	0.11			$	0.07			$	0.03			$	0.04
Weighted average number of shares outstanding:
Basic			14,573				32,617				37,003				36,747				37,272
Diluted			14,573				34,103				38,071				37,708				38,676

		As of June 30, 2010
		Actual				As Adjusted
		(unaudited)
		(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	4,252			$
Working capital			23,149
Total assets			94,558
Line of credit			10,861
Capital leases			618
Stockholders’ equity			43,851

		Year Ended December 31,
		2005				2006				2007				2008				2009
		(unaudited)
		(in thousands)
Net income (loss)		$	(1,683	)		$	1,792			$	(2,415	)		$	3,743			$	2,620
Provision for income taxes			—				45				1,508				2,518				3,559
Interest income (expense), net			1,127				1,245				5,787				(66	)			110
Depreciation and amortization			864				901				1,143				1,750				3,723
EBITDA		$	308			$	3,983			$	6,023			$	7,945			$	10,012

 

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with the other information in this prospectus, before making a decision to purchase shares of our common stock. If any of the following risks, or the risks described elsewhere in this prospectus, occur, our business, prospects, results of operations and financial condition could be materially harmed. As a result, the market price of our common stock could decline and you may lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

 

Risks Related to Our Business

 

We depend on the biopharmaceutical industry for substantially all of our revenue. Factors or trends affecting that industry could adversely affect our business.

 

We provide services and solutions to the biopharmaceutical industry, and our revenues depend on the outsourcing trends and research and development expenditures of the biopharmaceutical industry. Economic factors and industry trends that affect companies in the biopharmaceutical industry also affect our business. For example, the practice of many companies in this industry has been to engage companies like us to manage the clinical development of their product pipelines. If these companies reduce their tendency to outsource projects and development programs in light of current difficult conditions in credit markets and the economy in general or for any other reason, our operations, financial condition and growth rate would be materially and adversely impacted. In the past, factors such as industry consolidation, product failures and withdrawals, liability lawsuits and governmental regulation to control growing healthcare costs have also slowed decision-making by biopharmaceutical companies and delayed drug development projects. Any such developments could cause our clients to reduce their drug discovery and development spending, which could reduce demand for our services and have an adverse effect on our business.

 

Recent consolidation in the biopharmaceutical industry could lead to a reduction in our revenues.

 

A number of large biopharmaceutical companies have recently completed mergers and acquisitions that will consolidate the research and development expenditures and outsourcing trends of the biopharmaceutical industry into fewer companies. For example, Wyeth, our largest customer during 2008 and 2009, representing 20% and 17%, respectively, of our service revenue during those years, was acquired by Pfizer, and Schering-Plough, our second largest customer during 2008 and 2009, representing 12% and 16%, respectively, of our service revenue during those years, was acquired by Merck. While Pfizer and Merck were also our clients prior to these acquisitions, we cannot assure you whether we will continue to generate revenues from these companies that are consistent with or higher than their historic levels. As the integration of these acquisitions continues, the surviving biopharmaceutical companies may decide to use other CROs, keep clinical research services in-house, or otherwise diminish the use of our services. We cannot predict the potential impact of these acquisitions and subsequent integration, but any resulting decisions related to outsourcing clinical trial services could reduce our revenues if we are not engaged to continue providing the same level of services to the acquiring company. Regardless of the reason, the negative impact of the loss of business from any large biopharmaceutical companies may be enhanced due to consolidation in this industry.

 

Providing outsourcing services to the biopharmaceutical industry is highly competitive, and our failure to compete effectively could harm our business. We also compete with existing in-house personnel employed by our clients, and the increased use of these personnel could reduce our revenues.

 

We compete with a wide range of providers of outsourcing services to the biopharmaceutical industry, including small, niche providers and full-service global clinical research organizations. Outsourcing service providers compete based on a variety of factors, including reputation for quality, performance, price, scope of service offerings and geographic presence. A number of our competitors possess substantially greater resources and more well-established brand names than we do, which may hurt our competitive position within the industry.

 

Additionally, some of our current or potential clients use in-house personnel to perform the same functions and

services that we seek to perform for these clients on an outsourced basis. The increased use of in-house personnel by these companies would decrease the likelihood that we could obtain additional new contracts or extensions of our existing contracts to participate in our clients’ drug development process, which could eliminate or substantially reduce our revenues. In addition, clients and prospective clients may choose not to utilize our project-based, hybrid or integrated solutions at any particular period of time, which could lead to fluctuations and variability in our revenue.

 

The biopharmaceutical industry generally, and drug discovery and development more specifically, is also subject to increasingly rapid technological changes. Our competitors or others might develop technologies, services or products that are more effective or more commercially attractive than our current or future technologies and services, or which render our technologies and services less competitive or obsolete. If competitors introduce superior technologies and services or products and we cannot make enhancements to remain competitive, our competitive position would be materially and adversely affected.

 

 

Our contracts may be delayed, terminated or reduced in scope with little or no notice, which could adversely impact our revenues and our profitability.

 

Many of our contracts with our clients may be terminated or reduced in scope with little or no notice. Cancellations may occur for a variety of reasons, including the failure of the client’s product to satisfy safety or efficacy requirements, unexpected clinical trial results using the client’s product, regulatory developments, economic issues, availability of clinical trial material, protocol design matters or the client’s decision to reduce its research and development activities. In addition, if we are unable to provide staff sufficient in number or experience as required for a project, the contract may be delayed, terminated or reduced in scope. Any of these developments could lead to an unexpected reduction in our revenues and an impairment of our profitability and cash flow.

 

Our backlog as of a given date may not be a meaningful predictor of our future results.

 

Our backlog, which represents anticipated service revenue from executed contracts that either have not started but are anticipated to begin in the near future, or are in process and have not been completed, can be affected by a number of factors, such as the size and duration of contracts, many of which are performed over several years, and changes in labor utilization over the course of a clinical trial. Also, the scope of a contract can change significantly during a project, which could cause our backlog to be adjusted. We cannot assure investors that we will fully realize our entire backlog, which was $183.0 million as of June 30, 2010, as service revenue in the future or at a rate consistent with historic levels.

 

A substantial percentage of our revenue is attributable to a relatively small number of clients. The loss of, or reduction in services provided to, these clients could significantly reduce our revenues and profitability.

 

For the six months ended June 30, 2010, our five largest clients accounted for 59% of our service revenue and our 20 largest clients accounted for 86% of our service revenue. For the six months ended June 30, 2010, our largest customer accounted for 17% of our service revenue, and for the year ended December 31, 2009, our largest customer accounted for 17% of our service revenue. The loss of one or more of our largest clients, or the reduction in scope of a single contract or several smaller contracts with our largest clients, could materially reduce our revenues, cash flow and profitability.

 

If we are unable to recruit and retain qualified personnel, or to reassign billable personnel from one project to another as projects are completed, it will be difficult for us to achieve our financial and operational goals.

 

Our success depends to a significant extent upon the efforts of our senior management team and our ability to hire qualified management and scientific personnel in the regions in which we perform services for our clients. There is substantial competition within the biopharmaceutical and CRO industries for qualified personnel, and any difficulty that we encounter in recruiting or retaining qualified personnel would impact our ability to meet our financial and operational goals.

 

We rely on our proprietary database of clinical trial professionals in order to recruit professional staff for our engagements and to compete with other providers of outsourcing services to the biopharmaceutical industry. The

loss, damage or misappropriation of our database could result in our inability to meet our contractual obligations with our clients, a loss of a competitive edge with other outsourcing service providers or a loss of potential growth opportunities.

 

Furthermore, our financial and operational success depends to a significant extent upon our ability to minimize the number of unassigned billable personnel at any one time by reassigning billable personnel from one project to another as projects are completed. Because unassigned personnel remain on our payroll, we do not earn any revenue, but continue to pay billable personnel who are unassigned, which increases our expenses and reduces our profitability.

 

The fixed price nature of some of our contracts could result in financial losses.

 

Some of our contracts are structured as fixed price contracts. If we underbid our fixed price contracts or overrun our initial cost estimates, we may not be able to achieve or maintain profitability.

 

Our business depends on our senior management team and other key personnel, and the loss of any member of the team could harm our business.

 

We believe that our success will depend on the continued employment of our senior management team, which has substantial experience in the administration of biopharmaceutical services businesses. Our growth and profitability could be materially and adversely affected if the services of our senior management or other key employees cease to be available. If one or more members of our senior management team were unable or unwilling to continue in their present positions, those persons could be difficult to replace and our business could be harmed. If any of our key employees were to join a competitor or form a competing company, some of our clients might choose to use the services of that competitor or new company instead of our services. While our senior management employees have entered into non-competition agreements with us that would restrict their ability to compete with us after their employment with us ceases, we cannot assure you that a court would enforce the non-competition provisions in a manner that would be advantageous to us. Further, if non-competition provisions were enforced, they are limited in time and scope and we cannot assure you that the provisions would adequately protect our business. In addition, if his employment is terminated, Mr. Perlman, our chief executive officer, may elect to forego any severance benefits owed to him in return for the elimination of the non-compete provisions in his employment agreement.

 

Unfavorable general economic conditions could hurt our business.

 

Unstable global economic conditions, including the recent recession in the United States, political and economic unrest outside of the United States, and the continuing financial crisis in the banking system and financial markets, could negatively affect our business. While it is difficult for us to predict the impact of general economic conditions on our business, these conditions could reduce client demand for some of our services or the ability of third parties to provide services critical to our business, which could cause our revenue to decline. Also, our clients, particularly smaller biopharmaceutical companies which are especially reliant on the credit and capital markets, may not be able to obtain adequate access to credit or equity funding, which could affect their ability to make timely payments to us. If that were to occur, our cash flows could be impaired, and we could be required to increase our allowance for doubtful accounts, which could impact our profitability.

 

We may not be able to expand through acquisitions successfully.

 

From time to time, we evaluate acquisition opportunities globally and in the United States in order to increase our market share and our presence in servicing the biopharmaceutical industry. Our ability to grow successfully through acquisitions could be affected by, among other things, the following:

 

 

 

To the extent that we are unable to successfully execute our acquisition strategy, or our recent acquisitions do not prove to be accretive, it may compromise our ability to expand domestically and internationally.

 

Our international operations are subject to numerous risks.

 

We have international operations in Canada, Latin America, Europe and the Asia-Pacific region, and we intend to develop our operations globally through organic growth and selective acquisitions based on client demand. Our current and future foreign operations are and will be subject to risks inherent in operating in foreign countries, including government regulations different from those we face domestically, currency restrictions and fluctuations, additional taxes and potential political and civil instability and unrest. Our ability to manage these issues could be affected by applicable U.S. laws and the need to protect our assets in those locations. Although we intend to take steps to mitigate these risks where possible, political, economic or social instability or other developments could make less developed countries less suitable for our expansion plans and may hurt our ability to operate in and contract with persons in such countries.

 

Further, our financial statements are denominated in U.S. dollars. As a result, factors associated with current and future international operations, including changes in foreign currency exchange rates, could significantly impair our results of operations or financial condition. For the year ended December 31, 2009 and the six months ended June 30, 2010, we generated approximately 17% and 16%, respectively, of our service revenue from our foreign operations. Exchange rate fluctuations between local currencies and the U.S. dollar create risk in several ways, including foreign currency translation risk related to our revenue and expenses of foreign operations being generally denominated in local currencies, and foreign currency transaction risk related to our foreign contracts that may be denominated in a currency other than the currency in which we incur expenses related to such contracts. In addition, as a result of our acquisitions of three CROs in Europe and one CRO in China during 2008 and 2009, we have increased our number of paid personnel in foreign countries significantly, and fluctuations in foreign currency exchange rates could increase our employee compensation expenses in those foreign countries accordingly. In the future, we may seek to limit these risks through exchange rate fluctuation provisions in our contracts, or by hedging our transaction risk with foreign currency exchange contracts or options. Despite these efforts, we may still experience fluctuations in financial results from our operations outside the United States, and we cannot assure investors that we will be able to favorably reduce our currency transaction risk associated with our contracts.

 

Proposed and future legislation or regulations may increase the cost of our business or limit our service offerings.

 

Federal, state or local authorities might adopt legislation or regulations that are more burdensome than existing regulations applicable to our business. For example, recent product safety concerns and the creation by the FDA of

the Drug Safety Oversight Board could change the regulatory environment for drug products including the process for FDA product approval and post-approval safety surveillance. These and other future changes in regulation could increase our expenses or limit our ability to offer some of our services.

 

We may be affected by recently enacted healthcare reform legislation.

 

In March 2010, the U.S. Congress enacted the Patient Protection and Affordable Care Act, which is intended over time to expand health insurance coverage and impose healthcare cost containment measures. This legislation may significantly impact the biopharmaceutical industry. Under this healthcare reform legislation, medical device manufacturers and biopharmaceutical companies will be subject to an excise tax in excess of $2 billion per year that escalates over time and will be allocated based on market share. In addition, the FDA is authorized to establish a process to regulate the approval of generic versions of biologic drugs. The imposition of excise taxes and a simplified approval process for biologic drugs could decrease the amount of money our clients can spend on our services, provide a disincentive to discover new biologic drugs, or otherwise decrease demand for our services. We are presently uncertain as to all of the effects the recently enacted legislation could have on our business and are unable to predict what legislative proposals will be adopted in the future, if any.

 

Healthcare reform legislation may also limit the profits that can be made from the development of new drugs. This could adversely affect research and development expenditures by the biopharmaceutical industry, which could in turn decrease the business opportunities available to us both in the United States and abroad. In addition, new laws or regulations may create a risk of liability, increase our costs or limit our service offerings.

 

Our business and our clients’ businesses are subject to extensive regulation, and our and their results of operations could be harmed if regulatory standards change significantly or if we fail to maintain compliance with regulations.

 

Laws and regulations regarding the development and approval of drug and biological products have become increasingly stringent in both the U.S. and foreign jurisdictions, resulting in a need for more complex and often larger clinical studies. Pharmaceutical and biologic products and medical devices to be used in humans are subject to rigorous regulation by the U.S. government—principally by the FDA, but also by the Federal Trade Commission and other agencies—and by foreign governments if products are tested or marketed abroad. Additional legislation or regulation governing the possession, use and dissemination of medical record information and other personal health information might require us to implement new security measures that require substantial expenditures or limit our ability to offer certain of our services. Further, a relaxation of the scope of regulatory requirements, such as the introduction of simplified marketing applications for pharmaceuticals and biologics, such as those made by generic drug manufacturers, could decrease the business opportunities available to us.

 

In addition, because we offer services relating to the conduct of clinical trials and the preparation of marketing applications, we are required to comply with applicable regulatory requirements governing, among other things, the design, conduct, performance, monitoring, auditing, recording, analysis and reporting of these trials. In the United States, the FDA governs these activities pursuant to the agency’s good clinical practice, or GCP, regulations. We have a limited history of inspection by the FDA. Our failure to maintain compliance with GCP or other applicable regulations could lead to a variety of sanctions, including, among other things, and depending on the nature of the violation and the type of product involved, the suspension or termination of a clinical study, civil penalties, criminal prosecution, debarment or prohibition from assisting in the submission of new drug applications, or NDAs. Although we recently underwent our first inspection for GCP compliance and received no observations of noncompliance, we cannot assure you that future inspections will not identify GCP or other violations that could subject us to FDA enforcement actions, including warning letters. In addition, we could be required to pay monetary damages to our clients in the event we are found not to have complied with GCP. While we monitor clinical trials to test for compliance with applicable laws and regulations in the United States and foreign jurisdictions in which we operate, and have adopted standard operating procedures that are designed to satisfy applicable regulatory requirements, our business spans multiple regulatory jurisdictions with varying, complex regulatory frameworks, and therefore we cannot assure investors that our systems will ensure compliance in every instance in the future. We could be forced to incur significant costs in complying with new regulations, and we may incur fines or damage to our reputation as a result of our failure to comply with any such regulations.

Our clinical research services create a risk of liability, and we could be required to pay damages or to bear the costs of defending any claim not covered by contractual indemnity.

 

Clinical research services performed by or on behalf of biopharmaceutical companies involve the testing of new drugs, biologics, and devices on human volunteers, and, if marketing approval is received for any of their drug, biologic and device candidates, their use by patients. This testing creates risks of liability for personal injury, sickness or death of patients resulting from their participation in the study. These risks include, among other things, unforeseen adverse side effects, improper application or administration of a new drug or device, and the professional malpractice of medical care providers. Many volunteer patients are already seriously ill and are at heightened risk of future illness or death. Clinical trial agreements between sponsors and investigators do not include us as a party, which may place us at a disadvantage in the allocation of risk and regulatory responsibility. Although we do not believe we are legally accountable for the medical care rendered by third party investigators, it is possible that, in the event of the personal injury or death of persons participating in clinical trials, we could be held liable for the claims and expenses arising from any professional malpractice of the investigators. We also could be held liable for errors or omissions in connection with the services we perform. While we believe our current insurance coverage is adequate, our business could be materially harmed if we were required to pay damages or bear the costs of defending any claim outside the scope of, or in excess of, the contractual indemnification provided by our agreements with our clients that is beyond the level or scope of insurance coverage in effect. Further, an indemnifying party may not fulfill its indemnification obligations to us or indemnification agreements may not enforced by a court in accordance with their terms, which would compromise our financial position.

 

We may not be able to manage our growth effectively.

 

We have experienced substantial revenue and employee growth over the last several years, and we believe that sustained growth may place a strain on our operational, human, and financial resources. To manage our growth, we must continue to improve operating and administrative systems and services and attract and retain qualified management, professional, scientific and technical operating personnel. We believe that maintaining and enhancing both our systems and personnel at reasonable costs are instrumental to our success. The nature and pace of our growth also introduces risks associated with quality control and client dissatisfaction due to potential delays in performance or other problems.

 

Our business depends significantly on the continued effectiveness of our information technology infrastructure, and failures of such technology could disrupt our operations.

 

To remain competitive, we must employ information technologies that capture, manage, and analyze the large streams of data generated during clinical trials in compliance with applicable regulatory requirements. In addition, because we provide services on a global basis, we rely extensively on technology to allow the concurrent conduct of studies and work sharing around the world. Any loss of communication services, such as telephone, e-mail, or internet service could compromise our ability to communicate with our clients and recruit clinical trial professionals. As with all information technology, our system is vulnerable to potential damage or interruptions from fires, blackouts, telecommunications failures, computer-related hardware and software failures and disruptions and other unexpected events, as well as to break-ins, sabotage, or intentional acts of vandalism. Any substantial disruption or resulting loss of data that is not avoided or corrected by backup measures could significantly disrupt our operations. While we carry business interruption insurance policies that we believe to be adequate, we might suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies or for which the policies do not provide coverage.

 

We may face significant employment liability risk.

 

With many of our integrated solutions, we employ and place people at the physical workplaces of our clients. An inherent risk of such activity includes possible claims of errors and omissions, misuse or misappropriation of client proprietary information, misappropriation of funds, discrimination and harassment, failure to comply with applicable immigration laws and regulations, theft of client property, other criminal activity, and torts or other claims under traditional theories of employment liability or under co-employment or joint employment liability. We have policies and guidelines in place to reduce our exposure to such risks. However, failure of any employee or

personnel to follow these policies and guidelines may result in negative publicity, loss of client relationships and business, injunctive relief, or the payment of monetary damages or fines. Moreover, we could be held responsible for the actions at a workplace of persons not under our immediate control. To reduce our exposure, we also maintain insurance covering general liability, workers compensation claims, errors and omissions and employee theft. Due to the nature of our assignments, in which we have access to client information systems and confidential information, we may not be able to obtain insurance coverage in amounts adequate to cover any liability on our part on acceptable terms. In addition, we face various employment-related risks not covered by insurance, such as compliance with wage and hour laws and employment and withholding tax responsibilities, which if not complied with could result in significant financial penalties.

 

We are a holding company and derive substantially all of our cash flow from our subsidiaries.

 

We rely upon revenues and distributions from our subsidiaries to generate the funds necessary to meet our obligations. Our subsidiaries are separate and independent legal entities and have no obligation, contingent or otherwise, to make funds available to us, whether in the form of loans, dividends or otherwise. The ability of our subsidiaries to pay dividends to us is also subject to, among other things, the availability of sufficient funds in such subsidiaries and applicable state or foreign laws. Claims of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and claims of our creditors and stockholders. In addition, we have pledged the ownership interests in ReSearch Pharmaceutical Services, LLC, our principal operating subsidiary, to a bank as security for our line of credit, and therefore, if we are in default of any of the provisions of our agreement for the line of credit, our bank could foreclose on the pledged ownership interests of ReSearch Pharmaceutical Services, LLC. If the bank were to foreclose on the pledged ownership interests, we would no longer be entitled to receive revenues or distributions from our U.S. operating subsidiaries.

 

Risks Related to This Offering

 

An active trading market for our common stock may not develop, and our stockholders may not be able to resell their stock at or above the current price.

 

There is currently no public market for shares of our common stock. Our common stock and warrants were previously listed on the London Stock Exchange’s AIM, until, at a special meeting of our stockholders and warrant holders on August 26, 2009, we received approval from the requisite percentage of our stockholders to delist our common stock from AIM. The warrant holders did not approve our proposal to delist our warrants from AIM. On September 4, 2009, our common stock was delisted from AIM and our nominated advisor resigned from its position and trading of our warrants on AIM was suspended. We did not appoint another nominated advisor within one month of the suspension of trading of our warrants and the listing of our warrants was cancelled on October 5, 2009. All of our unexercised warrants expired by their own terms on April 28, 2010.

 

The initial public offering price for our common stock in this offering will be determined through negotiations between us and the representative of the underwriters and may bear no relationship to the price at which our common stock will trade following the completion of this offering. Although we have applied to have our common stock listed on The NASDAQ Global Market, the listing of our common stock may not lead to investor interest, and an active trading market for our stock may never develop or may not be sustained following this offering. If an active market does not develop, it will be difficult or impossible for you to sell the shares of common stock you acquire in this offering without depressing the market price of our common stock or to sell your shares at all.

 

The trading price of the shares of our common stock is likely to be volatile, and purchasers of our common stock could incur substantial losses.

 

Our stock price is likely to be volatile. The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The following factors, in

addition to the other risks described in this prospectus, may have a significant impact on the market price of our common stock:

 

 

Some or all of these factors may be beyond our control. In addition, material adverse changes in the market for companies in the biopharmaceutical and CRO industries could result in the loss of investor confidence. Fluctuations in our stock price may be even more pronounced in the trading market for our stock shortly following this offering. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in very substantial costs and divert our management’s attention and resources.

 

We incur increased costs as a public company, which may strain our resources and adversely affect our operating results and financial condition.

 

As a public company since 2008, we incur significant accounting, legal and other expenses. We will continue to incur costs associated with our public company reporting requirements, since we will continue to be subject to the requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 and other rules and regulations, and in addition, we will be subject to the requirements of NASDAQ after this offering. Our management and other personnel devote a substantial amount of time in an effort to comply with these and other public company requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and make some activities more time-consuming and costly. Further, these laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, its committees or as executive officers.

 

We have been and will be required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. We are expending significant resources to develop the necessary documentation and testing procedures required by Section 404. We cannot be certain that the actions we are taking to improve our internal controls over financial reporting will be sufficient, or that we will be able to implement our planned processes and procedures in a timely manner.

 

If we are not the subject of securities or industry analyst reports, or if any securities analyst publishes unfavorable research about our business, our common stock or our industry sector, the price of our common stock could be negatively affected and trading volume could decline.

 

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by these analysts. There are many publicly traded companies that provide services to the biopharmaceutical industry, which may mean it will be less likely that we receive analysts’ coverage, which in turn could adversely affect the market price of our common stock. In addition, if a securities or industry analyst downgrades the outlook for our stock or one of our competitors’ stocks, or if analysts cease to cover us or fail to

publish regular reports on us, interest in the purchase of our common stock could decrease, which would cause the trading price of our common stock and trading volume to be negatively affected. Securities analysts may publish reports about our industry containing information that may affect the trading price of our common stock.

 

A substantial number of shares of our common stock will become eligible for resale by our existing stockholders in the public market following this offering, and substantial amounts of such sales may cause the trading price of our common stock to decline, even if our business is doing well.

 

Sales of substantial amounts of our common stock could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market following this offering, this may depress the market price of our shares and affect the value of your investment and also make it more difficult for us to raise capital in the future.

 

Following completion of this offering,          shares of our common stock will be outstanding, and          shares will be issuable upon the exercise of outstanding stock options. Of the          shares outstanding upon the completion of this initial public offering, the           shares sold pursuant to this prospectus will be freely tradable immediately without restriction, unless such shares are purchased by our affiliates (as such term is defined in Rule 144 under the Securities Act).

 

Our directors, executive officers and certain of our other existing stockholders have agreed to enter into lock-up agreements pursuant to which they have agreed not to sell shares of our common stock in the public market for a period of 180 days after the date of this prospectus, which lock-up period may be extended in certain circumstances. Upon expiration of the lock-up period, shares subject to such lock-up agreements will become freely tradable without limitation, unless held by our affiliates. The representative of the underwriters may also release the holders from the lock-up provisions at any time in its sole discretion, which would allow for earlier sales of shares in the public market. See “Shares Eligible for Future Sale—Lock-Up Agreements.”

 

Shares held by our affiliates will become eligible for resale pursuant to Rule 144 following the expiration of the lock-up period, subject to the volume and manner of sale restrictions set forth in Rule 144. In addition, we have filed a registration statement on Form S-8 which permits our current and former employees, including our directors and officers, to resell shares they have obtained upon exercise of options.

 

In addition, at any time after the expiration of the 90-day period beginning on the date of this prospectus, our existing stockholders will have the ability to require us to register shares of common stock for resale, subject to specified limitations. See “Shares Eligible for Future Sale—Registration Rights.”

 

We will have broad discretion in how we use the proceeds of this offering and we may not use them effectively, or we may use the proceeds in ways with which you disagree and in ways that may not yield a return on your investment.

 

We will have considerable discretion in applying the net proceeds of this offering. We anticipate that we will use the net proceeds we receive from this offering to further develop and expand of our service offerings globally, including, among other things, the acquisition and subsequent growth of businesses similar to ours in Europe and Asia, to repay existing debt under our revolving line of credit, and for working capital and general corporate purposes. Because of the number and variability of factors that determine our use of proceeds from this offering, our actual uses for the proceeds of this offering may vary substantially from our currently planned uses. Stockholders may not deem such uses desirable. In particular, in order to avoid regulation as an investment company under the Investment Company Act of 1940, as amended, and pending the use of the proceeds in the development and expansion of our business, we will be limited as to the ability to invest a substantial amount of our proceeds in assets other than cash items, such as cash, demand deposits with banks, shares of money market funds, government securities and certain certificates of deposit. Our short-term use of proceeds in this manner may not yield a significant return for our stockholders.

You will experience immediate dilution in the book value of the shares of common stock you purchase in this offering.

 

We expect the initial public offering price of our common stock to be substantially higher than the net tangible book value per share of our common stock. Therefore, after giving effect to the shares of common stock to be sold in this offering, the price per share that you pay will be higher than the book value of that share.

 

Based on an assumed initial public offering price of $      per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $      per share, representing the difference between our net tangible book value per share after giving effect to this offering and the assumed initial public offering price. In addition, purchasers of common stock in this offering will have contributed approximately     % of the aggregate price paid by all purchasers of our common stock but will own only approximately     % of our common stock outstanding after this offering.

 

In addition, as of June 30, 2010, we had outstanding stock options to purchase an aggregate of 2,908,393 shares of common stock with a weighted average exercise price of $2.07 per share. To the extent these outstanding options are exercised, there will be further dilution to investors in this offering.

 

We do not intend to pay dividends on shares of our common stock for the foreseeable future, and capital appreciation, if any, will be your sole source of gains.

 

We have never declared or paid any cash dividends on our common stock. We intend to use our earnings, if any, to fund the operation, development and growth of our business, and we do not anticipate paying any cash dividends in the foreseeable future. In addition, the agreement governing our current line of credit with a bank contains covenants that provide that we may not pay any dividends other than stock dividends during the term of the agreement. As a result, your potential gain from your investment in our common stock will be solely the capital appreciation, if any, of our common stock for the foreseeable future.

 

Our executive officers, directors and principal stockholders own a significant percentage of our stock and could exert significant influence over matters requiring stockholder approval, which may prevent new investors from influencing significant corporate decisions.

 

We anticipate that upon completion of this offering, our executive officers, directors and beneficial holders of 5% or more of our common stock will, together with their affiliates, beneficially own approximately     % of our common stock, or approximately     % if the underwriters exercise their over-allotment option in full. Accordingly, our executive officers, directors and principal stockholders and their affiliated entities will have control over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. The interests of this group of stockholders may not coincide with our interests or those of other stockholders. Corporate action may be taken even if other stockholders, including those who purchase shares in this offering, oppose such action. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.

 

Provisions of our corporate charter documents and Delaware law may have the effect of delaying or preventing attempts by our stockholders to change our management or an acquisition by a third party, and the market price of our common stock may be lower as a result.

 

Our certificate of incorporation and bylaws contain several provisions that may make it more difficult for a third party to acquire control of our company, even if such acquisition would be beneficial to our stockholders. For example, our certificate of incorporation authorizes our Board of Directors to issue up to 1,000,000 shares of “blank check” preferred stock and to attach special rights, including voting and dividend rights, to this preferred stock, in each case without stockholder approval. With these rights, preferred stockholders could make it more difficult for a third party to acquire us. In addition, our certificate of incorporation does not provide for cumulative voting in the election of directors and also provides for a staggered Board of Directors, whereby directors serve for three-year terms, with approximately one-third of the directors coming up for re-election each year. Having a staggered board makes it more difficult for a third party to obtain control of our Board of Directors through a proxy contest, which may be a necessary step in an acquisition of us that is not favored by our Board of

Directors. In addition, our stockholders are not entitled to remove directors other than by a majority vote and only for cause.

 

We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. Under these provisions, if anyone becomes an “interested stockholder,” we may not enter into a “business combination” with that person for three years without special approval, which could discourage a third party from making a takeover offer or tender offer for our stock and could delay or prevent a change of control or changes in our management. For the purposes of Section 203, “interested stockholder” means, generally, someone owning 15% or more of our outstanding voting stock or an affiliate of ours that owned 15% or more of our outstanding voting stock during the past three years, subject to certain exceptions as described in Section 203.

 

This prospectus contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, many of which are beyond our control. Our actual results could differ materially and adversely from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in the “Risk Factors” section of this prospectus. Important factors that may cause actual results, levels of activity, performance or achievements to differ from the information expressed or implied by these forward-looking statements include, but are not limited to:

 

 

The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” but are also contained elsewhere in this prospectus. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future operations, financial position, estimated revenue or losses, projected costs, prospects, current expectations, forecasts, and plans and objectives of management are forward-looking statements, and you should not place undue reliance on them. When used in this prospectus, the words “aim,” “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “could,” “should,” “would,” “project,” “predict,” “plan,” “objectives,” “goals,” “potential,” “continue,” “ongoing” and similar expressions, or negatives of these words, are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this prospectus. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements in this prospectus are reasonable, we cannot assure you that these plans, intentions or expectations will be achieved. We do not undertake any obligation to update any forward-looking statements or other information contained in this prospectus, whether as a result of new information, future events or otherwise, except as required by federal securities laws.

 

Information regarding market and industry statistics contained in this prospectus is included based on information available to us that we believe is accurate as of the date of this prospectus. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications described above and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. We undertake no obligation to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. See the “Risk Factors” section of this prospectus for a more detailed discussion of uncertainties and risks that may have an impact on our future results.

 

We estimate that our net proceeds from the sale of shares of our common stock in this offering, after deducting underwriting discounts and commissions and offering expenses payable by us, will be approximately $      million, or $      million if the underwriters exercise their overallotment option in full, based upon an assumed initial public offering price of $      per share, which is the midpoint of the range set forth on the cover page of this prospectus. We will not receive any proceeds from the sale of shares by the selling stockholders.

 

A $1.00 increase or decrease in the assumed initial public offering price of $      per share would increase or decrease, as applicable, our net proceeds by $     , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and our estimated offering expenses. A           share increase or decrease in the number of shares of common stock that we sell in this offering would increase or decrease, as applicable, our net proceeds by $     .

 

The primary purposes of this offering are to create a public market for our common stock, to facilitate future access to the public equity markets and to obtain additional capital. We anticipate that we will use the proceeds of this offering as follows:

 

 

In addition, we may use a portion of the net proceeds to acquire complementary businesses or assets, although we currently have no agreements or commitments with respect to any acquisitions.

 

The anticipated uses of net proceeds from this offering represent our intentions based upon our current plans and business conditions. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the outstanding principal and interest balance under our working capital line of credit. Our working capital line of credit matures on October 31, 2012. It had a principal and interest balance of approximately $10.9 million at June 30, 2010 and bears interest at the Federal funds open rate plus 2%, or 4.75% at June 30, 2010. Our actual expenditures may also vary significantly depending on the extent to which we acquire or invest in businesses, assets, and technologies; the global market for our service offerings; cash flows from operations; the anticipated growth of our business; and any unforeseen or underestimated cash needs and other factors. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

 

Pending our use of the net proceeds of this offering, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade liquid investments, such as demand deposits with banks, shares of money market funds, guaranteed obligations of the U.S. government and certificates of deposit.

 

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings to finance the operation, development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. In addition, the agreement governing our line of credit provides that we may not pay any dividends other than stock dividends during the term of the agreement, which expires on October 31, 2012.

 

The following table sets forth our cash and cash equivalents, short-term debt and capitalization at June 30, 2010:

 

 

The as adjusted information below is illustrative only, and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table in conjunction with “Use of Proceeds,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and our financial statements and related notes included elsewhere in this prospectus.

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $      per share, which is the midpoint of the range set forth on the cover of this prospectus, would increase or decrease, as applicable, our as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by $     , assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same. Assuming this initial public offering price per share, a           share increase or decrease in the number of shares of common stock that we sell in this offering would increase or decrease, as applicable, our as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by $     .

 

The number of shares of our common stock outstanding in the table above does not include:

 

 

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock immediately after this offering. Net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding.

 

Investors participating in this offering will incur immediate and substantial dilution. Our net tangible book value was $27.8 million, or approximately $0.75 per share of common stock, at June 30, 2010. After giving effect to the sale by us of the           shares of common stock offered by us in this offering at an assumed initial public offering price of $      per share, which is the midpoint of the range set forth on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our as adjusted net tangible book value at June 30, 2010, would have been $      million, or approximately $      per share of common stock. This represents an immediate increase in net tangible book value of $      per share of common stock to our existing stockholders and an immediate dilution in net tangible book value of $      per share to the new investors purchasing shares in this offering at the assumed initial public offering price. We determine dilution to new investors participating in this offering by subtracting the net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of common stock in this offering.

 

The following table illustrates this per share dilution:

 

 

 

The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. The information in the preceding table has been calculated using an assumed initial public offering price of $      per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus. A $1.00 increase or decrease in the assumed initial public offering price per share would decrease or increase, as applicable, the net tangible book value per share of common stock after this offering by $      per share and increase or decrease, as applicable, the dilution per share of common stock to new investors in this offering by $      per share, in each case calculated as described above and assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. Likewise, the information in the preceding table has been calculated assuming that we issue a number of shares of common stock in this offering equal to the number of shares appearing on the cover of this prospectus. A          share increase or decrease in the number of shares of common stock that we issue in this offering would decrease or increase, as applicable, the net tangible book value per share of common stock after this offering by $      per share and increase or decrease, as applicable, the dilution per share of common stock to new investors in this offering by $      per share, in each case calculated as described above and assuming an initial public offering price of $      per share.

 

The following table sets forth on the basis described above, as of June 30, 2010, the number of shares of common stock purchased or to be purchased from us, the total consideration paid or to be paid and the weighted average price per share paid or to be paid by existing holders of common stock, and by the new investors in this offering, at an assumed initial public offering price of $      per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

The discussion and tables above assume no exercise of the underwriters’ overallotment option. If the underwriters’ overallotment option is exercised in full:

 

 

 

As of June 30, 2010, there were options outstanding to purchase 2,908,393 shares of our common stock, with exercise prices ranging from $0.37 to $5.05 per share and a weighted average exercise price of $2.07 per share. The tables and calculations above assume that those options have not been exercised. To the extent outstanding options are exercised, you would experience further dilution if the exercise price is less than our net tangible book value per share. If all of the outstanding options as of June 30, 2010 had been exercised, our net tangible book value would have been $      per share of common stock, net tangible book value after this offering would be $      per share of common stock and dilution in net tangible book value to new investors in this offering would be $      per share of common stock. In addition, if all of the outstanding options as of June 30, 2010 were so exercised as of such date, before deducting underwriting discounts and commissions and our estimated offering expenses, (i) existing stockholders would have purchased           shares representing     % of the total shares for $     , or approximately     % of the total consideration paid, with an average price per share of $      and (ii) using an assumed public offering price of $      per share, shares purchased by new stockholders in this offering would represent approximately     % of the total shares for approximately $     , or approximately     % of the total consideration paid.

 

If we grant options, warrants, preferred stock, or other convertible securities or rights to purchase our common stock in the future with exercise prices below the initial public offering price, new investors will incur additional dilution upon exercise of such securities or rights.

 

Our common stock is not currently traded on any established public trading market. Our common stock, along with warrants to purchase common stock that have since expired, were traded on the Alternative Investment Market of the London Stock Exchange, or AIM, under the symbols “RPSE” for our common stock and “RPSW” for our warrants until September 4, 2009 and October 4, 2009, respectively. At a special meeting of stockholders and warrant holders on August 26, 2009, we received approval from the requisite percentage of our stockholders to delist our common stock from AIM. The warrant holders did not approve our proposal to delist our warrants from trading on AIM. Upon the date of delisting of our common stock from AIM, our nominated advisor resigned from its position, and the trading of our warrants on AIM was suspended. We did not appoint another nominated advisor within one month after the suspension of our warrants from trading on AIM, and as a result the listing of our warrants on AIM was cancelled on October 4, 2009. Due to the limited quotations of our common stock and warrants on AIM while listed, AIM was not considered an established public trading market under U.S. securities laws.

 

As of September 30, 2010, there were approximately 101 record holders of our common stock. Because some of our common stock may be held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial holders represented by these record holders.

 

The initial public offering price for the common stock being offered by this prospectus will be determined by negotiation between us and the underwriters based on a number of factors which are described in “Underwriting.”

 

The following tables set forth certain of our selected historical consolidated financial data and should be read together with our consolidated financial statements and related notes to those statements, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each included elsewhere in this prospectus. We have derived the consolidated statement of operations data for each of the years ended December 31, 2007, 2008 and 2009 and the consolidated balance sheet data as of December 31, 2008 and 2009 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the consolidated statement of operations data for each of the years ended December 31, 2005 and 2006 and the balance sheet data as of December 31, 2005, 2006 and 2007 from our audited consolidated financial statements not included in this prospectus. We have derived the consolidated statement of operations data for the six months ended June 30, 2009 and June 30, 2010 and the consolidated balance sheet data as of June 30, 2010 from our unaudited consolidated financial statements included in this prospectus. These interim financial statements reflect all adjustments, consisting of normal recurring adjustments, which are necessary in the opinion of management to present fairly our consolidated financial position and results of operations for the interim periods. Our historical financial results are not necessarily indicative of financial results that may be expected in future periods, and our financial results for any interim period are not necessarily indicative of financial results that may be expected for a full fiscal year.

 

A description of the merger between Old RPS and Cross Shore in August 2007 and the accounting treatment thereof is further described in Note 2 to our consolidated financial statements, beginning on page F-8 of this prospectus.

 

 

 

You should read the following discussion and analysis of our financial condition and results of operations together with the “Selected Consolidated Financial Data” section of this prospectus and our audited and unaudited consolidated financial statements and the related notes to those statements that appear elsewhere in this prospectus. In addition to historical information, this discussion contains forward-looking statements reflecting our current plans, estimates, beliefs and expectations that involve risks and uncertainties. Actual results may differ materially from those discussed or anticipated in these forward-looking statements due to a number of important factors, including those set forth in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements and Industry Data” and elsewhere in this prospectus.

 

Introduction

 

Management’s discussion and analysis of financial condition, changes in financial condition and results of operations is provided as a supplement to the accompanying consolidated financial statements and notes to help provide an understanding of our financial condition and results of operations. This discussion is organized as follows:

 

 

Overview

 

We are a global, next-generation CRO providing a broad range of clinical development solutions and services to biopharmaceutical companies. Our services support the design, initiation and management of our clients’ clinical trials programs that are required to obtain regulatory approval to market biopharmaceutical products.

 

We offer a comprehensive suite of outsourced solutions focused on Phases II through IV of the clinical development process, which encompasses late-stage and post-marketing clinical trials. We provide our services both as integrated solutions within a client’s internal clinical development operations, with an ability to work across multiple clinical trials, product candidates and clinical development functions, and on a more traditional project basis. We also offer hybrid solutions combining our integrated and project-based offerings. Our flexible model enables us to tailor our services to the differing needs of small, mid-sized, and large biopharmaceutical companies. We believe that the combination of our clinical expertise and our extensive personnel resourcing capabilities enables us to achieve cost savings, improvements in the quality of clinical trial execution and accelerated clinical timelines on behalf of our clients.

 

International Expansion and Acquisitions

 

We began our investment in global expansion in 2005 through 2007 with the opening of international offices in Canada, Mexico, Argentina, Brazil, Colombia and Chile. In December 2008, we completed the acquisition of three CROs located in France, Germany, and Spain, and in July 2009, we completed the acquisition of Paramax International Inc., a CRO located in China. We have accounted for each of these acquisitions as a purchase, and, accordingly, the results of operations of the acquired company have been included in our consolidated financial

statements commencing on the dates of the respective acquisitions. We believe that these acquisitions provide us with further expansion opportunities in Europe and the Asia-Pacific region and complement our operations in North America and Latin America. We expect that our international expansion will enable us to meet the growing global needs of our clients in the rapidly expanding market for integrated clinical research services.

 

Merger with Cross Shore and Basis of Presentation

 

Our predecessor company, Old RPS, merged with and into a wholly owned subsidiary of Cross Shore. As a result of the merger, Old RPS became a limited liability company organized under the laws of Delaware under the name Research Pharmaceutical Services, LLC and Cross Shore changed its name to ReSearch Pharmaceutical Services, Inc. We are now a holding company for, and conduct all of our operations through, our wholly owned subsidiary, Research Pharmaceutical Services, LLC. When we discuss our business and our financial results throughout this prospectus, we are referring to Old RPS for periods prior to August 30, 2007 and to our combined company for periods after that date.

 

The merger between Old RPS and Cross Shore was accounted for under the purchase method of accounting as a reverse acquisition in accordance with GAAP. Under this method of accounting, Cross Shore was treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the merger was treated as the equivalent of Old RPS issuing stock for the net assets of Cross Shore, which amounted to $50.6 million and consisted of cash and investments of $51.3 million, $600,000 of other assets, and $1.3 million of accrued transaction fees. The purchase price was allocated to the assets acquired and liabilities assumed based upon their respective fair values as of the date of the merger. All operating results shown in our financial statements for periods prior to August 30, 2007, the date of the merger, reflect solely the operations of Old RPS.

 

Components of Operating Results

 

 

Many of our contracts may be terminated by the client either immediately or upon short notice, typically 30 to 120 days. In the case of early termination, these contracts typically require payment to us of expenses to wind down a program and payment of our fees earned to date.

 

Our backlog consists of anticipated service revenue from executed contracts that either have not started but are anticipated to begin in the near future, or are in process and have not been completed. Amounts included in backlog represent anticipated future service revenue, excluding revenues that have been recognized previously, and have been adjusted for foreign currency fluctuations. Once contracted work begins, service revenue is recognized over the life of the contract. We do not include potential reimbursement revenue or investigator fees in our backlog. We cannot assure investors that we will fully realize our entire backlog in the future or at a rate consistent with historic levels.

 

For the years ended December 31, 2007, 2008 and 2009, our service revenue was $120.5 million, $157.0 million and $200.5 million, respectively. We expect that our service revenue will increase as we continue to expand our operations.

 

 

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements are prepared in accordance with GAAP, which requires our management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates. Our significant accounting policies are also discussed in Note 2 to the audited financial statements beginning on page F-1 of this prospectus. The following discussion highlights what we believe to be the critical accounting policies and judgments made in the preparation of these consolidated financial statements.

 

Revenue and Cost Recognition

 

Our service revenue is derived from fee-for-service contracts, some of which are fixed price contracts. We recognize revenues and the related direct costs of fee-for-service contracts in the period in which services are performed. We recognize fixed price contract revenue on a proportional performance basis based on the rate that costs incurred to date bear to estimated total costs at completion. We also recognize revenue under units-based contracts by multiplying units completed by the applicable contract per-unit price. We recognize revenue related to contract modifications when realization is assured and the amounts are reasonably determinable. We make adjustments to contract estimates in the periods in which the facts that require the revisions become known. When the revised estimate indicates a loss, the loss is provided for in the financial statements during that period. Deferred revenue represents amounts billed to clients in excess of revenues recognized.

 

Income Taxes

 

We account for income taxes using the asset and liability approach, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. This approach also requires that deferred tax assets be reduced by a

valuation allowance if it is more likely than not that some portion or the entire deferred tax asset will not be realized. We evaluate whether our deferred tax assets are realizable on an ongoing basis by assessing the valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income might affect the ultimate realization of the net deferred tax assets.

 

Effective January 1, 2007, we adopted Financial Accounting Standards Board, or FASB, guidance related to accounting for uncertainty in income taxes. This authoritative interpretation clarified and standardized the manner by which companies are required to account for uncertain income tax positions. Under this guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount of the accrual for which an exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that we believe is more likely than not to be realized upon ultimate settlement of the position.

 

Our provision for income taxes and the determination of the resulting deferred tax assets and liabilities involve a significant amount of our management’s judgment. Management’s judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We operate within federal, state and international taxing jurisdictions and we are subject to audit in those jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve.

 

Stock-Based Compensation

 

FASB guidance requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values as of the date of grant. This guidance requires that an entity measure the cost of equity-based service awards based on the grant-date fair value of the award and then recognize the cost of the award over the vesting period during which the employee is required to provide services to earn the award.

 

We estimated the weighted-average fair value of the options granted during the year ended December 31, 2007, 2008 and 2009 to be $1.70, $1.96 and $0.87 per share, respectively, and the weighted-average fair value of options granted during the six months ended June 30, 2009 and 2010 to be $0.86 and $1.78 per share, respectively, using the Black-Scholes option-pricing model with the following assumptions, which are based upon our history or industry comparative information:

 

 

Prior to August 30, 2007, our common stock was not publicly traded, and the expected volatility was calculated as of each grant date based on an alternative method, or calculated value. As of August 30, 2007, our common stock and warrants to purchase our common stock were listed on the Alternative Investment Market of the London Stock Exchange, or AIM, although we continued to utilize the calculated value for expected volatility because a sufficient level of history as a publicly traded company was not available.

 

In September and October 2009, in anticipation of a potential listing in the United States, we delisted our common stock and warrants from AIM, respectively, and our common stock and warrants are no longer publicly traded. Accordingly, we will continue to use the calculated value in connection with our stock-based awards as long as our stock is not listed on a national securities exchange. We have identified similar public entities for which share price information is available, and we have considered the historical volatility of these entities’ share prices in determining our estimated expected volatility. We used the average volatility of these guideline companies over a

six-year period, consistent with the expected term calculated pursuant to FASB guidance. From August 30, 2007 through the September 2009 AIM delisting date, we utilized our quoted stock price on the AIM as the sole determinant of the fair value of our common stock. Subsequent to the AIM delisting date, we estimate the fair value of our common stock using the market and income valuation approaches, with the assistance of a valuation consultant.

 

For the years ended December 31, 2007, 2008 and 2009 and the six months ended June 30, 2009 and 2010, stock-based compensation expense amounted to approximately $212,000, $569,000, $597,000, $309,000 and $294,000, respectively. We recognize the compensation expense of such stock-based service awards on a straight-line basis. Total compensation cost of options granted but not yet vested as of June 30, 2010 was $327,000, net of estimated forfeitures, which is expected to be recognized over the weighted average remaining vesting period of 1.7 years.

 

Valuation of Long-lived Assets

 

Intangible assets consist primarily of non-compete agreements, customer contracts and lists, brand names and goodwill. The majority of the intangible asset balances consist of intangible assets acquired from our European acquisitions in 2008 and the Paramax acquisition in 2009. We amortize finite-lived intangible assets on a straight-line basis over the following periods: Customer lists—three to five years, brand names—two years, and non-compete agreements—three to six years. Goodwill represents the excess of the cost over the fair value of net assets acquired in a business combination. If we determine that the carrying value of definite lived long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment, we perform an undiscounted cash flow analysis to determine if impairment exists. If impairment exists, we measure the impairment based on the difference between the asset’s carrying amount and its fair value. Goodwill is tested for impairment on an annual basis as of October 1 of each year and more frequently if an event occurs or circumstances change that would more likely than not reduce our fair value below the carrying value. If our fair value is less than the carrying value, goodwill may be impaired, in which case we write it down to the estimated fair market value, if necessary.

 

Results of Operations

 

Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009

 

Revenues. Service revenue increased by $28.7 million, or 30.6%, to $122.4 million for the six months ended June 30, 2010 from $93.7 million for the six months ended June 30, 2009 as we generated additional business from existing and new clients. The majority of the increase is related to the continued build from existing contracts with several biopharmaceutical companies that use our integrated programs. Service revenue from integrated programs for the six months ended June 30, 2010 grew 38.0% over the comparable prior period, and accounted for 65.0% of our total service revenue and accounted for approximately 76.0% of our revenue growth for the six months ended June 30, 2010 over the prior year period. The remaining 24.0% of our revenue growth for the six months ended June 30, 2010 over the prior year period was the result of new project awards and growth in our hybrid and traditional project-based offerings from our clients worldwide.

 

Reimbursement revenue and offsetting reimbursable out-of-pocket costs fluctuate from period to period due primarily to the level of pass-through expenses in a particular period. Reimbursement revenue and reimbursable out-of-pocket costs increased by $4.6 million, or 41.7%, to $15.5 million during the six months ended June 30, 2010 from $10.9 million during the six months ended June 30, 2009. The increase is due primarily to an increase in the number of programs for which we provide our various services.

 

Direct Costs. Direct costs increased by $20.6 million, or 30.2%, to $88.7 million for the six months ended June 30, 2010 as compared to $68.2 million for the six months ended June 30, 2009. As a percentage of service revenue, direct costs decreased from 72.7% to 72.5% between periods. Although the increase in direct costs is directly correlated with the increase in revenues as described above, the improvement in direct costs as a percentage of service revenue was the result of increased labor efficiencies that we have continued to implement.

 

Selling, general and administrative expenses. SG&A increased by $4.6 million, or 21.7%, to $25.7 million for the six months ended June 30, 2010, from $21.1 million for the six months ended June 30, 2009. As a percentage of

service revenue, however, SG&A decreased from 22.5% to 21.0% between periods. The overall increase in SG&A was primarily the result of our investment in infrastructure related to our European acquisitions and the Paramax acquisition and an increase in the number of corporate personnel to support our expanded operations. Employee-related costs, including new salaries, health benefits and payroll taxes, increased to $15.6 million for the six months ended June 30, 2010 as compared to $12.3 million for the six months ended June 30, 2009. We also incurred an increase of $1.0 million in professional fees, office expenses and license fees compared to the six months ended June 30, 2009, and an increase in rent and travel expense to $3.1 million for the six months ended June 30, 2010 as compared to $2.7 million for the six months ended June 30, 2009, as a result of our expanded global operations.

 

Depreciation and amortization expense. Depreciation and amortization expense increased by $531,000, or 31.8%, to $2.2 million for the six months ended June 30, 2010, as compared to $1.7 million for the six months ended June 30, 2009. The increase was due primarily to an increase in our depreciable asset base and the amortization of intangible assets related to the Paramax acquisition.

 

Income from operations. As a result of the revenue and expense increases described above and our leverage of fixed costs across our larger revenue base, our income from operations increased by $3.0 million, or 108.5%, to $5.8 million for the six months ended June 30, 2010 as compared to $2.8 million for the six months ended June 30, 2009.

 

Interest expense. Interest expense increased by $135,000, or 44.3%, to $438,000 for the six months ended June 30, 2010, as compared to $304,000 for the six months ended June 30, 2009. The increase was due to an increase in borrowings on our line of credit.

 

Interest income. Interest income from our interest-bearing cash balances decreased by $163,000, or 96.9%, to $5,000 for the six months ended June 30, 2010, as compared to interest income of $168,000 during the six months ended June 30, 2009. The decrease in interest income during the six months ended June 30, 2010 was due to both fluctuations in and a decrease in the level of investable cash on hand throughout the period.

 

Other income. We recorded other income of $37,000 during the six months ended June 30, 2010 as a result of favorable foreign currency fluctuations impacting our Latin American operations, as compared to other expense of $167,000 from such currency fluctuations during the six months ended June 30, 2009.

 

Provision for income taxes. The provision for income taxes for the six months ended June 30, 2010 increased by $2.5 million, to $4.0 million, as compared to a provision of $1.5 million for the six months ended June 30, 2009. The increase in the provision was due to an increase in taxable income in the United States during the period, as well as an increase in our overall effective tax rate. Our effective tax rate increased as we are not recording a tax benefit for certain net operating losses generated in our foreign subsidiaries, as we may not realize the tax benefit of those operating losses.

 

Net income. As a result of the factors discussed above, we reported net income of $1.5 million, or $0.04 per basic and diluted share, for the six months ended June 30, 2010, as compared to net income of $989,000, or $0.03 per basic and diluted share, for the six months ended June 30, 2009.

 

Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008

 

Revenues. Service revenue increased by $43.5 million, or 27.7%, to $200.5 million for 2009 from $157.0 million for 2008 as we generated additional business from existing and new clients. The $43.5 million increase in revenue was related to significant new contracts and the continued growth of existing contracts, including growth in the revenue attributable to our integrated solutions of $22.1 million or 50.8% of the increase in service revenue, and $21.4 million, or 49.2% of the increase in service revenue, from the European acquisitions and the Paramax acquisition. Service revenue from our integrated solutions for the year ended December 31, 2009 grew 24.7% over the comparable prior period, and accounted for $123.6 million, or 61.6%, of our total service revenue for the year ended December 31, 2009, as compared to growth in revenue from our integrated solutions of 16.1% for the period ended December 31, 2008 over the comparable prior period, which accounted for $99.1 million, or 63.2%, of total service revenue for the year ended December 31, 2008.

Reimbursement revenue and reimbursable out-of-pocket costs increased by $5.6 million, or 31.0%, to $23.7 million in 2009 from $18.1 million in 2008. The increase was due primarily to an increase in the number of programs for which we provide our various services.

 

Direct Costs. Direct costs increased by $27.5 million, or 23.4%, to $145.2 million for 2009, as compared to $117.7 million for 2008. As a percentage of service revenue, direct costs decreased from 75.0% to 72.4% between years. Although the increase in direct costs was directly correlated with the increase in revenues, the improvement in direct costs as a percentage of service revenue was the result of increased labor efficiencies.

 

Selling, general and administrative expenses. SG&A increased by $13.5 million, or 43.2%, to $44.8 million from $31.3 million for 2008. As a percentage of service revenue, SG&A increased from 19.9% to 22.3% between years. Growth in SG&A expenditures outpaced revenue growth primarily as a result of our investment in infrastructure related to our European acquisitions and the Paramax acquisition, which included an increase in the number of corporate personnel to support our expanded operations. Employee-related costs, such as new salaries, health benefits and payroll taxes, increased to $25.9 million for the year ended December 31, 2009 as compared to $18.8 million for the year ended December 31, 2008. We also incurred a $1.9 million increase in rent and travel expense to $5.4 million for the year ended December 31, 2009, as compared to $3.5 million for the year ended December 31, 2008, as a result of expanded international operations.

 

Depreciation and amortization expense. Depreciation and amortization expense increased by $2.0 million, or 112.7%, to $3.7 million for 2009, as compared to $1.8 million for 2008. The increase was due primarily to the amortization of intangibles related to the European acquisitions and the Paramax acquisition.

 

Income from operations. As a result of the revenue and expense changes described above and our additional leveraging of fixed costs across a larger revenue base, our income from operations increased by $523,000, or 8.4%, to $6.7 million for 2009, as compared to $6.2 million for 2008.

 

Interest expense. Interest expense increased by $422,000, or 186.4%, to $650,000 for 2009, as compared to $227,000 for 2008. The increase was due to the interest expense incurred on the higher average outstanding balance on our line of credit.

 

Interest income. Interest income increased by $246,000, or 84%, to $539,000 during the year ended December 31, 2009 from $293,000 during 2008. The increase was due to an increase in the level of our interest-bearing cash balances during 2009 as compared to 2008.

 

Other expense. We recorded other expense of $452,000 during the year ended December 31, 2009 due to adverse foreign currency fluctuations impacting our Latin American operations in Brazil and Colombia.

 

Provision for income taxes. The provision for income taxes for 2009 increased by $1.1 million to $3.6 million, as compared to $2.5 million for 2008. The increase in the provision was due to both an increase in taxable income in the United States during the year, as well as an increase in the overall effective tax rate. The effective tax rate increased as we are not recording a tax benefit for net operating losses generated in certain foreign subsidiaries, since we may not realize the tax benefit of these operating losses.

 

Net income. As a result of the factors discussed above, our net income for 2009 decreased to $2.6 million, or $0.07 per basic and diluted share, from net income of $3.7 million, or $0.11 per basic and diluted share, for 2008.

 

Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

 

Revenues. Service revenue increased by $36.5 million, or 30.3%, to $157.0 million for 2008 from $120.5 million for 2007 as we generated additional business from existing and new clients. The majority of the increase was related to significant new contracts and the continued growth of existing contracts with several pharmaceutical companies for which we provide our integrated solutions. Service revenue from providing our integrated solutions for the year ended December 31, 2008 grew 56.3% over the comparable prior period, and accounted for $99.1 million or 63.2% of our total service revenue for the year ended December 31, 2008, as compared to growth in revenue from our integrated solutions of 181.1% for the period ended December 31, 2007 over the comparable prior period, which accounted for $63.4 million or 53.2% of total service revenue for the year ended December 31, 2007.

Reimbursement revenue and reimbursable out-of-pocket costs increased by $4.2 million, or 29.9%, to $18.1 million in 2008 from $13.9 million in 2007. The increase was due primarily to an increase in the number of programs for which we provided our various services.

 

Direct Costs. Direct costs increased by $30.0 million, or 34.3%, to $117.7 million for 2008, as compared to $87.7 million for 2007. As a percentage of service revenue, direct costs increased from 72.8% to 75.0% between years. The increase in direct costs was directly correlated with the increase in revenues, and the increase in direct costs as a percentage of service revenue was the result of providing service offerings that tend to increase direct costs as a percentage of revenue.

 

Selling, general and administrative expenses. SG&A increased by $4.5 million, or 16.8%, to $31.3 million for 2008, from $26.8 million for 2007 to support the increase in revenues. As a percentage of service revenue, SG&A decreased from 22.2% to 19.9% between years. The decrease in SG&A as a percentage of revenue was attributable to our ability to leverage fixed infrastructure costs and contain semi-variable overhead costs at a slower rate of growth than revenues. The primary reason for the increase in overall SG&A costs was an increase in the number of corporate personnel, which resulted in increases in employee-related costs, such as new salaries, as well as increases in salaries for existing employees, bonuses, commissions, health benefits and payroll taxes, to $18.8 million for the year ended December 31, 2008 as compared to $16.2 million for the year ended December 31, 2007. We also incurred a $877,000 increase in rent and travel expense to $3.5 million for the year ended December 31, 2008, as compared to $2.6 million for the year ended December 31, 2007, as a result of increased international operations. Our expenditures for insurance premiums, licenses and professional fees decreased to $3.1 million for the year ended December 31, 2008, from $3.4 million for the year ended December 31, 2007.

 

Depreciation and amortization expense. Depreciation and amortization expense increased by $607,000, or 53.0%, to $1.8 million for 2008, as compared to $1.1 million for 2007. The increase was due primarily to an increase in our depreciable asset base.

 

Income from operations. As a result of growth in revenues in excess of the corresponding growth in direct costs and SG&A, our income from operations increased by $1.3 million, or 27.5%, to $6.2 million for 2008, as compared to $4.9 million for 2007.

 

Interest expense. Interest expense decreased by $5.8 million, or 96.2%, to $227,000 for 2008, as compared to $6.0 million for 2007. During the year ended December 31, 2007, we recorded a non-cash charge of $4.7 million to adjust our put warrant liability to its market value during the period. The put warrants were exchanged for a combination of common stock and cash in connection with our merger with Cross Shore on August 30, 2007, and therefore there was no corresponding expense for the put warrants during the year ended December 31, 2008.

 

Provision for income taxes. The provision for income taxes for 2008 increased by $1.0 million to $2.5 million, as compared to $1.5 million for 2007. The increased provision is reflective of our increased income before provision for income taxes. Our effective tax rate for 2007 was significantly higher than in prior year, as the $4.7 million non-cash interest charge recorded related to the put warrant liability discussed above was non-deductible for income tax purposes.

 

Net income. As a result of the factors discussed above, net income for 2008 increased to $3.7 million, or $0.11 per basic and diluted share, from a net loss of $2.4 million, or $0.19 per basic and diluted share, for 2007.

 

Liquidity and Capital Resources

 

Cash Flows

 

Operating Activities

 

During the six months ended June 30, 2009 and 2010, we used cash of $8.8 million and generated cash of $893,000, respectively, in our operating activities. We generated net income of $1.0 million and $1.5 million for the six months ended June 30, 2009 and 2010, respectively. Increases in our accounts receivable resulted in net cash outflows of $7.6 million and $3.4 million during the six months ended June 30, 2009 and 2010, respectively. In addition, changes in our prepaid expenses, accounts payable, accrued expenses, other liabilities, customer

deposits and deferred revenue resulted in net cash outflows of $3.9 million during the six months ended June 30, 2009 and net cash inflows of $373,000 during the six months ended June 30, 2010. The net income for the periods also includes non-cash charges for depreciation, amortization, stock-based compensation and the deferred tax provision totaling $1.7 million and $2.5 million during the six months ended June 30, 2009 and 2010, respectively.

 

During the year ended December 31, 2007, we generated $1.6 million in cash from operating activities. During the years ended December 31, 2008 and 2009, we used cash of $2.8 million and $744,000, respectively, in our operating activities. For the year ended December 31, 2007, we had a net loss of $2.4 million and we generated net income of $3.7 million and $2.6 million for the years ended December 31, 2008 and 2009, respectively. Increases in our accounts receivable resulted in net cash outflows of $10.0 million, $4.9 million and $10.9 million during the years ended December 31, 2007, 2008 and 2009, respectively. In addition, changes in our prepaid expenses, accounts payable, accrued expenses, other liabilities, customer deposits and deferred revenue resulted in net cash inflows of $8.0 million for the year ended December 31, 2007, net cash outflows of $3.4 million for the year ended December 31, 2008 and net cash inflows of $3.7 million for the year ended December 31, 2009. The net income (loss) for the periods also includes non-cash charges for depreciation, amortization, stock-based compensation and the deferred tax provision totaling $1.3 million, $1.8 million and $3.9 million during the years ended December 31, 2007, 2008 and 2009, respectively. During the year ended December 31, 2007, our net loss also included the $4.7 million non-cash interest charge related to our put warrant liability.

 

Investing Activities

 

During the six months ended June 30, 2009, we used cash of $1.2 million in our investing activities, consisting of $1.6 million used in connection with the European acquisitions and $1.3 million used for the purchase of equipment, offset by a change of $1.6 million in our restricted cash balances. For the six months ended June 30, 2010, we used cash of $1.0 million in our investing activities, consisting of $1.1 million used for the purchase of equipment, offset by a change of $53,000 in our restricted cash balances.

 

During the years ended December 31, 2007, 2008 and 2009, we used cash of $2.0 million, $8.7 million and $3.6 million, respectively, in our investing activities. During the years ended December 31, 2008 and 2009, we used an aggregate of $7.9 million and $3.0 million, respectively, for the European and Paramax acquisitions. For the years ended December 31, 2007, 2008 and 2009, we used $2.2 million, $1.3 million and $2.7 million, respectively, for the purchase of equipment. These uses were offset by changes in our restricted cash balances of $146,000, $420,000 and $2.1 million, respectively, during these years.

 

Financing Activities

 

During the six months ended June 30, 2009 and 2010, we generated cash of $4.5 million and $1.0 million, respectively, from our financing activities. During these periods, we had net borrowings of $4.9 million and $1.3 million, respectively, under our line of credit, we made principal payments on our capital lease obligations of $350,000 and $187,000, respectively, and we made $105,000 in payments on deferred equity financing costs during the six months ended June 30, 2010 in connection with the contemplated public offering of our common stock.

 

During the years ended December 31, 2007, 2008 and 2009, we generated cash of $11.3 million, $6.9 million and $1.3 million, respectively, from our financing activities. During the year ended December 31, 2007, we received cash proceeds of $51.4 million, net of fees, from the merger with Old RPS. In connection with the merger, we also paid $20.0 million in cash distributions to our stockholders and $2.6 million to former holders of preferred stock for accrued dividends, and we used $3.8 million to repurchase shares of common stock from former stockholders of Cross Shore. We also used proceeds from the merger with Old RPS to repay an aggregate of $13.6 million of indebtedness, including on our line of credit, during the year ended December 31, 2007. During the years ended December 31, 2008 and 2009, we had net borrowings of $7.5 million and $2.1 million, respectively, under our line of credit. During the years ended December 31, 2007, 2008 and 2009, we also repaid $194,000, $605,000 and $750,000, respectively, in principal on our capital lease obligations.

Sources of Liquidity

 

We manage our liquidity primarily through cash flows from operations and borrowings under our lines of credit. We monitor our accounts receivable balances to ensure sufficient operating cash flow. In the United States, we manage our cash function using collection and cash management accounts. Daily collections of our accounts receivable are swept into our operating account, with excess funds invested in high-quality money market funds of short duration. Disbursements presented for payment are funded daily out of the money market accounts. Outside of the United States, our cash balances are maintained at levels necessary to support operating activities. As in the United States, cash balances for our foreign subsidiaries are generally maintained in the functional currency of the applicable subsidiary.

 

We maintain a working capital line of credit with a bank, with a maximum potential borrowing capacity of $30.0 million, depending on our borrowing base of eligible accounts receivable. At June 30, 2010 and December 31, 2009, we had $10.9 million and $9.6 million, respectively, in outstanding borrowings under this facility and $18.7 million and $13.5 million, respectively, in available borrowings under this facility. Interest on outstanding borrowings under our facility accrues at an annual rate equal to the Federal Funds open rate plus 2%, which was 4.75% at June 30, 2010. Our credit facility contains various financial and other covenants, including a prohibition on paying dividends or distributions other than dividends or distributions payable in our stock. At June 30, 2010 and December 31, 2009, we were in compliance with these covenants. Our credit facility is secured by all of our assets.

 

At June 30, 2010, we had available cash and cash equivalent balances of $4.3 million and working capital of $23.1 million, which we believe will provide sufficient liquidity for at least the next twelve months.

 

Contractual Obligations

 

Our industry is generally not capital-intensive. Our principal operating cash needs are for payment of salaries, office rents, and travel expenditures. From time to time we may also make capital expenditures for facilities, information system enhancements and potential acquisitions to support our expansion.

 

Set forth below is information concerning our known contractual obligations as of December 31, 2009, consisting only of obligations under operating and capital leases:

 

 

Off-Balance Sheet Arrangements

 

We are not a party to any off-balance sheet arrangements as defined by Regulation S-K Item 303(a)(4)(ii).

 

Inflation

 

A portion of our revenues are earned under long-term contracts having terms in excess of one year, which generally include an inflation or cost of living adjustment for the portion of services to be performed more than one year from the contract date. As a result, we believe that the effects of inflation generally do not have a material effect on our operations or financial condition.

 

Recently Issued Accounting Standards

 

We adopted new accounting guidance on fair value measurements effective January 1, 2008, for our financial assets and liabilities. In addition, effective January 1, 2009, we adopted this guidance as it relates to nonfinancial assets

and liabilities that are not recognized or disclosed at fair value in the financial statements on at least an annual basis. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability, referred to as the exit price, in an orderly transaction between market participants at the measurement date. The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value of financial assets, we primarily use prices and other relevant information generated by market transactions involving identical or comparable assets, called the market approach. As of June 30, 2010 and December 31, 2009, the fair value of all of our financial assets are based on level one observable inputs. The provisions of this guidance will be applied at such time a fair value measurement of a nonfinancial asset or liability is required, which may result in a fair value that is materially different than would have been calculated prior to the adoption of this guidance. The implementation of this fair value guidance has not had an impact on our consolidated financial statements.

 

In December 2007, the FASB issued new guidance related to business combinations. This guidance retains the fundamental requirements of existing guidance that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. This guidance defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date the acquirer achieves control. This guidance was effective beginning January 1, 2009 and was followed in connection with the Paramax acquisition. The impact of this guidance will depend upon the nature and terms of business combinations that we may consummate in the future.

 

In June 2008, the FASB issued new guidance related to assessing whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock for the purposes of determining whether such equity-linked financial instrument (or embedded feature) is subject to derivative accounting. We adopted this new guidance effective January 1, 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

In May 2009, the FASB issued new guidance on subsequent events. The standard provides guidance on management’s assessment of subsequent events and incorporates this guidance into accounting literature. We adopted this guidance commencing with our June 30, 2009 consolidated financial statements. The implementation of this standard did not have a material impact on our consolidated financial statements.

 

In April 2009, the FASB issued a staff position requiring fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. We adopted this guidance commencing with our June 30, 2009 consolidated financial statements. The implementation of this standard did not have a material impact on our consolidated financial statements.

 

In June 2009, FASB Accounting Standards Codification, or Codification, was issued, effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification supersedes literature of the FASB, Emerging Issues Task Force and other sources. The Codification did not change GAAP. The implementation of this standard did not have a material impact on our consolidated financial statements.

 

Quantitative and Qualitative Disclosures about Market Risk

 

Foreign currency risks. Since we operate in countries other than the United States, we are exposed to various foreign currency risks. The majority of the services we provide to our clients result in revenues that are denominated in U.S. dollars. However, at times, a portion of the work is performed by one of our foreign subsidiaries under a contract specifying that costs are to be incurred in the local denomination of that subsidiary. When expenses are incurred in a denomination other than U.S. dollars, our net earnings can be affected by fluctuations in exchange rates. In addition, any fluctuation in the exchange rates of the net assets of our foreign subsidiaries denominated in local currencies would be reflected in translation gains or losses, which are accounted for in other comprehensive income in our statements of redeemable convertible preferred stock and stockholders’ equity. We do not believe that a change of 10% in the applicable foreign currency exchange rates as of and during the six months ended June 30, 2009 and 2010 or as of and for the years ended December 31, 2007, 2008 or 2009 would have had a material impact on our financial position or results of operations as of those dates and during those periods.

 

Approximately 16% of our service revenue for the six months ended June 30, 2010 and 2009, and approximately 5%, 6% and 17% of our service revenue for the years ended December 31, 2007, 2008 and 2009, respectively, were derived from our operations outside of the United States. We currently do not engage in derivative or hedging activities related to our potential foreign exchange exposures. However, as we contemplate future anticipated foreign currency working capital requirements, capital asset acquisitions of our foreign operations, and our continued international expansion, we will consider maintaining a portion of our cash and cash equivalents denominated in foreign currencies sufficient to satisfy these possible future requirements. We will also evaluate the need and cost of financial instruments to hedge currency exposures on an ongoing basis and may hedge against exchange rate exposure in the future.

 

Interest rate risk. The primary objective of our investment activity is to preserve principal, provide liquidity and maximize income without increasing risk. Our investments have limited exposure to market risk. To minimize this risk, we maintain our portfolio of cash and cash equivalents in a variety of investments, consisting primarily of bank deposits and money market funds. The interest rates are variable and fluctuate with current market conditions. The risk associated with fluctuating interest rates is limited to this investment portfolio and the variable interest rate under our line of credit, and we do not believe that a 100 basis point change in interest rates would have had a material impact on our interest income during the years ended December 31, 2007, 2008 and 2009 or the six months ended June 30, 2009 and 2010. We do not believe that a 100 basis point change in the variable interest rate on our line of credit would have had a material impact on our interest expense during the years ended December 31, 2007, 2008 and 2009 or the six months ended June 30, 2009 and 2010.

 

Business Overview

 

We are a global, next-generation clinical research organization, or CRO, providing a broad range of clinical development solutions and services to biotechnology and pharmaceutical companies. Our services, which we provide across a broad range of therapeutic areas, include clinical trial project management, site identification, management and monitoring, patient enrollment, data collection and management, statistical analysis and report writing, quality assurance, regulatory and medical affairs, and pharmacovigilance services. These services support the design, initiation and management of our clients’ clinical trials programs that are required to obtain regulatory approval to market biopharmaceutical products.

 

We offer a comprehensive suite of outsourced solutions covering the entire range of our clients’ biopharmaceutical clinical development activity. Our innovative business model allows us to use the existing processes and systems of our clients to improve quality, increase the speed of product development and reduce overall development costs, while allowing the client to maintain control of their development portfolio. We provide our services both as integrated solutions embedded within a client’s internal clinical development operations, with an ability to work across multiple clinical trials, product candidates and clinical development functions, and on a more traditional project basis. We also offer hybrid solutions combining our integrated and project-based offerings. Our flexible model enables us to tailor our services to meet the differing needs of small, medium and large biopharmaceutical companies.

 

We believe that our integrated solutions address shortcomings of the traditional CRO model by providing clients with more control of the strategic aspects of their clinical trials, greater integration of in-house capabilities with outsourced resources, reduced costs and improved productivity and efficiency. By focusing on creating strategic relationships with our clients for their entire pipeline of drugs in development, we attempt to create effective partnerships with our clients that enhance long-term revenue opportunities and minimize dependence on individual trials.

 

Our business model focuses on integrating our clinical development solutions within the internal clinical development operations of our clients, and in doing so, we address both the outsourced and in-house components of our clients’ Phase II through Phase IV research and development expenditures. We believe that the combination of our clinical expertise and our extensive personnel resourcing capabilities enables us to achieve cost savings, improvements in the quality of clinical trial execution and accelerated clinical timelines on behalf of our clients. We have a professional staff of over 2,300 individuals averaging over 12 years of experience in the biotechnology and pharmaceutical industries, and we maintain a proprietary human resources database that includes approximately 188,000 additional clinical professionals around the world.

 

We offer our services on a global basis, with international operations in North America, Latin America, Europe and Asia. Our diverse client mix includes 14 of the 15 largest pharmaceutical companies in the world as ranked by 2009 global revenues, and our annual service revenue has increased from $62.8 million in 2005 to $200.5 million in 2009, a compounded annual growth rate of 33.7%. In the six months ended June 30, 2010, we generated $122.4 million of service revenue, a 30.6% increase over service revenue of $93.7 million for the first six months of 2009.

 

Industry Background and Outsourcing Drivers

 

Discovering and developing new drugs is an extremely expensive, complex, high-risk and time-consuming process. According to Frost and Sullivan, a market research firm, the average development cost of a new drug in the United States from conception stage to marketing approval from the U.S. Food and Drug Administration, or FDA, increased from $138 million in 1975 to approximately $800 million by 2000 and was estimated to be over $1.3 billion by the end of 2008. The Pharmaceutical Research and Manufacturers of America estimates that it typically takes between 10 and 15 years to develop and obtain approval to market a new prescription drug in the United States.

 

The rising cost of drug development and stringent regulatory guidelines have been major drivers for outsourcing of drug development by biopharmaceutical companies. These companies outsource portions of their drug

development needs to CROs in order to manage the product development process more efficiently and cost effectively and to accelerate time to market. CROs typically provide a variety of clinical drug development services, including protocol design and management of Phase I through Phase IV clinical trials, data management, laboratory testing, medical and safety reviews and statistical analysis. These services are intended to generate high-quality and timely data in support of applications for regulatory approval of new drugs and reformulations of existing drugs, as well as to support new and existing marketing claims. By outsourcing drug development activities, biopharmaceutical companies can reduce their fixed costs and their investments in clinical infrastructure and focus their resources on their core competencies, such as sales and marketing and drug discovery.

 

We and other CROs derive revenues from the research and development expenditures of biopharmaceutical companies, which have increased substantially in recent years. We target Phase II through Phase IV clinical development programs, which encompass late-stage and post-marketing clinical trials of biopharmaceutical products. According to Frost and Sullivan, research and development spending by the global pharmaceutical industry is expected to grow from $109 billion in 2009 to $169 billion in 2015, a compound annual growth rate of 7.7%. Spending in Phase II through IV in the United States is expected to grow as a percentage of total research and development spending from 66% in 2009 to 69% by 2015. Additionally, according to Frost & Sullivan, CRO revenues, as a percentage of global research and development spending, is expected to be 19.6% in 2010.

 

Traditional project-based CROs target this 19.6% of the research and development spending, the outsourced portion of this market. By contrast, we seek to address a significantly larger portion of the research and development spending market because we integrate our clinical development solutions into various levels of our clients’ operations, allowing us to target both the outsourced and in-house components of our clients’ Phase II through IV clinical expenditures.

 

The growth in total research and development spending is expected to be driven by increased competition, product innovation, advances in research and clinical analysis and the desire to fill the pipelines of many large biopharmaceutical companies, which are facing patent expirations of a significant portion of their drug portfolios. Continued investment in research and development has resulted in growing pipelines of drugs in development, leading to an increase in demand for clinical trials.

 

In addition to the overall increase in research and development spending, we believe that there are a number of trends and challenges facing biopharmaceutical companies that will increase their reliance on outsourced services, including:

 

 

In order to address these challenges and to better meet their needs, we believe that biopharmaceutical companies are increasingly turning to innovative solutions, such as our integrated service offerings, as an alternative to the exclusive use of traditional, project-based CRO outsourcing.

 

Our Solution

 

We have created a next-generation CRO that addresses both the outsourced and in-house components for Phase II through Phase IV clinical development activities. Our model combines innovative integrated services with traditional, project-based CRO services, as well as hybrid solutions. This flexible approach enables us to tailor our service offerings to meet the differing needs of small, mid-sized and large biopharmaceutical companies.

 

 

We believe that our approach, combining innovative integrated services with traditional project-based CRO services, results in a number of advantages that differentiate us within our industry, including:

 

 

 

Our Growth Strategy

 

Our corporate mission is to help our clients maximize the return on their research and development investments and to accelerate the delivery of safe and effective therapeutics to patients. The key parts of our growth strategy that enable this mission and expand our business include the following initiatives:

 

 

 

The Drug Development Process

 

Before a new prescription drug or biologic product reaches the commercialization stage, it must undergo extensive clinical testing and, eventually, regulatory review for verification that the product is safe and efficacious for its intended use. Regulatory requirements are a significant factor in the time and cost of drug development and contribute to the small number of approved products that reach the market. The Pharmaceutical Research and Manufacturers of America estimates that for every 5,000 to 10,000 potential new molecular compounds researched, only five will be evaluated through clinical trials and only one will be approved for use in humans.

 

The drug development process consists of two stages: research (comprising pre-discovery, discovery and pre-clinical) and clinical development. In the research stage, targets are identified, and candidate drugs or biologics are developed and tested in a test tube and in animals generally to assess and optimize potential use in humans. The research stage generally occurs over a three- to six-year period. After successful preclinical testing, the new drug can be advanced to the clinical development stage, which involves testing in humans. The FDA and equivalent agencies outside the United States regulate both the research and clinical phases of the drug development cycle.

 

Prior to commencing human clinical trials in the United States, a biopharmaceutical company must file with the FDA an investigational new drug application, or IND, containing details for at least one study protocol and outlines of other planned studies. The biopharmaceutical company must provide available manufacturing data, pre-clinical data, information about any use of the drug or biologic in humans for other purposes, and a detailed plan for the proposed clinical trials. The design of these clinical trials, also referred to as the study protocol, is essential to the success of the drug development effort. The protocols must correctly anticipate the nature of the data to be generated and results that the FDA will require before approving the product. If the FDA does not comment on an IND within 30 days after filing, human clinical trials may begin.

 

Before a new product is ready for submission for approval by regulatory authorities, it must undergo a rigorous clinical trial process. The clinical trial process must be conducted in accordance with regulations promulgated by the FDA or the appropriate foreign regulatory body, which require the product to be tested and studied in a setting analogous to real-world use of the drug. Human clinical trials seek to establish the safety and efficacy of the product in the proposed class of patients. The clinical trial process generally consists of the following interrelated phases, which may overlap:

 

 

After the completion of all clinical phases, a biopharmaceutical company may submit to the FDA a new drug application, or NDA, or a biologic license application, or BLA. Equivalent regulatory agencies outside of the United States follow a similar procedure by requiring an equivalent application for a new drug or biologic. The biopharmaceutical company submits an NDA, BLA or equivalent application for a drug or a biologic, requesting that the product be approved for marketing. The NDA, BLA or equivalent application includes, among other things, the clinical trial data generated and analyzed during the clinical development process.

 

 

The FDA’s regulatory requirements have served as the model for much of the regulation of new drug development worldwide, and regulatory requirements similar to those of the FDA exist in the other countries in which we operate. Over the past two decades, the FDA and corresponding regulatory agencies of the European Union and Japan have developed harmonized standards for pre-clinical and clinical studies and the format and content of applications for new drug approvals. Data from multinational studies adhering to international standards of clinical practice are now generally acceptable to the FDA and Canadian, European and Japanese regulators, and a common format drug and biologic marketing authorization application is mandatory in Europe and Japan and highly recommended by the FDA and by Canadian regulatory authorities.

 

Our Clinical Development Services

 

We provide our clients with a range of clinical development services, primarily from Phase II to Phase IV in the drug development cycle. Our employees have drug development experience across a number of therapeutic areas, including cardiovascular, gastroenterology, hematology, immunology, infectious diseases, metabolic disorders, neurology, oncology, ophthalmology, orthopedics, pulmonology, rheumatology and women’s health.

 

We provide the following core Phase II to Phase IV clinical trial management services to our clients:

 

 

 

Although some of our clients choose to contract with us for these services on an individual project basis, we also provide these services in the form of our integrated solutions, a business model we pioneered. In our integrated solutions, we collaborate more closely with the client, across multiple clinical trials and product candidates and often across multiple clinical development functions. While our integrated solutions are primarily targeted at large biopharmaceutical companies, we also offer a wide spectrum of project-based solutions to small and mid-sized biopharmaceutical clients, as well as hybrid solutions combining our integrated and project-based offerings.

 

Our Personnel Resourcing Capabilities

 

In addition to our clinical expertise, we have extensive personnel resourcing capabilities that enable us to rapidly identify and deploy highly experienced professionals to staff our clinical engagements. We have developed and maintain a proprietary database, currently consisting of approximately 188,000 clinical trial professionals throughout the United States, Latin America, Europe and Asia, that we use to recruit clinical development professionals in support of our engagements. This database contains not only general contact information for candidates, but also includes specific candidate job requirements such as travel preferences and salary requirements, work history and current clinical trial experience, as well as specialty and sub-specialty information. To ensure security of the data, our database system has both physical and application security restrictions, as well as role-based access restrictions.

 

Our personnel resourcing division is organized into dedicated teams, each focused on a key functional area within the clinical development field. We are organized into seven specialty recruiting teams: clinical research; biometrics; regulatory affairs, safety and medical writing; physicians; scientific and analytical chemistry; and health outcomes and pharmacoeconomics. Each team is staffed by a marketing recruiter, a project leader, senior recruiters, recruiters and researchers. We refer to our teams, coupled with our proprietary database and our processes, as “resourcing

engines.” Our resourcing engines provide us with the resourcing capabilities to proactively allocate human capital by identifying the expertise needed on each client program and matching those needs with the availability, capacity and expertise of the most appropriate professionals. Our resourcing engines give us the ability to rapidly resource, allocate and redeploy, or re-resource, our highly experienced professional staff, which is essential in providing integrated solutions that enable us to achieve improved quality of trial execution, accelerated clinical development timelines and cost reductions for our clients.

 

Our Clients

 

We provide development services to the biopharmaceutical industry and view our operations and manage our business as one operating segment. Our clients range from the world’s largest pharmaceutical companies and biotechnology companies to small and start-up organizations. Our diverse client mix includes 14 of the 15 largest pharmaceutical companies in the world as ranked by 2009 global revenues.

 

Wyeth, which is now a subsidiary of Pfizer Inc., accounted for $28.4 million, $31.1 million, and $34.2 million, or 23%, 20% and 17%, of our service revenue during the years ended December 31, 2007, 2008 and 2009, respectively, and Pfizer and Wyeth collectively accounted for $19.3 million, or 16%, of our service revenue for the six months ended June 30, 2010. Aggregate service revenue from Pfizer and Wyeth was $7.6 million in the first quarter of 2009, when the acquisition of Wyeth by Pfizer was announced. In the second quarter of 2010, following completion of the acquisition of Wyeth, combined revenue from Pfizer and Wyeth accounted for $9.8 million in service revenue, an increase of 28%. Schering-Plough, which is now a subsidiary of Merck & Co., accounted for $11.1 million, $18.5 million, and $31.0 million, or 9%, 12% and 16%, of our service revenue, respectively, during these years, and Merck and Schering Plough collectively accounted for $17.8 million, or 15%, of our service revenue for the six months ended June 30, 2010. Aggregate service revenue from Merck and Schering-Plough was for $6.5 million in the first quarter of 2009, when the acquisition of Schering-Plough by Merck was announced. In the second quarter of 2010, following completion of the acquisition of Schering-Plough, combined revenue from Merck and Schering-Plough accounted for $8.5 million in service revenue, an increase of 31.4%. Additionally, Johnson & Johnson accounted for $20.0 million, or 17%, of our service revenue during the six months ended June 30, 2010. We provide Pfizer, Merck and Johnson & Johnson with integrated solutions.

 

For the years ended December 31, 2007, 2008 and 2009, approximately 95%, 94% and 83%, respectively, of our service revenue was derived from work performed in the United States. As a result of our recent international acquisitions during 2008 and 2009, we expect that the percentage of our service revenue derived from foreign countries will increase. As of December 31, 2007, 2008 and 2009, approximately 97%, 76% and 65% of our consolidated tangible assets were located in the United States.

 

Backlog

 

Our backlog consists of anticipated service revenue from executed contracts that either have not started but are anticipated to begin in the near future, or are in process and have not been completed. Amounts included in our backlog represent anticipated future service revenue, excluding revenues that have been recognized previously and have been adjusted for foreign currency fluctuations. Once contracted work begins, service revenue is recognized over the life of the contract. We do not include potential reimbursement revenue in our backlog. Our backlog was $183.0 million in anticipated service revenue at June 30, 2010, compared to $231.6 million at December 31, 2009 and $187.2 million at December 31, 2008. Of our backlog as of June 30, 2010, we expect that approximately $61.9 million will be recognized after December 31, 2010. While traditional CROs may use book-to-bill metrics that compare new project awards booked to revenue reported during a particular period as a future indicator of revenue performance, we do not currently believe such metrics to be relevant to our business, based on the contractual structure of our integrated programs.

 

Our backlog as of any date is not necessarily a meaningful predictor of future results because our backlog can be affected by a number of factors, including the size and duration of contracts, many of which are performed over several years. Additionally, contracts are subject to early termination by the client. Clinical trials can be delayed or canceled for many reasons, including unexpected test results, safety concerns, regulatory developments, economic issues, availability of clinical trial material and protocol design matters, all of which could lead to early termination of a contract. Also, the scope of a contract can change significantly during the course of a study. If the scope of a

contract is revised, the adjustment to our backlog occurs when the revised scope is approved by the client. For these and other reasons, we might not fully realize our entire backlog as revenue.

 

Sales and Marketing

 

We use corporate marketing to support the efforts of our centralized business development staff, calling on biopharmaceutical companies. Our sales teams focus on client segments and service areas. In addition, while service area representatives call on particular functional groups within a given client, our key account directors are responsible for managing the relationship and book of business with clients across our portfolio of services.

 

Our business development personnel consult with potential pharmaceutical and biotechnology clients early in the project consideration stage in order to determine their requirements. Along with the appropriate operational, technical or scientific personnel, our business development representatives invest significant time to determine the optimal means to design and execute the potential client’s program requirements. As an example, recommendations we make to a potential client with respect to a drug development study design and implementation are an integral part of our bid proposal process and an important aspect of the integrated services we offer. We believe that our preliminary efforts relating to the evaluation of a proposed clinical protocol and implementation plan enhance the opportunity for accelerated initiation and overall success of the trial.

 

Our global marketing initiatives include integrated, multi-channel campaigns designed to help differentiate and promote our expertise and services. Through trade events, online and print advertising in trade publications, direct communication, newsletters and our website, we provide our perspective on current industry challenges or developments to create an ongoing dialogue with our clients and to promote our industry expertise, quality, technology and innovation. We reinforce key messages and selling points through client presentations, corporate materials, participation in trade events and speaking engagements at industry conferences.

 

We encourage and sponsor the participation of our scientific and technical personnel in a variety of professional endeavors, including speaking and the presentation of papers at national and international professional, scientific and trade meetings and the publication of scientific articles in medical and pharmaceutical journals. Through these presentations and publications, we seek to further our reputation for professional excellence.

 

Competition

 

The CRO industry is highly competitive and fragmented, consisting of hundreds of smaller, limited-service providers and a number of full-service global companies. In the past, the industry experienced some consolidation and a group of large, full-service competitors emerged. Consolidations and acquisitions have continued. These consolidations and other transactions could potentially increase competition in our industry for clients, experienced clinical personnel, geographic markets and acquisition candidates. Additional business combinations by competitors or clients are possible and could have a significant impact on the competitive landscape of the CRO industry.

 

Our significant CRO competitors include Covance Inc., Pharmaceutical Product Development, Inc., Quintiles Transnational Corp., PAREXEL International Corporation, Kendle International Inc., ICON plc, PRA International, i3 Research and Pharmanet Development Group Inc. These and other potential competitors have financial and other resources substantially greater than ours.

 

In addition to competing with a number of other global, full-service companies, services similar to ours are also provided by medium-sized companies, in-house research and development departments of biopharmaceutical companies, universities and teaching hospitals. Newer, smaller entities with specialty focuses, such as those focused on a specific disease or therapeutic area, compete aggressively against larger companies for clients. Increased competition might lead to price and other forms of competition that could adversely affect our operating results.

 

Providers of outsourced drug development services compete on the basis of a number of factors. These factors include:

 

 

 

Although there can be no assurance that we will continue to do so, we believe we compete favorably in these areas.

 

Despite recent consolidation, our industry remains highly fragmented, with several hundred smaller, limited-service providers and a small number of full-service companies with global capabilities. Although there are few barriers to entry for smaller, limited-service providers, there are significant barriers to becoming a global provider offering a broad range of services. These barriers include:

 

 

Intellectual Property

 

We have developed a number of technically derived processes and procedures and other intellectual property, including our proprietary resourcing database, that are intended to maximize the quality, efficiency and effectiveness of our services. Although our intellectual property rights are valuable to our success, we believe that the technical expertise, proprietary know-how, ability and experience of our professional staff are more important and that, overall, these capabilities provide significant benefits to our clients. Where we consider it to be appropriate, we take steps to protect trade secrets and know-how through confidentiality agreements with employees and consultants. If these arrangements are not honored, we might not have adequate remedies for breach. We have no patents, trademarks, licenses or franchises that are material and upon which any of our service offerings are dependent.

 

Government Regulation

 

In the United States, the FDA governs the conduct of clinical trials of drug products in human subjects, the form and content of regulatory applications, including, but not limited to, INDs for human clinical testing and the development, approval, manufacture, safety, labeling, storage, recordkeeping and marketing of drug products. The FDA has similar authority and similar requirements with respect to the clinical testing of biological products. Outside the United States, the European Medicines Agency and other regulatory agencies require that test results submitted to such authorities be based on studies conducted in accordance with the FDA’s GCP regulations.

 

Governmental regulation directly affects our business. Increased regulation leads to more complex clinical trials and an increase in potential business for us. Conversely, a relaxation in the scope of regulatory requirements, such as the introduction of simplified marketing applications for pharmaceutical and biological products, could decrease the business opportunities available to us. Changing levels of business opportunities and government regulation will result in a corresponding change in our direct and indirect costs incurred in providing services. For example, additional legislation or regulation governing the possession, use and dissemination of medical record information and other personal health information might require us to implement new security measures that require substantial expenditures or limit our ability to offer some of our services and products. These regulations might also increase costs by creating new privacy procedures and requirements.

 

In the United States, we must perform our clinical drug and biologic services in compliance with applicable laws, rules and regulations, including GCP regulations, which govern, among other things, the design, conduct,

performance, monitoring, auditing, recording, analysis, and reporting of clinical trials. Before a human clinical trial may begin, the manufacturer or sponsor of the clinical product candidate must file an IND with the FDA, which contains, among other things, the results of preclinical tests, manufacturer information and other analytical data. A separate submission relating to an existing IND must also be made for each successive clinical trial conducted during product development. Each clinical trial must be conducted pursuant to, and in accordance with, an effective IND.

 

In addition, under the GCP regulations, each human clinical trial is subject to the oversight of an institutional review board, which is an independent committee that has the authority to review, approve, monitor and suspend a clinical trial for which the institutional review board has responsibility. The FDA, an institutional review board or a biopharmaceutical company may suspend or terminate a clinical trial at any time on various grounds, including a finding that the study subjects are being exposed to an unacceptable health risk.

 

In order to comply with the GCP and other regulations, either we or our clients must, among other things:

 

 

We must also maintain reports and other related information and documents in compliance with applicable regulatory requirements for each study. These reports, other information and documents may be audited by our clients, the FDA or similar regulatory authorities.

 

A failure to comply with applicable regulations relating to the conduct of clinical trials or the preparation of marketing applications could lead to a variety of sanctions. For example, violations of the GCP regulations could result, depending on the nature of the violation and the type of product involved, in the issuance of a warning letter, suspension or termination of a clinical study, refusal by the FDA to approve clinical trial or marketing applications or withdrawal of such applications, injunction, seizure of investigational products, civil penalties, criminal prosecutions or debarment from assisting in the submission of new drug applications.

 

We monitor our clients’ clinical trials to test for compliance with applicable laws and regulations in the United States and the foreign jurisdictions in which we operate. We have adopted standard operating procedures that are designed to satisfy regulatory requirements and serve as a mechanism for controlling and enhancing the quality of those clinical trials. In the United States, our procedures were developed to ensure compliance with the GCP regulations and associated guidelines.

 

The Standards for Privacy of Individually Identifiable Health Information, or Privacy Rule, issued under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, restrict the use and disclosure of certain protected health information. Under the Privacy Rule, specified entities may not use or disclose protected health information without the authorization of the individual whose information is protected, unless the use or disclosure of the information is specifically permitted by regulation or law.

 

We are not a covered entity under the HIPAA Privacy Rule. However, in connection with our clinical development activities, we do receive protected health information from covered entities subject to HIPAA. In order for those covered entities to disclose protected health information to us, the covered entity must obtain an authorization meeting Privacy Rule requirements from the research subject, or make a disclosure under an exception to the Privacy Rule’s authorization requirement. As part of our research activities, we require covered entities that perform research activities on our behalf to comply with HIPAA, including the Privacy Rule’s authorization requirement.

Outside of the United States, many countries have enacted laws to safeguard the privacy and security of personal information, including individually identifiable health information. The member states of the European Union have adopted a rigorous system of data protection regulations, based upon a framework imposed by the 1995 European Commission Directive on Data Protection, or the Directive. The Directive provides broad protections for personal information, including, among other things, notice requirements, limits on the scope and duration that personal information may be maintained and processed, restrictions on disclosures of personal information, standards for providing individuals with control over the manner in which personal information is processed, and restrictions on transfers of such data to countries that the European Union finds to lack adequate data protection laws of their own. The Directive applies standards for the protection of all personal data, not just health information, in the European Union and requires its member states to enact national laws implementing the Directive. Our operations in Europe are subject to the Directive and to any variations in the Directive as enacted by individual member states in which we operate.

 

Professional Staff

 

As of August 31, 2010, we had approximately 2,365 professional staff located throughout North America, Latin America, Europe and the Asia-Pacific regions. Of these, approximately 2,236 are full-time employees, and the remainder are part-time employees or independent contractors. Approximately 24% of our professional staff are located outside of the United States. None of our employees are subject to a collective bargaining agreement. Employees in certain of our non-U.S. locations are represented by works councils as required by local laws. We believe that our relations with our employees are good.

 

Legal Proceedings

 

We are party to lawsuits and administrative proceedings incidental to the normal course of our business. We do not believe that any liabilities related to any current lawsuits or proceedings will have a material adverse effect on our financial condition, results of operations or cash flows.

 

Properties

 

Our headquarters are located on our campus in Fort Washington, Pennsylvania, where we lease approximately 96,000 square feet of space under leases with terms that are scheduled to expire between April 2014 and June 2017. This facility accommodates our executive offices, recruiting and management operations. We lease additional office space in Montreal, Canada; Buenos Aires, Argentina; Mexico City, Mexico; Bogota, Colombia; Sao Paolo, Brazil; Santiago, Chile; Lima, Peru; Paris and Caen, France; Nuremburg, Germany; Barcelona and Madrid, Spain; Beijing, China; and Seoul, South Korea.

 

Corporate Information

 

We were incorporated in Delaware on January 30, 2006 as Cross Shore Acquisition Corporation, a blank check company formed for the sole purpose of acquiring an operating business engaged in the delivery of business services to consumers and companies in the United States. On April 24, 2006, we consummated an initial public offering on the Alternative Investment Market of the London Stock Exchange, or AIM, and on August 30, 2007, a wholly owned subsidiary of our company completed a merger with ReSearch Pharmaceutical Services, Inc., a Pennsylvania corporation providing services to the biopharmaceutical industry since 1994, which we refer to in this prospectus as Old RPS. Upon the completion of the merger, we changed our corporate name to ReSearch Pharmaceutical Services, Inc. and Old RPS, which survives as our wholly owned subsidiary, was converted into a Delaware limited liability company with the name ReSearch Pharmaceutical Services, LLC. We are now a holding company for, and conduct all of our operations through, ReSearch Pharmaceutical Services, LLC.

 

On September 4, 2009, we delisted our common stock from AIM following approval of the delisting by the requisite number of our stockholders. Trading of our warrants on AIM was suspended simultaneously, and our warrants were delisted from AIM on October 5, 2009. All of our unexercised warrants expired on April 28, 2010.

 

In December 2008, we completed the acquisition of three CROs located in France, Germany, and Spain, and in July 2009 we completed the acquisition of a CRO located in China.

 

The following table sets forth certain information about our executive officers and directors:

 

 

Daniel M. Perlman joined Old RPS in 1998 as President and became its Chief Executive Officer and Chairman of the Board of Directors in 2001. Mr. Perlman continued as our Chief Executive Officer and Chairman of the Board of Directors following the merger between Cross Shore and Old RPS. From 1993 until joining Old RPS, Mr. Perlman served as Vice President—Operating Specialties at Kforce Inc., a professional staffing company, where he started the contract staffing divisions in the pharmaceutical, healthcare, engineering, legal and scientific industries. From 1990 to 1993, Mr. Perlman served as Managing Director of a local division of CDI Corporation, a professional staffing company, where he specialized in pharmaceutical outsourcing. Prior to that, Mr. Perlman worked at a private label division of Goodyear where he last served as Vice President - Sales and Marketing, Private Label Division. From 1985 until 1990, Mr. Perlman was President of TKA, a tire company in eastern Pennsylvania. He graduated from The Haverford School and The Wharton School, University of Pennsylvania.

 

The Board of Directors believes that Mr. Perlman’s extensive experience leading both our Board of Directors and our company, his intimate familiarity with our business, and his 20 years of management experience in the pharmaceutical outsourcing and staffing industry give him the expertise, skills, and judgment to serve as Chairman. Under Mr. Perlman’s guidance, our Board of Directors has expanded our global footprint and increased our growth in a manner that we believe has positioned us well for the future.

 

Harris Koffer joined Old RPS in July 2006 as President and Chief Operating Officer and a member of its board of directors, and has continued as our President and Chief Operating Officer and as a director of our company following the merger between Cross Shore and Old RPS. Prior to joining Old RPS, from December 2005 to June 2006, Dr. Koffer served as Corporate Executive Vice President and President, Cardiac Safety Services, for Medifacts International, a cardiac safety service provider. Dr. Koffer resigned from all positions he held at Medifacts International in June 2006. On January 28, 2007, Medifacts International filed for Chapter 11 bankruptcy protection. Dr. Koffer also served as Vice President, Clinical Trials and Pharmaceutical Business Development, for Quest Diagnostics from 2000 to November 2005, and served in various positions at Covance Inc., a global CRO, and its predecessor companies from 1981 to 2000, including as Vice President and General Manager of Covance Clinical Services from 1995 to 1998, and as President of Covance Periapproval Services from 1992 to 1995. In addition, Dr. Koffer served on the board of directors for BioImaging Technologies from 1995 to 1998. Dr. Koffer has served as Adjunct Assistant Professor of Pharmacy in Medicine at the University of Pennsylvania School of Medicine and as Clinical Associate Professor of Pharmacy at the Philadelphia College of Pharmacy and Science. Dr. Koffer has published and presented numerous papers in the fields of cardiovascular clinical pharmacology and pharmacoeconomics. He earned both a B.S. degree in pharmacy and a PharmD. degree

from the Philadelphia College of Pharmacy and Science and completed a Fellowship in Clinical Pharmacology at Thomas Jefferson University Hospital in Philadelphia.

 

The Board of Directors believes that Dr. Koffer’s service as a director since 2006 and his more than 30 years of experience in biopharmaceutical research and development provides him with a substantial knowledge and understanding of our company, the biopharmaceutical industry, and the contract service organization marketplace that enable him to be a valuable member of our Board of Directors. Dr. Koffer’s experience in the academic and private sector, his doctorate in pharmacy, and his expertise in pharmacoeconomics, clinical pharmacology, pharmacoepidemiology, and drug development in general, as well as his experience as an executive at several clinical research and related organizations give him particular professional expertise and management experience relevant to his qualifications as a director.

 

Steven Bell joined Old RPS in 2003 as Executive Vice President, Finance and Chief Financial Officer, and has continued in those positions with our company following the merger between Cross Shore and Old RPS. Prior to joining Old RPS, Mr. Bell served as Chief Financial Officer for CareScience, Inc., a publicly traded healthcare technology company located in Philadelphia. Before that, Mr. Bell spent four years at The MRC Group, Inc., a national medical transcription company, where he served as Senior Vice President of Finance. In addition to his executive experience, Mr. Bell’s career includes 13 years in public accounting, first at Price Waterhouse, and then as a partner in the firm Zelenkofske, Axelrod and Co. Mr. Bell is a certified public accountant and received his B.S. degree in Business Administration from Temple University in Philadelphia.

 

Janet L. Brennan joined Old RPS in 1999 as its Vice President of Clinical Operations and was promoted to Chief Operating Officer in 2001, and then promoted to the position of Chief Clinical Officer and Executive Vice President of Global Operations in 2006, and remained in that position with our company following the merger between Cross Shore and Old RPS. Ms. Brennan was promoted to the position of Chief International Affairs Officer and Executive Vice President in 2009. She has been instrumental in the expansion of our company into global markets and is currently responsible for directing and managing the business and clinical research operations for the Asia-Pacific, Europe and Latin America regions. Ms. Brennan has over 19 years of experience in clinical trial operational and strategic development activities in the contract resourcing arena of the biopharmaceutical industry. Prior to joining our company, Ms. Brennan had managerial responsibilities as a director of several large project management and clinical monitoring departments and began her career in the industry in the pharmacovigilance area. Ms. Brennan’s clinical trial experience includes Phase I, Phase II, Phase III, Phase IV, post-marketing surveillance and treatment IND applications. Ms. Brennan is a registered nurse and holds a B.S.N degree from Thomas Jefferson University in Philadelphia.

 

Samir Shah joined Old RPS in 2000 and served as its Vice President, Strategic Development and continued in that position with our company following the merger of Cross Shore and Old RPS. Mr. Shah was promoted to the position of Executive Vice President, Strategic Development of our company in June 2010. Mr. Shah oversees business development and has responsibilities for corporate expansion. From 1992 until 2000, Mr. Shah worked in the pharmaceutical, biotech and clinical research organization industries in various roles in both clinical research and business operations at Parexel International, US Bioscience, Zeneca Pharmaceuticals and IBAH (Bio-Pharm) Clinical Services. Mr. Shah began his career in the Department of Psychiatry/Pharmacology at the University of Pennsylvania Medical Center where he was a Research Scientist. Mr. Shah received a B.S. degree in Bio-Psychology from Saint Joseph’s University in Philadelphia.

 

Thomas R. Armstrong has served as a director of our company since 2008. He co-founded Cartesian Capital Group, LLC, a global private equity firm with more than $1 billion in commitments under management. Mr. Armstrong served as Senior Advisor to AIG Capital Partners, or AIGCP, from 1999 to 2005, playing an active role in a number of the firm’s investments. Mr. Armstrong previously co-founded Advent International, a global private equity investment firm, in 1984, where he served as Executive Vice President and Chief Operating Officer from its inception to 1998. During that period, he served on Advent’s investment committee and assisted in the formation and operation of over 20 affiliated private equity firms around the world. Mr. Armstrong has also served as Vice President, International, of The Allen Group, a publicly listed manufacturer of capital equipment, automotive parts, and consumer products. Mr. Armstrong also previously co-founded and served as Chief Operating Officer of Thrasos, Inc., a pharmaceutical development firm using combinatorial and computational chemistry technology to validate early stage biological targets and accelerate the development of new therapeutic agents. Mr. Armstrong

holds engineering degrees from Princeton University and Cornell University, and an MBA from Harvard Business School. Mr. Armstrong is a director of SCM Private Equity GP Ltd. and SCM Private Equity II GP Ltd. Mr. Armstrong was previously a director of Lexent Technologies.

 

The Board of Directors believes that Mr. Armstrong’s background in drug development as a founder and former chief operating officer of Thrasos, and his financial and investment expertise developed from investments in more than 200 companies in over a dozen different industries, gives him an experienced perspective on both the technical and the economic aspects of our business, and provides the Board of Directors with experienced views on the matters that come before the Board of Directors. In addition, Mr. Armstrong’s experience in international investments and transactions has been valuable in developing international operations as we expand our global footprint.

 

Jack H. Dean has served as a director of our company since 2008. Dr. Dean retired in January 2006 as the President of U.S. Science and Medical Affairs for Sanofi-Aventis, a global pharmaceutical company, and as the Global Director of Preclinical Development for Sanofi-Aventis, SA. Dr. Dean is currently a director of Drug Development Advisors, LLC, his drug development and drug safety consulting company, and a research professor in the departments of Pharmacology and Toxicology at the College of Medicine at the University of Arizona. Prior to retiring after his 18-year tenure with Sanofi-Aventis and legacy companies, Dr. Dean was the Executive Vice President, Development and Director of the Department of Toxicology and Vice President, Drug Safety Assessment, for Sterling Winthrop, a global pharmaceutical company, as well as the Director of the Sterling Winthrop Pharmaceuticals Research Center. From 1982 to 1988, Dr. Dean was the head of the Department of Cellular and Molecular Toxicology at the Chemical Industry Institute of Toxicology, and was the head of the Immunotoxicology Section of National Institute of Environmental Health Services and National Toxicology Program at the National Institutes of Health. Dr. Dean holds a B.S. degree in microbiology and a M.S. degree in medical microbiology from California State University, Long Beach, and a Ph.D. in molecular biology, with a minor in biochemistry, from the University of Arizona Health Sciences Center in Tucson, Arizona. Dr. Dean is a Chevalier in the Ordre national de la Légion d’honneur for his contribution to medical and pharmaceutical research.

 

The Board of Directors believes that Dr. Dean’s more than 20 years of experience in the drug development industry and management experience in government, academic, and the private sector gives him extensive knowledge of our industry and business. Dr. Dean’s drug development and drug safety expertise, his advanced degrees in relevant scientific fields, and his position as a professor of pharmacology and toxicology give him particular technical expertise related to our business that is relevant to his qualifications as a director. In addition, the Board of Directors believes that Mr. Dean’s consulting experience gives him a broad perspective and insight on effectively managing and advising a business.

 

James R. Macdonald began serving as a director of Old RPS in 2001 and has continued to serve as a director of our company following the merger between Cross Shore and Old RPS. Mr. Macdonald is a Managing Director of First Analysis Corporation, an investment research and private equity management company he joined in 1997. Prior to that, he was employed by Nalco Chemical Company from 1983 to 1997. Mr. Macdonald is on the boards of several other private companies as part of his investment role with First Analysis. Mr. Macdonald graduated with a B.S. degree in civil engineering from Cornell University and an MBA degree from Harvard Business School.

 

The Board of Directors believes that Mr. Macdonald’s service as a director of Old RPS and our company for more than nine years gives him significant knowledge of our company, its history, and its businesses. Additionally, Mr. Macdonald is a director of three private companies in the healthcare and outsourced services field, a registered research analyst covering multiple public healthcare and outsourcing companies, and the managing partner of private equity funds responsible for investments in more than 10 companies in the healthcare and outsourced services industries, giving him specialized insight into both our business and the business of our clients.

 

Warren W. Myers began serving as a director of our company in 2008. Mr. Myers presently serves as a consultant to the biopharmaceutical industry, and most recently was the Executive Director, Strategic Sourcing and Procurement at Amgen Inc., serving Amgen’s Research and Development organization. Mr. Myers joined Amgen in 1997 and left to start his consulting business in late 2007. Prior to his time with Amgen, Mr. Myers was Associate Director, Medical Research with Bayer Pharmaceuticals. Mr. Myers joined Bayer in 1991. Mr. Myers

holds a B.A. degree in biology from the University of California, Santa Barbara, and an M.S. degree in technology management from Pepperdine University.

 

The Board of Directors believes that Mr. Myers’ more than 10 years of experience in sourcing and procurement for the biopharmaceutical industry, his advanced degrees in relevant fields, and his medical research and development experience provide Mr. Myers with extensive knowledge of our business and our industry, as well as the sourcing and procurement needs of our clients. In addition, Mr. Myers’ consulting experience gives him a broad perspective and insight on effectively managing and advising a business.

 

Daniel Raynor began serving as a director of Old RPS in 2001 and has continued to serve as a director of our company following the merger between Cross Shore and Old RPS. He is a managing partner of The Argentum Group, a private equity firm, a position he has held since co-founding the firm in 1987. In this capacity, Mr. Raynor also serves as a director of several privately held companies engaged in outsourced, healthcare and technology-enabled services in which Argentum’s managed funds have an equity interest. Mr. Raynor also serves as a director of Comforce, Inc., a publicly traded New York-based provider of staffing, consulting and outsourcing solutions. Previously, Mr. Raynor served as a director and compensation committee member of NuCo2, Inc., a provider of carbon dioxide to the hospitality industry, from February 1998 until it was acquired in May 2008 and ceased being a publicly traded company. He received a B.S. degree in economics from The Wharton School, University of Pennsylvania.

 

The Board of Directors believes that Mr. Raynor’s service as a director of Old RPS and our company for more than nine years gives him extensive knowledge of our history and business, and his position as a current or former director of several private companies in the outsourcing, consulting and technology-enabled services fields provides him with significant knowledge of our industry. Additionally, Mr. Raynor currently serves as a director of a publicly traded company, and has served as a director of another leading clinical research organization, and is the managing partner of private equity funds responsible for investments in more than 50 companies in the healthcare and outsourcing fields, which provides the Board of Directors with significant guidance relating to our business and our industry.

 

Stephen E. Stonefield became a director of Cross Shore in 2006 and has continued to serve as a director of our company following the merger between Cross Shore and Old RPS. Mr. Stonefield is a senior advisor and global strategy officer for Sabrient Systems LLC, a quantitative equity research publishing and advisory company. Mr. Stonefield has also served as Director of Precise Asset Management Pte. Ltd. since 2004, and is also serving in senior advisory roles to two privately held companies in Asia. In 2003, Mr. Stonefield retired after three decades of senior positions in investment banking, largely in Asia, most recently as Chairman, Pacific Region, of Credit Suisse First Boston, or CSFB, and former Vice-Chairman and member of the Executive Board of CSFB. Prior to joining CSFB, Mr. Stonefield was a Managing Director at Smith Barney in New York, where he was head of Equity Capital Markets and Financing Services and a member of the firm’s Steering Committee. Prior to that, he was a Managing Director at Morgan Stanley in Tokyo and New York. He began his career in finance at Continental Illinois Ltd. Mr. Stonefield has also served as a member of the Economic Review Committee for financial services in Singapore, the Securities Industry Council of Singapore, and as a member of the International Advisory Board Kuala Lumpur Stock Exchange in Malaysia. Mr. Stonefield graduated summa cum laude from Dartmouth College with a B.A. degree and has an M.A. degree from Harvard University.

 

The Board of Directors believes that Mr. Stonefield’s service as a director of our company since 2006 and his extensive career in global investment banking enhance his qualifications to serve on the Board of Directors, especially with our recent expansion into the Asia-Pacific market. His service as a director and executive of a number of global investment banks allows him to provide a broad perspective on techniques for effectively running a business, while his particular expertise in finance and investment, especially as it relates to international investments and management of those investments, has made Mr. Stonefield particularly valuable in the growth of our international footprint.

 

Peter M. Yu began serving as a director of our company in 2008. Mr. Yu founded Cartesian Capital Group, LLC, a global private equity firm with more than $1 billion in commitments under management and responsible for more than 12 investments in a variety of fields and industries. Prior to founding Cartesian, Mr. Yu founded and served as President and Chief Executive Officer of AIGCP. Under his leadership, AIGCP became a leading international private equity firm, with more than $4.5 billion in committed capital. Prior to founding AIGCP in

1996, Mr. Yu served President Clinton as Director to the National Economic Council, the White House office responsible for developing and coordinating economic policy. A graduate of Harvard Law School, Mr. Yu served as President of the Harvard Law Review and as a law clerk on the U.S. Supreme Court. Mr. Yu received a B.A. degree from Princeton University’s Woodrow Wilson School. Mr. Yu is a director of Banco Daycoval, S.A., a publicly traded bank headquartered in Brazil. Mr. Yu is also a director of a number of private entities partly or wholly owned by funds sponsored by Cartesian Capital Group.

 

The Board of Directors believes that Mr. Yu’s background in business management and financial and investment expertise gives him an experienced perspective on the economic side of our business and provides our Board of Directors with access to different and current views on the issues facing our company and our business. In addition, Mr. Yu’s extensive experience in international management and transactions has been instrumental in our recent global acquisitions and the integration of those acquisitions into our operations, which has made Mr. Yu also particularly valuable in the growth of our international footprint.

 

Board Composition, Committees, and Board Independence

 

Our business is managed under the direction of our Board of Directors, in accordance with the General Corporation Law of the State of Delaware and our bylaws. Members of the Board of Directors are kept informed of developments in our business through discussions with the Chairman and Chief Executive Officer and other officers, by reviewing materials provided to them, and by participating in regular and special meetings of the Board of Directors and its committees.

 

Our amended and restated certificate of incorporation provides that the size of our Board of Directors shall consist of not less than one nor more than eleven directors. Our Board of Directors currently consists of nine directors, with three classes of directors, each consisting of three directors. The directors serve for staggered three-year terms:

 

 

Pursuant to an agreement between us, certain of our stockholders, and Pangaea One Acquisition Holdings I, LLC, or Pangaea, an affiliate of Cartesian Capital Group, LLC, or Cartesian, Pangaea has the right to nominate and have elected up to two designees to our Board of Directors as long as Pangaea owns at least 20% of our outstanding common stock, and one designee as long as Pangaea owns at least 10% of our outstanding common stock. Pangaea currently owns approximately 25% of our common stock, and Messrs. Yu and Armstrong were Pangaea’s nominees and have been elected to our Board of Directors. The agreement expired on August 30, 2010.

 

Board of Directors

 

Our Board of Directors has a long-standing commitment to sound and effective corporate governance practices. The foundation for our corporate governance is the Board of Directors’ policy that a majority of its members should be independent. We have applied to list our stock on the NASDAQ Global Market. Under the applicable standards promulgated by NASDAQ, our Board of Directors has determined that five, and therefore a majority, of our current directors, Messrs. Raynor, Macdonald, Meyers and Stonefield and Dr. Dean, have no relationship which, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director, and that each meets the objective requirement of “independence,” as defined by the applicable listing rules of NASDAQ.

 

Mr. Perlman serves as both our Chief Executive Officer and as Chairman of the Board of Directors. The Board of Directors believes that it is appropriate for Mr. Perlman to serve as both Chief Executive Officer and Chairman because the Board of Directors believes that his role in transforming our company from a pharmaceutical staffing company into a next generation CRO uniquely qualifies Mr. Perlman as the individual who generally sets the agenda for, and leads discussions of, strategic issues for our company at the Board of Directors level, and

implements those strategic decisions while managing our company as its Chief Executive Officer. In addition, the Board of Directors believes that combining Mr. Perlman’s roles of Chief Executive Officer and Chairman of the Board of Directors provides an effective bridge between management and the Board of Directors, which facilitates a better flow of information in both directions and more efficient execution of the strategic goals developed by the Board of Directors throughout our company. Further, the Board of Directors believes that our corporate governance structure provides the appropriate balance between the need for consistent strategic direction and the need for the objectivity and independence of the non-management directors. The Board of Directors believes that there are a number of effective oversight mechanisms currently in place, including that a majority of the Board of Directors is independent and that our Audit Committee, Nominating and Corporate Governance Committee and Compensation Committee are composed entirely of independent directors and perform significant oversight functions, as detailed below under the heading “Board Committees.” The Board of Directors believes that separating the roles of Chairman and Chief Executive Officer would result in a less efficient implementation of our strategies without providing any added benefit beyond that already achieved by our existing governance structure.

 

The Board of Directors has considered designating a “lead independent director” but has elected not to do so at this time because, as described above, the Board of Directors believes that the current structure under which Mr. Perlman serves as Chairman and Chief Executive Officer is the most efficient and effective leadership structure for the Board of Directors and for our company. The Board of Directors has determined that each independent director represents expertise in the technical, financial, business, and international facets of our operations, and together provide comprehensive guidance in developing strategies for our growth. Further, the composition of our Audit Committee and Compensation Committee, each of which consists solely of independent directors and is chaired by a different director, provides our independent directors with leadership opportunities and promotes the potential for differing perspectives in these key areas of governance. Because of these factors, the Board of Directors has determined that each independent director plays an equally important role in the overall function of the Board of Directors and that designating one as the “lead independent director” would serve no additional benefit beyond that already achieved by our existing governance structure. However, with a view towards our commitment to sound and effective corporate governance practices, the Board of Directors, depending on circumstances, will consider other leadership models, including designating a “lead independent director,” if it becomes appropriate in the future.

 

Board Committees

 

Our Board of Directors has established an Audit Committee, Nominating and Corporate Governance Committee and a Compensation Committee, all of which operate pursuant to written charters.

 

Audit Committee

 

Our Audit Committee assists our Board of Directors in the oversight of the integrity of our consolidated financial statements, as well as the qualifications, independence and performance of our independent registered public accounting firm. Our Audit Committee currently consists of Mr. Macdonald as the chairman and Messrs. Raynor and Stonefield, each of whom our Board of Directors has determined to be independent under SEC and NASDAQ rules. The Audit Committee currently operates under a written charter that has been approved by our Board of Directors. The Audit Committee Charter is reviewed annually by the Audit Committee with any recommended changes approved by the Board of Directors.

 

The Audit Committee’s primary responsibility is to assist the Board of Directors in fulfilling its oversight responsibilities to our stockholders and other constituencies by reviewing our financial statements and other financial information we provide, and reviewing our system of internal controls, including accounting, auditing and financial reporting practices. In furtherance of those oversight responsibilities, the Audit Committee’s primary duties are to: (1) appoint (and terminate, as appropriate), compensate, retain and oversee the work of the independent accountants, including the audit plan, scope and procedures; (2) approve or pre-approve, as applicable, the engagement of our independent accountants, the terms of such engagements, and all audit services and permissible non-audit services provided by the independent accountants to us; (3) confirm and take action to assure the independence of the independent accountants by reviewing and discussing the formal written statement and other periodic written reports received from the independent accountants regarding their objectivity and

independence, including statements concerning other relationships and services that may affect their independence; (4) set clear hiring policies for employees and former employees of the independent accountants; (5) consider and review, with the independent accountants, the manager of our internal accounting controls, and management, the adequacy and effectiveness of our internal controls, including processes for identifying significant risks or exposures, and elicit recommendations for the improvement of such internal control procedures where desirable; (6) review with the independent accountants and management (i) our financial reporting (including financial statements and related footnotes), (ii) any significant changes required in the independent accountants’ audit plan, (iii) any material difficulties or disputes with management encountered during the course of the audit, (iv) other matters related to the conduct of the audit, (v) any material written communications provided by the independent accountants to management, and (vi) any legal and regulatory matters that may have a material impact on the financial statements; (7) review the appointment, replacement, reassignment or dismissal of the manager of our internal accounting controls; (8) review the processes of our management for performing its required certifications under the Sarbanes-Oxley Act; (9) review and discuss all earnings press releases and guidance; (10) review and approve all related party transactions; (11) establish procedures for (i) the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls, or auditing matters, and (ii) the confidential, anonymous submission by our employees of concerns regarding these issues; (12) report Audit Committee actions to the Board of Directors with such recommendations as the Audit Committee may deem appropriate; (13) prepare the audit committee report required to be filed with the SEC; (14) review and reassess the adequacy of the Audit Committee’s Charter annually and submit recommended amendments to the Board of Directors for approval; (15) investigate any matter brought to the attention of the Audit Committee within the scope of the Audit Committee’s duties, with the power to retain and determine the appropriate compensation for independent legal, accounting, financial and other advisors as the Audit Committee may deem necessary or appropriate to carry out its duties, at our expense; and (16) enforce our Code of Business Conduct and Ethics. The Audit Committee has been established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended.

 

Messrs. Macdonald, Raynor and Stonefield all have significant past employment experience in finance, and our Board of Directors has designated each of them as audit committee financial experts under SEC rules.

 

In addition to the Audit Committee’s responsibilities set forth above, the Audit Committee has, pursuant to its current charter, primary responsibility for the oversight of risks that could affect us. The entire Board of Directors is actively involved in, and has ultimate responsibility for, the oversight of risks facing us and management of that risk, but the Audit Committee conducts preliminary evaluations of risk and addresses risk prior to review by the Board of Directors. The Audit Committee considers and reviews, in conjunction with our internal control processes, independent public accounting firm and management, the adequacy of our internal controls, including the processes for identifying significant risks or exposures, and elicits recommendations for the improvements of such procedures where desirable. In addition to the Audit Committee’s role, the full Board of Directors is involved in oversight and administration of risk and risk management practices by overseeing members of senior management in their risk management capacities, and regularly reviewing and analyzing the investment of our available cash and accompanying risk levels. Members of our senior management have day-to-day responsibility for risk management and establishing risk management practices, and members of management are expected to report matters relating to financial or accounting risk to the Audit Committee, and to report all other matters directly to the Board of Directors as a whole. Members of our senior management have an open line of communication to the Board of Directors and have the discretion to raise issues from time to time in any manner they deem appropriate, and management’s reporting on issues relating to risk management typically occurs through direct communication with directors or committee members as matters requiring attention arise.

 

Compensation Committee

 

The Compensation Committee operates under a written charter that has been approved by the Board of Directors. The Compensation Committee Charter is reviewed annually by the Compensation Committee with any recommended changes approved by the Board of Directors. The Compensation Committee is responsible for formulating, evaluating, and approving the compensation of our executive officers, overseeing all compensation programs involving the issuance of our common stock and other equity securities, and preparing the annual report on executive compensation for inclusion in our annual proxy statement. The Compensation Committee:

(1) annually reviews, determines, and approves the compensation of our Chief Executive Officer and all other executive officers, including the use of cash incentives and deferred compensation plans; (2) determines our policy with respect to the application of Section 162(m) of the Internal Revenue Code; (3) approves compensation programs and grants involving the use of our common stock and other equity securities; (4) reviews, approves, and when appropriate, recommends to our Board of Directors for approval, any employment agreements or any severance arrangements for our executive officers; (5) reviews and discusses with management our analysis and discussion of compensation for inclusion in our annual proxy statement; and (6) reviews our incentive compensation programs to determine whether they encourage excessive risk-taking and assesses, at least annually, the relationship between risk management policies and practices and compensation. To perform its duties, the Compensation Committee has the power to retain, at our expense, experts and other professionals, including compensation consultants.

 

Our Compensation Committee consists of Mr. Raynor as the chairman and Mr. Stonefield, each of whom our Board of Directors has determined to be independent under NASDAQ listing rules.

 

The section of this prospectus entitled “Compensation Discussion and Analysis” includes additional information about the processes and procedures of the Board of Directors and the Compensation Committee for considering and determining executive officer compensation.

 

In addition to the Audit Committee, the Compensation Committee considers the risks that may be implicated by our executive compensation practices, as described under the heading “Executive Compensation—Compensation Discussion and Analysis—Performance Bonuses.”

 

Nominating and Corporate Governance Committee

 

The Nominating and Corporate Governance Committee, or Nominating Committee, operates under a written charter that has been approved by our Board of Directors. The Nominating Committee Charter is reviewed annually by the Nominating Committee with any recommended changes approved by the Board of Directors. The Nominating Committee is responsible for establishing criteria for selecting new directors, identifying, screening, and recruiting new directors, recommending director nominees to the full Board of Directors, and recommending to the Board of Directors a set of corporate governance principles applicable to our company. The Nominating Committee: (1) establishes and reviews as necessary the criteria for selecting new directors, including the review and approval of any written policies relating to the submission of candidates for director by stockholders; (2) assesses the contributions of the current directors to the Board of Directors in connection with their re-nomination and makes recommendations to the Board of Directors for director nominees at our annual meeting of stockholders and to fill vacancies; (3) recommends standards for determining director independence to the Board of Directors and periodically reviews director independence; (4) recommends and reviews corporate governance guidelines to the Board of Directors, including guidelines in our bylaws and committee charters; (5) oversees the evaluation of the effectiveness of the Board of Directors; (6) recommends the assignment of members of committees to the Board of Directors; and (7) periodically reviews all elements of non-employee director compensation and makes recommendations to the Board of Directors regarding changes. To perform its duties, the Nominating Committee has the power to retain, at our expense, experts and other professionals, including director search firms.

 

Our Nominating Committee consists of Dr. Dean as the chairman and Mr. Myers, each of whom our Board of Directors has determined to be independent under NASDAQ listing rules.

 

Compensation Committee Interlocks and Insider Participation

 

Daniel Raynor and Stephen Stonefield were the only members of our Compensation Committee during the last fiscal year, neither of whom has ever been an employee or officer of our company. None of our executive officers serves as a member of the Board of Directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more executive officers who serve as members of our Board of Directors or our Compensation Committee.

Director Compensation

 

Until August 30, 2007, the Board of Directors of Cross Shore consisted of Edward V. Yang (chair), Dennis M. Smith, Stephen E. Stonefield and Jon A. Burgman. The directors were not paid compensation of any kind until August 30, 2007, with the exception of reimbursement for out-of-pocket expenses incurred by or on behalf of the director in identifying and performing due diligence on potential acquisition targets. Effective August 29, 2007, Messrs. Smith and Yang each entered into service agreements with us. Messrs. Smith and Yang resigned as directors effective December 6, 2007, but their respective service agreements remained in place. Mr. Burgman resigned as a director on August 30, 2007, and Mr. Stonefield remained as a director of our company. Pursuant to the service agreements, Messrs. Smith and Yang provided consulting services, were entitled to receive their respective annual base salaries ($60,000 each), and were eligible to participate in all of our benefit plans and equity incentive plans, and to receive an annual bonus at the sole discretion of our Board of Directors for a period of two years. Under the terms of this arrangement, Messrs. Smith and Yang received $60,000 each for the year ended December 31, 2008 and additional compensation of $15,168 and $10,417, respectively, related to our cost of medical, dental and other insurance premiums covered under our benefit plans. Messrs. Smith and Yang received $40,000 each for the year ended December 31, 2009 and additional compensation of $9,152 and $6,391, respectively, related to the cost of medical, dental and other insurance premiums covered under our benefit plans. The service agreements were not renewed and expired on their terms on August 29, 2009.

 

In conjunction with the merger with Old RPS, Daniel Perlman, Harris Koffer, Daniel Raynor and James Macdonald were appointed as directors. Thomas Armstrong, Peter Yu, Warren Myers, and Jack Dean were appointed as directors on May 12, 2008. Dr. Dean and Messrs. Stonefield and Myers are each entitled to receive $6,250 per quarter for their service on our Board of Directors, totaling $25,000 annually. In addition, Dr. Dean and Mr. Myers were each granted options to purchase 5,000 shares of our common stock at an exercise price of $3.70 per share on the day they were appointed to the Board of Directors in May 2008, and Mr. Stonefield was granted an option to purchase 5,000 shares of our common stock at an exercise price of $1.75 per share on May 20, 2009. One-third of the stock options granted to Dr. Dean and Messrs. Myers and Stonefield vest on each anniversary of the grant date over three years. The directors of our predecessor, Old RPS, were not compensated for their services.

 

Mr. Perlman and Dr. Koffer receive no additional compensation for their service as directors of RPS. Compensation for Mr. Perlman and Dr. Koffer is set forth in the Summary Compensation Table below. Messrs. Yu, Armstrong, Raynor and Macdonald receive no compensation for their service as directors.

 

The following table provides compensation information for the year ended December 31, 2009 for each member of our Board of Directors serving during 2009.

 

 

 

 

 

Compensation Discussion and Analysis

 

Our Compensation Committee, currently comprised of Mr. Raynor as chairman and Mr. Stonefield, has overall responsibility for reviewing and approving the recommendations of management with respect to the appropriate compensation policies, programs and levels, and for continually monitoring adherence to our compensation philosophy. The Compensation Committee is responsible for ensuring that the total compensation paid to our executive officers is fair, reasonable and competitive and approves all changes to the compensation packages for our Chief Executive Officer and our other executive officers.

 

Objectives of Our Compensation Program

 

The primary objective of our compensation program is to ensure that members of our executive management team are provided with appropriate incentives to encourage enhanced performance and are, in a fair and responsible manner, rewarded for their individual contributions to our success. The Compensation Committee reviews and approves our compensation program to provide sufficient compensation opportunities for executives in order to attract, retain and motivate the best possible management team to lead us in the achievement of both our short- and long-term performance goals. The Compensation Committee believes that the first step in attracting and retaining executives is to ensure that our compensation program is competitive in the marketplace. Furthering this goal, the compensation packages for each of our named executive officers, including the Chief Executive Officer, consist of a base salary, opportunities for annual cash compensation in the form of performance bonuses, and long-term compensation in the form of equity ownership.

 

Each of our named executive officers has a written employment agreement setting forth the material terms of his or her employment. The material terms of the named executive officers’ employment agreements currently in effect are described below under “Named Executive Officer Employment Agreements.”

 

On an ongoing basis, the Compensation Committee determines adjustments to base salary, the amount and timing of performance bonuses, the performance targets required to be achieved for the payment of performance bonuses, and the appropriate level and targets for other compensation, if any, to be paid to our named executive officers. The Compensation Committee, annually and as it otherwise deems appropriate, meets with the Board of Directors to obtain recommendations with respect to our compensation programs for executives and other employees. The Board of Directors may make recommendations to the Compensation Committee on base salary, performance targets and other terms, which the Compensation Committee may consider. No director or executive is involved in any decisions as to his or her own compensation.

 

Short-Term versus Long-Term Compensation

 

Short-term compensation paid to our named executive officers includes:

 

 

Our long-term compensation currently consists of grants of stock options. Our executives may also participate in our 401(k) plan, which is open to all employees who have completed at least three months of service and are at least 21 years of age.

 

The Compensation Committee seeks to balance the need of our named executive officers for current income with the need to create longer-term incentives that are directly tied to achievement of our long-term targets and the enhancement of stockholder value. Our allocation between cash and non-cash and between short-term and long-term incentive compensation is set by the terms of the individual employment agreement and the terms of our equity incentive plan. Income from elements of incentive compensation is realized as a result of the performance of

our company or the executive, depending on the type of award, compared to goals proposed and approved by the Compensation Committee on an annual basis.

 

Benchmarking and Use of Compensation Consultants

 

The Compensation Committee does not engage in formal benchmarking when setting compensation for our named executive officers, including Mr. Perlman, although the Compensation Committee has in the past and would expect in the future to consider information regarding compensation of executive officers of other similar companies in revising our compensation plan. Neither the Board of Directors nor the Compensation Committee has engaged compensation consultants for the purposes of determining executive or director compensation. We have engaged compensation consultants for the purposes of general human resources and benefits advisory services that are applicable and available to all salaried employees, and the fees for such services did not exceed $120,000 in 2009.

 

Compensation Components

 

The principal compensation components for the named executive officers consists of the following:

 

 

Historically, the largest portion of our executives’ compensation packages have been in the form of annual base salary.

 

Base Salary

 

The Compensation Committee adjusts base salaries of our named executive officers based on a number of factors, with the primary factor being the base salary agreed upon in each named executive officer’s employment agreement, but also including an individual’s role and responsibilities, experience, expertise, individual job performance relative to his or her responsibilities, impact on development and achievement of our business strategy, and competitive market factors for comparable talent. The Compensation Committee may also adjust base salaries from time to time if a change in scope of the officer’s responsibilities justifies an adjustment or, in limited circumstances, to maintain salary competitiveness.

 

In 2009, the Compensation Committee increased the base salaries of Messrs. Perlman and Bell and Dr. Koffer by approximately 1%, and increased Ms. Brennan’s base salary by approximately 2%, when compared to the base salaries earned by those named executive officers in 2008, while Mr. Shah’s base salary remained the same.

 

Base salary for our named executive officers in fiscal years 2007 through 2009 is shown in the Summary Compensation Table below, under the heading “Salary.”

 

Annual Performance Bonuses

 

The Compensation Committee believes that some portion of overall cash compensation for executive officers should be contingent on the successful achievement of business and financial targets determined by the Board of Directors on an annual basis. To that end, and depending on our financial and operating performance, cash compensation is augmented in appropriate circumstances by the payment of performance bonuses. These performance-based bonuses more closely align an individual’s overall compensation with his or her performance and our financial performance. The Compensation Committee believes that this bonus arrangement focuses our executives on strategic goals established for the fiscal year and aligns management’s interests with those of our stockholders. The Compensation Committee historically established a bonus pool to be distributed to our executive officers upon the achievement of specified objectives.

In prior years, the Board of Directors had the discretion to increase the amount available in the aggregate bonus pool based on whether we exceed an established earnings before interest, taxes, depreciation, and amortization, or EBITDA, target. For example, if EBITDA exceeded the established target, a percentage ranging from 15% to 100% of such excess could be added to the aggregate amount available for bonuses. Exceeding the EBITDA performance target could result in performance bonuses exceeding the amounts initially reserved in the aggregate bonus pool, and falling short of the EBITDA performance target could result in performance bonuses less than the amount reserved for the aggregate bonus pool. The Compensation Committee has sole discretion whether the excess over targeted EBITDA will be added to the aggregate bonus pool, the percentage over targeted EBITDA that can be contributed to the aggregate bonus pool, and the percentage of the aggregate bonus pool to be paid to individual executive officers.

 

In determining the amounts to be paid to individual executive officers out of the established bonus pool, the Board of Directors considered factors including the performance of the individual executive and our performance as a whole, including performance as measured by EBITDA. In fiscal year 2008, the Board of Directors reviewed and approved an annual budget that included a provision for awarding performance bonuses to the executive officers based upon achieving performance targets established by the Board of Directors for 2008. Depending on whether we achieved, exceeded or fell short of the financial target established by the Board of Directors, the Compensation Committee determined, in its sole discretion, whether an amount equal to or greater or less than the budgeted amount was paid in performance bonuses. The targets established by the Board of Directors serve as general guidelines for determining bonuses, but the ultimate determination regarding the performance bonus amount awarded to individual executive officers is at the discretion of the Compensation Committee, taking into account any contractual provisions in an executive’s employment agreement. During 2008, progress towards meeting the financial target was evaluated on a quarterly basis, and each executive officer was awarded 50% of the bonus that the Board of Directors determined that executive officer was entitled to receive for the relevant quarter, and the remaining bonus amounts were paid at the end of the fiscal year.

 

In 2009, the Board of Directors did not establish a performance bonus target using the same criteria used in 2008, and instead elected to award bonuses at its discretion based on overall financial performance, including EBITDA. Based upon a review of 2009 financial performance, the Compensation Committee established a discretionary bonus pool to be distributed to the executive officers. The performance bonus amounts were determined in the fourth quarter of 2009 and approved by the Compensation Committee and paid in January 2010.

 

The performance target for 2008 and the aggregate bonus pool available to our named executive officers for 2008 and 2009 are summarized below:

 

 

The Board of Directors, in connection with its assessment of performance criteria for 2009, concluded that while the consideration of the performance of both the individual and our company as a whole in determining performance bonuses may promote prudent risk-taking in support of our objectives, balancing our financial performance against an individual’s personal performance and our overall ability to reach our objectives did not encourage or promote inappropriate risk-taking by the participants.

 

Comparing performance bonuses as a percentage of base salary earned by the named executive officers in 2008 to 2009, the performance bonuses for all of our executive officers increased between the two years. As a percentage of base salary, Mr. Perlman’s performance bonus increased 12%, Dr. Koffer’s increased by 10%, Mr. Bell’s increased by 9%, Ms. Brennan’s increased by 5%, and Mr. Shah’s increased by 8%.

 

Performance bonuses for our named executive officers earned in fiscal 2007, 2008 and 2009 are shown in the Summary Compensation Table below, under the heading “Non-Equity Incentive Plan Compensation.”

Long-Term Incentives

 

The Compensation Committee considers incentives that vest over time to be an essential component of executive compensation so that a proper balance exists between short- and long-term considerations and enhancing stockholder value. The Compensation Committee believes that management ownership of stock and equity-based performance compensation arrangements are useful tools to align the interests of management with those of our stockholders. Certain of our named executive officers previously participated in the equity incentive plan maintained by Old RPS. These named executive officers received option grants under the Old RPS plan that vested over a period of three years from the date of grant. After the merger between Cross Shore and Old RPS, we adopted the 2007 Equity Incentive Plan, which we refer to in this prospectus as the 2007 Plan, and terminated the plan maintained by Old RPS. All prior awards made under the Old RPS plan were terminated unless exercised in connection with the merger. Options to purchase common stock of Old RPS were replaced with options to purchase our common stock, based upon the exchange ratio established in the merger agreement. As a result, Mr. Bell, Dr. Koffer, Ms. Brennan and Mr. Shah received replacement options to purchase 72,560 shares, 899,279 shares, 83,445 shares and 130,610 shares, respectively.

 

In December 2007, following the merger between Cross Shore and Old RPS, we granted options to Mr. Perlman, Mr. Bell and Dr. Koffer to purchase 450,000 shares, 180,000 shares and 120,000 shares, respectively, as an additional incentive for them to remain with our company and to align their interests with those of our public company stockholders. These options vest over a three-year period through December 6, 2010 and have an exercise price of $5.05 per share, which was the closing price of our common stock on the AIM on the date of grant. The aggregate grant date fair value of stock option awards in 2007 for Messrs. Perlman and Bell and Dr. Koffer was $760,500, $304,200, and $202,800 respectively. Ms. Brennan and Mr. Shah were not granted any stock options in 2007.

 

Because retention of these executives following the merger between Cross Shore and Old RPS was one factor in the decision to make stock option awards following the merger, and those executives have remained with us since the merger, the Compensation Committee’s goal of retaining these executive officers in the years immediately following the merger was largely completed and therefore no additional equity compensation was awarded in 2008 or 2009. The Compensation Committee believes that the possible forfeiture of options upon the departure of our executives provides an additional retention incentive, and the vesting of options over time aligns the interests of our executives with our stockholders. To that end, our Compensation Committee authorized the grant of an option to purchase 100,000 shares of common stock and issued 40,000 shares of restricted stock to Mr. Bell in August 2010 as a retention incentive and in recognition of his continued service to our company.

 

Other Compensation and Benefits

 

All of our named executive officers are eligible to participate in certain benefit plans and arrangements offered to employees generally, including health, dental, life and disability insurance, our 401(k) plan, and our Section 125 cafeteria plan. With the exception of the perquisites described below, we do not generally differentiate between the benefits we offer our named executives and the benefits we offer our other employees. We do not maintain any executive retirement programs such as executive pension plans, deferred compensation plan, or other executive retirement benefits. We intend to continue to maintain our current benefits for our executive officers, although the Compensation Committee in its discretion may reduce, revise, amend or add to any executive’s benefits or perquisites as it deems advisable.

 

We provide our executive officers with limited perquisites and other personal benefits that are not otherwise available to all of our employees. These perquisites consist of automobile-related reimbursements and premiums paid on behalf of the executive for health, dental, life and disability insurance coverage that is not made generally available to our other employees. Perquisites and personal benefits are taken into account in evaluating the total compensation package for our named executive officers. We believe the few perquisites and other personal benefits that we make available to our executive officers are reasonable and consistent with our overall compensation program, and better enable us to attract and retain superior employees for key positions. Certain perquisites may be subject to the approval of the Compensation Committee, depending on the amount and type. Additional details are provided in the “All Other Compensation Table” below.

Tax Considerations

 

Section 162(m) of the Internal Revenue Code, which is referred to in this prospectus as the Code, generally disallows a tax deduction for compensation in excess of $1.0 million paid to our Chief Executive Officer and the four other most highly paid executive officers. Qualifying performance-based compensation is not subject to the deduction limitation if specified requirements are met. The Compensation Committee generally intends to structure the performance-based portion of our executive compensation, when feasible, to comply with the exemptions provided in Section 162(m) so that the compensation remains tax deductible to us. However, the Board of Directors may, in its judgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments are appropriate to attract and retain executive talent.

 

Summary Compensation Table

 

The table below summarizes for the fiscal years ended December 31, 2009, 2008, and 2007 the total compensation earned by our Chief Executive Officer, Chief Financial Officer and our three other most highly compensated executive officers as of December 31, 2009. These persons are referred to in this prospectus as the named executive officers.