1
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended March 31, 2001
--------------
Commission file number 000-23520
---------
QUINTILES TRANSNATIONAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1714315
- ----------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4709 Creekstone Dr., Suite 200
Durham, NC 27703-8411
- ---------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
(919) 998-2000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
The number of shares of Common Stock, $.01 par value, outstanding as of April
30, 2001 was 116,603,423
2
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Index
Page
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets -
March 31, 2001 and December 31, 2000 3
Condensed consolidated statements of
operations - Three months ended
March 31, 2001 and 2000 4
Condensed consolidated statements of
cash flows - Three months ended
March 31, 2001 and 2000 5
Notes to condensed consolidated financial
statements - March 31, 2001 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 20
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities - Not Applicable 22
Item 3. Defaults upon Senior Securities - Not Applicable 22
Item 4. Submission of Matters to a Vote of Security
Holders - Not Applicable 22
Item 5. Other Information - Not Applicable 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit Index 24
2
3
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31 DECEMBER 31
2001 2000
----------- -----------
(unaudited) (Note 1)
ASSETS (In thousands)
Current assets:
Cash and cash equivalents $ 377,946 $ 330,214
Trade accounts receivable and unbilled services, net 446,859 413,992
Investments in debt securities 28,726 31,080
Prepaid expenses 34,081 31,984
Other current assets and receivables 27,911 29,405
----------- -----------
Total current assets 915,523 836,675
Property and equipment 610,155 602,950
Less accumulated depreciation (222,352) (210,990)
----------- -----------
387,803 391,960
Intangibles and other assets:
Intangibles, net 196,322 194,814
Investments in debt securities 47,228 76,732
Investments in marketable equity securities 257,998 384,040
Deferred income taxes 31,615 29,175
Deposits and other assets 53,428 48,182
----------- -----------
586,591 732,943
----------- -----------
Total assets $ 1,889,917 $ 1,961,578
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 17 $ 44
Accounts payable and accrued expenses 255,368 255,238
Credit arrangements, current 22,862 20,027
Unearned income 208,293 194,201
Income taxes payable 54,842 51,284
Deferred income taxes 4,545 4,774
Other current liabilities 1,655 2,423
----------- -----------
Total current liabilities 547,582 527,991
Long-term liabilities:
Credit arrangements, less current portion 11,077 18,965
Other liabilities 10,547 9,916
----------- -----------
21,624 28,881
----------- -----------
Total liabilities 569,206 556,872
Shareholders' equity:
Preferred stock, none issued and outstanding
at March 31, 2001 and December 31, 2000,
respectively -- --
Common stock and additional paid-in capital,
116,460,666 and 115,933,182 shares issued
and outstanding at March 31, 2001 and
December 31, 2000, respectively 881,535 876,407
Retained earnings 630,772 622,985
Accumulated other comprehensive loss (191,596) (94,686)
----------- -----------
Total shareholders' equity 1,320,711 1,404,706
----------- -----------
Total liabilities and shareholders' equity $ 1,889,917 $ 1,961,578
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
statements.
3
4
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED MARCH 31
-----------------------------
2001 2000
--------- ---------
(in thousands)
Net revenue $ 404,470 $ 414,845
Costs and expenses:
Direct 241,006 252,409
General and administrative 134,717 138,129
Depreciation and amortization 22,653 23,122
Restructuring -- 58,592
--------- ---------
398,376 472,252
--------- ---------
Income (loss) from operations 6,094 (57,407)
Other income, net 5,534 1,948
--------- ---------
Income (loss) from continuing operations before
income taxes 11,628 (55,459)
Income tax expense (benefit) 3,837 (18,300)
--------- ---------
Income (loss) from continuing operations 7,791 (37,159)
Income from discontinued operation, net of income taxes -- 10,594
--------- ---------
Net income (loss) $ 7,791 $ (26,565)
========= =========
Basic net income (loss) per share:
Income (loss) from continuing operations $ 0.07 $ (0.32)
Income from discontinued operation -- 0.09
--------- ---------
Basic net income (loss) per share $ 0.07 $ (0.23)
========= =========
Diluted net income (loss) per share:
Income (loss) from continuing operations $ 0.06 $ (0.32)
Income from discontinued operation -- 0.09
--------- ---------
Diluted net income (loss) per share $ 0.06 $ (0.23)
========= =========
The accompanying notes are an integral part of these condensed consolidated
statements.
4
5
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED MARCH 31
2001 2000
--------- ---------
(In thousands)
OPERATING ACTIVITIES
Net income (loss) $ 7,791 $ (26,565)
Income from discontinued operation, net of income taxes -- (10,594)
--------- ---------
Income (loss) from continuing operations 7,791 (37,159)
Adjustments to reconcile income (loss) from continuing operations
to net cash provided by (used in) operating activities:
Depreciation and amortization 22,653 23,122
Restructuring charge (payments) accrual, net (7,100) 50,874
Benefit from deferred income tax expense (105) (328)
Change in operating assets and liabilities 36,506 (59,621)
Other 678 (97)
--------- ---------
Net cash provided by (used in) operating activities 60,423 (23,209)
INVESTING ACTIVITIES
Proceeds from disposition of property and equipment 2,279 1,731
Acquisition of property and equipment (24,019) (26,545)
Acquisition of businesses, net of cash acquired (6,522) --
Proceeds from (purchases of) debt securities, net 32,667 (3,667)
Purchases of equity investments (13,576) (1,760)
Other -- 217
--------- ---------
Net cash used in investing activities (9,171) (30,024)
FINANCING ACTIVITIES
(Decrease) increase in lines of credit, net (26) 237
Principal payments on credit arrangements, net (4,370) (5,678)
Issuance of common stock, net 6,033 4,891
Repurchase of common stock (471) (6,517)
Dividend from discontinued operation -- 9,515
--------- ---------
Net cash provided by financing activities 1,166 2,448
Effect of foreign currency exchange rate changes on cash (4,686) (1,381)
--------- ---------
Increase (decrease) in cash and cash equivalents 47,732 (52,166)
Cash and cash equivalents at beginning of period 330,214 191,653
--------- ---------
Cash and cash equivalents at end of period $ 377,946 $ 139,487
========= =========
The accompanying notes are an integral part of these condensed consolidated
statements.
5
6
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
March 31, 2001
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three month period ended March 31,
2001 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2001. The balance sheet at December 31, 2000 has been
derived from the audited consolidated financial statements of the Company. For
further information, refer to the Consolidated Financial Statements and Notes
thereto included in the Annual Report on Form 10-K for the year ended December
31, 2000 of Quintiles Transnational Corp. (the "Company").
For an update of the Company's legal proceedings, refer to Item 1 of Part II of
this Form 10-Q.
2. Acquisitions
During the first quarter of 2001, the Company acquired OEC, SA, a
Switzerland-based company that provides drug safety services to the
pharmaceutical industry, and Ungerer Laboratory, a laboratory based in Pretoria,
South Africa specializing in microbiology, molecular biology and hematology.
These transactions were accounted for as purchases with an aggregate purchase
price of approximately $7.1 million.
3. Stock Repurchase
The authorization by the Board of Directors to repurchase up to $200 million of
the Company's Common Stock expired March 1, 2001. The Company did not enter into
any agreements to repurchase its Common Stock under this authorization during
2001.
On March 13 , 2001, the Board of Directors authorized the Company to repurchase
up to $100 million of the Company's Common Stock until March 1, 2002. During the
first three months of 2001, the Company entered into agreements to repurchase
100,000 shares of its Common Stock for an aggregate price of approximately $1.7
million.
6
7
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
4. Significant Customers
One customer accounted for 11.4% of consolidated net revenue for the three
months ended March 31, 2001. No one customer accounted for 10% of consolidated
net revenue for the three months ended March 31, 2000. The revenues were derived
from each of the Company's segments.
5. Restructuring Charge
During 2000, the Company adopted a restructuring plan ("Original Plan") and a
follow-on restructuring plan ("New Plan") which resulted in the recognition of a
restructuring charge of $58.6 million. Of the approximately 990 positions that
were to be eliminated under these plans, 824 positions have been terminated as
of March 31, 2001, which includes 755 positions under the original plan.
The following table reflects the costs incurred during the first three months of
2001 under the plans (in thousands):
Balance at Original Plan New Plan Balance at
December 31, 2000 Write-Offs/Payments Write-Offs/Payments March 31, 2001
----------------- ------------------- ------------------- --------------
Severance and related costs $ 8,867 $ (666) $ (2,142) $ 6,059
Exit costs 5,788 (1,127) (725) 3,936
-------- -------- -------- --------
$ 14,655 $ (1,793) $ (2,867) $ 9,995
======== ======== ======== ========
6. Net Income Per Share
The following table sets forth the computation of the weighted-average shares
used when calculating the basic and diluted net income per share (in thousands):
Three Months Ended March 31
---------------------------
2001 2000
------- -------
Weighted average shares:
Basic weighted average shares 116,338 115,392
Effect of dilutive securities:
Stock options 3,726 --
------- -------
Diluted weighted average shares 120,064 115,392
======= =======
Options to purchase approximately 8.8 million shares of common stock were
outstanding during the three months ended March 31, 2001, but were not included
in the computation of diluted net income per share because the options' exercise
price was greater than the average market price of the common stock and,
therefore, the effect would be antidilutive.
7
8
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Warrants to purchase 10 million shares of common stock were outstanding during
the three months ended March 31, 2001, but were not included in the computation
of diluted net income per share because the warrants' exercise price was greater
than the average market price of the common stock and, therefore, the effect
would be antidilutive.
7. Segments
The following table presents the Company's operations by reportable segment. The
Company is managed through three reportable segments, namely, the product
development service group, the commercialization service group and the
informatics service group. Management has distinguished these segments based on
the normal operations of the Company. The product development group is primarily
responsible for all phases of clinical research and outcomes research
consulting. The commercialization group is primarily responsible for sales force
deployment and strategic marketing services. The informatics group is primarily
responsible for providing market research solutions and strategic analysis to
support healthcare decisions. The Company does not include net revenue and
expenses relating to the Internet initiative (approximately $33,000 and $6.0
million, respectively, for the three months ended March 31, 2001 and
approximately $445,000 and $3.2 million, respectively, for the three months
ended March 31, 2000), non-recurring costs, interest income (expense) and income
tax expense (benefit) in segment profitability. Overhead costs are allocated
based upon management's best estimate of efforts expended in managing the
segments. There are not any significant intersegment revenues.
Three Months Ended March 31
-----------------------------
2001 2000
--------- ---------
Net revenue:
Product development $ 216,954 $ 200,496
Commercialization 172,018 200,356
Informatics 15,465 13,548
--------- ---------
$ 404,437 $ 414,400
========= =========
Income from operations:
Product development $ 8,482 $ (9,245)
Commercialization 6,340 15,669
Informatics (2,733) (2,495)
--------- ---------
$ 12,089 $ 3,929
========= =========
8
9
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
8. Comprehensive Income
The following table represents the Company's comprehensive income for the three
months ended March 31, 2001 and 2000 (in thousands):
Three Months Ended March 31
---------------------------
2001 2000
-------- --------
Net income (loss) $ 7,791 $(26,565)
Other comprehensive income (loss):
Unrealized (loss) gain on marketable securities, net of income taxes (82,964) 10,107
Foreign currency adjustment (13,946) (7,447)
-------- --------
Comprehensive loss $(89,119) $(23,905)
======== ========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Information set forth in this Form 10-Q, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Act of 1934, which statements
represent our judgement concerning the future and are subject to risks and
uncertainties that could cause our actual operating results and financial
position to differ materially. Such forward looking statements can be identified
by the use of forward looking terminology such as "may," "will," "expect,"
"anticipate," "estimate," "believe," or "continue," or the negative thereof or
other variations thereof or comparable terminology.
We caution you that any such forward looking statements are further qualified by
important factors that could cause our actual operating results to differ
materially from those in the forward looking statements, including without
limitation, the risk the market for our products and services will not grow as
we expect, the risk that our PharmaBio transactions will not generate revenues,
profits or return on investment at the rate or levels we expect, our ability to
efficiently distribute backlog among therapeutic business units and match demand
to resources, actual operating performance, the actual savings and operating
improvements resulting from the restructuring, the ability to maintain large
client contracts or to enter into new contracts, changes in trends in the
pharmaceutical industry, and the ability to operate successfully in new lines of
business. In addition, our data products business remains subject to state and
federal regulations and contracts with data vendors, including WebMD
Corporation. See "Risk Factors" below for additional factors that could cause
actual results to differ.
9
10
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Results of Continuing Operations
Three Months Ended March 31, 2001 and 2000
Net revenue for the first quarter of 2001 was $404.5 million, a decrease of
$10.4 million or 2.5% over the first quarter of 2000 net revenue of $414.8
million. Net revenue decreased as a result of large commercialization contracts
that were terminated or converted in-house during the second half of 2000
instead of being renewed. This decrease was partially offset by $5.2 million of
net revenue contributed by an acquisition completed in the first quarter of 2001
and an increase of approximately $3.6 million in net revenue from our Phase I
development services. We experienced strong growth in the Asia Pacific region
but a decrease in the Americas region primarily resulting from the decline in
the commercialization segment. The growth in the Europe and Africa region was
negatively impacted by approximately $13.8 million due to the effect of foreign
currency fluctuations related to the strengthening of the US Dollar relative to
the euro and other European currencies.
Direct costs, which include compensation and related fringe benefits for
billable employees, and other expenses directly related to contracts, were
$241.0 million or 59.6% of net revenue for the first quarter of 2001 versus
$252.4 million or 60.8% of net revenue for the first quarter of 2000.
General and administrative expenses, which include compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $134.7 million or
33.3% of net revenue for the first quarter of 2001 versus $138.1 million or
33.3% of net revenue for the first quarter of 2000. General and administrative
expenses decreased primarily due to the effects of reductions relating to our
restructuring. These reductions were partially offset by an increase of costs
associated with initiatives begun during 2000. Below is a brief description of
the progress made during 2001 on these initiatives:
o Costs relating to our Internet initiative increased $3.3 million. We are
targeting the launch of several web-enabled products into beta testing
during the second quarter of 2001.
o Costs relating to the implementation of a global shared service center
increased $2.8 million. During the first quarter of 2001, we opened our
finance shared service center in Scotland and anticipate the implementation
to continue during the second quarter of 2001.
o Costs relating to the implementation of global account teams increased $2.8
million. We currently have 16 global account teams in place. The teams have
regularly scheduled meetings to pursue key customers and contracts.
Depreciation and amortization were $22.7 million or 5.6% of net revenue for the
first quarter of 2001 versus $23.1 million or 5.6% of net revenue for the first
quarter of 2000.
Income from operations was $6.1 million or 1.5% of net revenue for the first
quarter of 2001 versus a loss from operations of $57.4 million or (13.8%) of net
revenue for the first quarter of 2000. Excluding the $6.0 million and $2.7
million for the Internet initiative in the first quarter of 2001 and 2000,
respectively and
10
11
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
the $58.6 million for the 2000 restructurings, income from operations was $12.1
million or 3.0% of net revenue for the first quarter of 2001 versus $3.9 million
or .9% of net revenue for the first quarter of 2000.
Other income was $5.5 million for the first quarter of 2001 versus $1.9 million
for the first quarter of 2000. The $3.6 million variation was primarily due to
an increase in net interest income as a result of an increase in investable
funds and a decrease in debt.
The effective income tax rate for the first quarter of 2001 was 33.0% versus a
(33.0%) effective income tax rate for the first quarter of 2000. Since we
conduct operations on a global basis, our effective income tax rate may vary.
Analysis by Segment:
The following table summarizes the operating activities for our three reportable
segments for the three months ended March 31, 2001 and 2000. We do not include
net revenue and expenses relating to the Internet initiative and restructuring
charges in our segment analysis, (dollars in millions).
Net Revenue (Loss)/Income From Operations
------------------------------- ----------------------------------------------
Growth % of Net % of Net
2001 2000 % 2001 Revenue 2000 Revenue
------ ------ ------ ------ ------- ------ -------
Product development $217.0 $200.5 8.2% $ 8.5 3.9% $ (9.2) (4.6%)
Commercialization 172.0 200.4 (14.1) 6.3 3.7 15.7 7.8
Informatics 15.5 13.5 14.1 (2.7) (17.7) (2.5) (18.4)
------ ------ ------ ------
$404.4 $414.4 (2.4%) $ 12.1 3.0% $ 3.9 .9%
====== ====== ====== ======
The product development group's financial performance improvement was a result
of several factors, including process enhancements and cost reduction efforts in
the American and European operations and growth in our Phase I development
services.
The commercialization group's financial performance was negatively impacted
during the quarter by several factors, including the effect of large contracts
converted in-house or terminated by our customers during the second half of 2000
instead of being renewed, costs incurred relating to the increased global
business development efforts and the effects of a collection issue with a
non-pharmaceutical customer receivable.
The informatics group's performance was impacted by the net effect of a 14%
increase in net revenue less the costs associated with developing new data
products.
11
12
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Liquidity and Capital Resources
Cash provided by operations was $60.4 million for the three months ended March
31, 2001 versus cash outflows of $23.2 million for the comparable period of
2000. Included in cash provided by operations for the three months ended March
31, 2001 was an income tax refund of $47.6 million. Investing activities, for
the three months ended March 31, 2001, consisted primarily of capital asset
purchases. Capital asset purchases required an outlay of cash of $24.0 million
for the three months ended March 31, 2001 compared to an outlay of $26.5 million
for the same period in 2000. In 1999, we acquired substantial assets of Aventis'
Kansas City-based Drug Innovation and Approval Facility. We believe that we will
either pay the remainder of the purchase price for the facility, approximately
$58 million, or enter into a long-term lease for the facility during 2001.
Total working capital was $367.9 million as of March 31, 2001, an increase of
$59.3 million versus working capital of $308.7 million as of December 31, 2000.
Net receivables from customers (trade accounts receivable and unbilled services,
net of unearned income) were $238.6 million at March 31, 2001 as compared to
$219.8 million at December 31, 2000. As of March 31, 2001, trade accounts
receivable were $257.0 million versus $246.3 million at December 31, 2000.
Unbilled services were $189.8 million at March 31, 2001 versus $167.7 million at
December 31, 2000, offset by unearned income balances of $208.3 million and
$194.2 million, respectively. The number of days of revenue outstanding in trade
accounts receivable and unbilled services, net of unearned income, increased to
47 days at March 31, 2001, from 43 days at December 31, 2000 as a result of
seasonality.
Investments in debt securities were $76.0 million at March 31, 2001 as compared
to $107.8 million at December 31, 2000. Our investments in debt securities
consist primarily of U.S. Government Securities, which are callable by the
issuer at par, and money funds. The $31.9 million decrease is a result of
investments being called by the issuer.
Investments in strategic marketable equity securities at March 31, 2001 were
$258.0 million, a decrease of $126.0 million, as compared to $384.0 million at
December 31, 2000. This decrease is due to unrealized losses on the portfolio as
a result of stock price declines. A significant factor was the decline in the
stock price of WebMD Corporation.
We have a $150 million senior unsecured credit facility with a U.S. bank. In
addition, we have available to us a (pound)10.0 million (approximately $14.4
million) unsecured line of credit and a (pound)1.5 million (approximately $2.2
million) general banking facility with an U.K. bank. At March 31, 2001, we did
not have any outstanding balances on these facilities.
In March 2001, the Board of Directors authorized us to repurchase up to $100
million of our common stock until March 1, 2002. During the first three months
of 2001, we entered into agreements to repurchase 100,000 shares for an
aggregate price of $1.7 million. Shareholders' equity at March 31, 2001 was
$1.32 billion versus $1.4 billion at December 31, 2000.
12
13
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Based on our current operating plan, we believe that our available cash and cash
equivalents and investments in marketable securities, together with future cash
flows from operations and borrowings under our line of credit agreements will be
sufficient to meet our foreseeable cash needs in connection with our operations.
As part of our business strategy, we review many acquisition candidates in the
ordinary course of business, and in addition to acquisitions already made, we
are continually evaluating new acquisition and expansion possibilities. We may
from time to time seek to obtain debt or equity financing in our ordinary course
of business or to facilitate possible acquisitions or expansion.
RISK FACTORS
In addition to the other information provided in our reports, you should
consider the following factors carefully in evaluating our business and us.
Additional risks and uncertainties not presently known to us, that we currently
deem immaterial or that are similar to those faced by other companies in our
industry or business in general, such as competitive conditions, may also impair
our business operations. If any of the following risks occur, our business,
financial condition, or results of operations could be materially adversely
affected.
Changes in outsourcing trends in the pharmaceutical and biotechnology industries
could adversely affect our operating results and growth rate.
Economic factors and industry trends that affect our primary customers,
pharmaceutical and biotechnology companies, also affect our business. For
example, the practice of many companies in these industries has been to hire
outside organizations like us to conduct large clinical research and sales and
marketing projects. This practice has grown substantially over the past decade,
and we have benefited from this trend. Some industry commentators believe that
the rate of growth of outsourcing will continue to trend downward. If these
industries reduce their tendency to outsource those projects, our operations,
financial condition and growth rate could be materially and adversely affected.
Recently, we also believe we have been negatively impacted by pending mergers
and other factors in the pharmaceutical industry, which appear to have slowed
decision making by our customers and delayed certain trials. A continuation of
these trends would have an ongoing adverse effect on our business. In addition,
numerous governments have undertaken efforts to control growing healthcare costs
through legislation, regulation and voluntary agreements with medical care
providers and pharmaceutical companies. If future regulatory cost containment
efforts limit the profits which can be derived on new drugs, our customers may
reduce their research and development spending, which could reduce the business
they outsource to us. We cannot predict the likelihood of any of these events or
the effects they would have on our business, results of operations or financial
condition.
If we are unable to successfully develop and market potential new services, our
growth could be adversely affected.
Another key element of our growth strategy is the successful development and
marketing of new services that complement or expand our existing business. If we
are unable to succeed in (1) developing new services and (2) attracting a
customer base for those newly developed services, we will not be able to
implement this element of our growth strategy, and our future business, results
of operations and financial condition could be adversely affected.
13
14
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
For example, we are expanding our pharmaceutical and healthcare information and
market research services. These services involve analyzing healthcare
information to study aspects of current healthcare products and procedures for
use in developing new products and services or in analyzing sales and marketing
of existing products. In addition to the other difficulties associated with the
development of any new service, our ability to develop these services may be
limited further by contractual provisions limiting our use of the healthcare
information or the legal rights of others that may prevent or impair our use of
the healthcare information. Due to these and other limitations, we cannot assure
you that we will be able to develop this type of service successfully. Our
inability to develop new products or services or any delay in development may
adversely affect our ability to maintain our rate of growth in the future.
Our plan to web-enable our product development and commercialization services
may negatively impact our results in the short term.
We are currently making a substantial investment in developing an Internet
platform for our product development and commercialization services, but we do
not believe that we will see any positive impact to our revenues from this
investment over the short term. We have entered into an agreement with WebMD
Corporation and certain other vendors for them to provide web-enablement
services to help us develop this platform. Performance and other issues
regarding the agreement currently are under dispute with WebMD. If WebMD or
other vendors fail to perform as required, if we are unable to favorably resolve
our current dispute with WebMD or if there are substantial delays in developing
and implementing this platform, we may have to make substantial further
investments, internally or with WebMD or other third parties, to achieve our
objectives. Meeting our objectives is dependent on a number of factors which may
not take place as we anticipate, including obtaining adequate web-enablement
services, creating web-enablement services which our customers will find
desirable and implementing our business model with respect to these services.
Also, these expenditures are likely to negatively impact our profitability, at
least until our web-enabled products are commercialized. Over time, we envision
continuing to invest in extending and enhancing our Internet platform in other
ways to further support and improve our services. We cannot assure you that any
improvements in revenues resulting from our Internet capabilities will be
sufficient to offset our investments in the Internet platform. Our results could
be further negatively impacted if our competitors are able to execute their
services on a web-based platform before we can launch our Internet services or
if they are able to structure a platform that attracts clients away from our
services.
Our ability to provide informatics services depends on our agreement with WebMD.
In order to provide our informatics products and services, we need access to
healthcare data. Prior to the sale of our ENVOY subsidiary, we obtained this
data directly from ENVOY. Following the sale of ENVOY to WebMD, we entered into
a data rights agreement with WebMD to continue to provide us with the ENVOY
data, as well as other data collected by WebMD. If WebMD fails to perform under
this agreement, for example, by stopping transmission of data to us, or our
access to data is otherwise significantly limited, we would be unable to provide
some or all of our informatics services, which would have a negative impact on
our business.
14
15
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
On February 24, 2001, WebMD unilaterally stopped the transmission of data to us
in violation of our rights under the data rights agreement. We have obtained a
preliminary injunction requiring WebMD to continue the unaltered and
uninterrupted flow of data to us until the matter can be resolved, and we intend
to pursue our rights under the data agreement. If we are unable to enforce our
rights to this data, we would have to re-negotiate the terms of our agreement
with WebMD or seek to obtain similar data from alternate sources. These options
may not be available if WebMD or third parties are not willing to negotiate or
provide terms that are acceptable to us, or are unable to give us access to the
quality and timeliness of data that we need to support our informatics products.
If we do not have continued access to data on the terms we negotiated with WebMD
or on similar terms, our informatics service group would not be able to support
its contracts with existing customers or continue development projects as
currently planned, which would have a material adverse effect on our business.
The potential loss or delay of our large contracts could adversely affect our
results.
Many of our customers can terminate our contracts upon 15-90 days' notice. In
the event of termination, our contracts often provide for fees for winding down
the project, but these fees may not be sufficient for us to maintain our
margins, and termination may result in lower resource utilization rates. Thus,
the loss or delay of a large contract or the loss or delay of multiple contracts
could adversely affect our net revenue and profitability. We believe that this
risk has potentially greater effect as we pursue larger outsourcing arrangements
with global pharmaceutical companies, which may encompass global clinical trials
at a number of sites and cross many service lines. Also, over the past eighteen
months we have observed that customers may be more willing to delay, cancel or
reduce contracts more rapidly than in the past. If this trend continues, it
could become more difficult for us to balance our resources with demands for our
services and our financial results could be adversely affected.
Our backlog may not be indicative of future results.
We report backlog, $1.9 billion at December 31, 2000, based on anticipated net
revenue from uncompleted projects that our customers have authorized. We cannot
assure you that the backlog we have reported will be indicative of our future
results. A number of factors may affect our backlog, including:
o the variable size and duration of projects (some are performed over several
years);
o the loss or delay of projects; and
o a change in the scope of work during the course of a project.
Also, if customers delay projects, the projects will remain in backlog, but will
not generate revenue at the rate originally expected. Accordingly, historical
indications of the relationship of backlog to revenues are not indicative of the
future relationship.
15
16
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Underperformance of our risk-sharing and gain-sharing strategies could have a
negative impact on our financial performance.
As part of our sales strategy, we enter into creative arrangements with
customers in which we take on some of the risk of the potential success or
failure of the customer's product. We may take risk through our PharmaBio
transactions, which may include a strategic investment in a customer, or by
taking an interest in the revenues from a customer's product. For example, we
may build a sales organization for a biotechnology customer to commercialize a
new product in exchange for a share in the revenues of the product. We must
carefully analyze and select the customers and products with which we are
willing to structure our risk-based deals. Our financial results would be
adversely affected if our customers' products do not achieve the level of
success that we anticipate and/or our return from the product or investment is
less than our costs of performance or investment.
If we lose the services of Dennis Gillings, Pamela Kirby or other key personnel,
our business could be adversely affected.
Our success substantially depends on the performance, contributions and
expertise of our senior management team, led by Dennis B. Gillings, Ph.D., our
Chairman, and Pamela Kirby, Ph.D., our Chief Executive Officer. Our performance
also depends on our ability to attract and retain qualified management and
professional, scientific and technical operating staff, as well as our ability
to recruit qualified representatives for our contract sales services. The
departure of Dr. Gillings, Dr. Kirby or any key executive, or our inability to
continue to attract and retain qualified personnel could have a material adverse
effect on our business, results of operations or financial condition.
Our product development services create a risk of liability from clinical trial
participants and the parties with whom we contract.
We contract with drug companies to perform a wide range of services to assist
them in bringing new drugs to market. Our services include supervising clinical
trials, data and laboratory analysis, patient recruitment and other services.
The process of bringing a new drug to market is time-consuming and expensive. If
we do not perform our services to contractual or regulatory standards, the
clinical trial process could be adversely affected. Additionally, if clinical
trial services such as laboratory analysis do not conform to contractual or
regulatory standards, trial participants could be affected. These events would
create a risk of liability to us from the drug companies with whom we contract
or the study participants.
We also contract with physicians to serve as investigators in conducting
clinical trials. Such testing creates risk of liability for personal injury to
or death of volunteers, particularly to volunteers with life-threatening
illnesses, resulting from adverse reactions to the drugs administered during
testing. It is possible third parties could claim that we should be held liable
for losses arising from any professional malpractice of the investigators with
whom we contract or in the event of personal injury to or death of persons
participating in clinical trials. We do not believe we are legally accountable
for the medical care rendered by third party investigators, and we would
vigorously defend any such claims. Nonetheless, it is possible we could be found
liable for those types of losses.
16
17
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
In addition to supervising tests or performing laboratory analysis, we also own
a number of labs where Phase I clinical trials are conducted. Phase I clinical
trials involve testing a new drug on a limited number of healthy individuals,
typically 20 to 80 persons, to determine the drug's basic safety. We also could
be liable for the general risks associated with ownership of such a facility.
These risks include, but are not limited to, adverse events resulting from the
administration of drugs to clinical trial participants or the professional
malpractice of Phase I medical care providers.
We also could be held liable for errors or omissions in connection with our
services. For example, we could be held liable for errors or omissions or breach
of contract if one of our laboratories inaccurately reports or fails to report
lab results or if our informatics products violate rights of third parties. We
maintain insurance to cover ordinary risks but any insurance might not be
adequate, and it would not cover the risk of a customer deciding not to do
business with us as a result of poor performance.
Relaxation of government regulation could decrease the need for the services we
provide.
Governmental agencies throughout the world, but particularly in the United
States, highly regulate the drug development/approval process. A large part of
our business involves helping pharmaceutical and biotechnology companies through
the regulatory drug approval process. Any relaxation in regulatory approval
standards could eliminate or substantially reduce the need for our services,
and, as a result, our business, results of operations and financial condition
could be materially adversely affected. Potential regulatory changes under
consideration in the United States and elsewhere include mandatory substitution
of generic drugs for patented drugs, relaxation in the scope of regulatory
requirements or the introduction of simplified drug approval procedures. These
and other changes in regulation could have an impact on the business
opportunities available to us.
Failure to comply with existing regulations could result in a loss of revenue.
Any failure on our part to comply with applicable regulations could result in
the termination of ongoing clinical research or sales and marketing projects or
the disqualification of data for submission to regulatory authorities, either of
which could have a material adverse effect on us. For example, if we were to
fail to verify that informed consent is obtained from patient participants in
connection with a particular clinical trial, the data collected from that trial
could be disqualified, and we could be required to redo the trial under the
terms of our contract at no further cost to our customer, but at substantial
cost to us.
17
18
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Proposed and final laws and regulations may create a risk of liability and
increase the cost of our business or limit our service offerings.
The confidentiality of patient-specific information and the circumstances under
which such patient-specific records may be released for inclusion in our
databases or used in other aspects of our business are subject to substantial
government regulation. Additional legislation governing the possession, use and
dissemination of medical record information and other personal health
information has been proposed or adopted at both the state and federal levels.
Proposed and final federal regulations governing patient-specific information
may (1) require us to implement new security measures that may require
substantial expenditures or (2) limit our ability to offer some of our products
and services. These regulations may also increase costs by creating new privacy
requirements for our informatics business and mandating additional privacy
procedures for our clinical research business. Additionally, states may adopt
health information legislation or regulations that contain privacy and security
provisions that are more burdensome than the proposed federal regulations. In
our dispute with WebMD, WebMD has advised us that a number of state laws apply
which may require modifications to access specifications for specific types of
de-identified patient-level data. These and other changes in regulation could
limit our ability to offer some of our products or have an impact on the
business opportunities available to us. There is a risk of civil or criminal
liability if we are found to be responsible for any violations of applicable
laws, regulations or duties relating to the use, privacy or security of health
information.
Industry regulation may restrict our ability to analyze and disseminate
pharmaceutical and healthcare data.
We are directly subject to certain restrictions on the collection and use of
data. Laws relating to the collection and use of data are evolving, as are
contractual rights. We cannot assure you that contractual restrictions imposed
by our customers, legislation or regulations will not, now or in the future,
directly or indirectly restrict the analysis or dissemination of the type of
information we gather and therefore materially adversely affect our operations.
We also have certain obligations to indemnify parties which provide us data for
losses they may incur arising from claims that they have provided us data in
violation of contract or other rights.
Our services are subject to evolving industry standards and rapid technological
changes.
The markets for our services, particularly our informatics services, which
include our data analysis services, are characterized by rapidly changing
technology, evolving industry standards and frequent introduction of new and
enhanced services. To succeed, we must continue to:
o enhance our existing services;
o introduce new services on a timely and cost-effective basis to meet evolving
customer requirements;
o achieve market acceptance for new services; and
o respond to emerging industry standards and other technological changes.
18
19
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Exchange rate fluctuations may affect our results of operations and financial
condition.
We derive a large portion of our net revenue from international operations; for
example, we derived approximately 44.0% of our 2000 net revenue from outside the
United States. Our financial statements are denominated in U.S. dollars; thus,
factors associated with international operations, including changes in foreign
currency exchange rates and any trends associated with the transition to the
euro, could significantly affect our results of operations and financial
condition. Exchange rate fluctuations between local currencies and the U.S.
dollar create risk in several ways, including:
o Foreign Currency Translation Risk. The revenue and expenses of our
foreign operations are generally denominated in local currencies.
o Foreign Currency Transaction Risk. Our service contracts may be
denominated in a currency other than the currency in which we incur
expenses related to such contracts.
We try to limit these risks through exchange rate fluctuation provisions stated
in our service contracts, or we may hedge our transaction risk with foreign
currency exchange contracts or options. Although we may hedge our transaction
risk, there were no open foreign exchange contracts or options relating to
service contracts at March 31, 2001. Despite these efforts, we may still
experience fluctuations in financial results from our operations outside the
United States, and we cannot assure you that we will be able to favorably reduce
our currency transaction risk associated with our service contracts.
We may be adversely affected by customer concentration.
We have one customer that accounted for 11.4% of our net revenues for the
quarter ended March 31, 2001. These revenues resulted from services provided by
each of our three service groups. If any large customer decreases or terminates
its relationship with us, our business, results of operations or financial
condition could be materially adversely affected.
New healthcare legislation or regulation could restrict our informatics
business.
On December 28, 2000, the Secretary of the Department of Health and Human
Services issued the final rule on Standards for Privacy of Individually
Identifiable Health Information to implement the privacy requirements for HIPAA.
These regulations generally (1) impose standards for covered entities
transmitting or maintaining protected data in an electronic, paper or oral form
with respect to the rights of individuals who are the subject of protected
health information; and (2) establish limitations on and procedures for (a) the
exercise of those individuals' rights and (b) the uses and disclosures of
protected health information. The effective date of the final rule was April 14,
2001 and the compliance date is April 14, 2003. According to the Secretary,
modifications and/or guidelines to the regulation will be forthcoming in the
next few months. If state or federal legislation or a more restrictive
regulation is adopted, it could inhibit third party processors in using,
transmitting or disclosing health data (even if they have been de-identified)
for purposes other than facilitating payment or performing other clearinghouse
functions which would restrict our ability to obtain data for use in our
informatics services. In addition, it could require us to establish uniform
specifications for obtaining de-identified data, so that de-identified data
obtained from different sources could be aggregated.
19
20
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
While the impact of developments in legislation, regulations or the demands of
third party processors is difficult to predict, each could materially adversely
affect our informatics business.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company did not have any material changes in market risk from December 31,
2000.
PART II. Other Information
Item 1. Legal Proceedings
Beginning on September 30, 1999, several purported class action
lawsuits were filed in the United States District Court for the Middle District
of North Carolina against us and several of our executive officers and directors
on behalf of all persons who purchased or otherwise acquired shares of our
common stock between July 16, 1999, and September 15, 1999. These actions were
subsequently consolidated and plaintiffs filed an amended complaint purporting
to represent a class of purchasers of our stock or call options, and sellers of
put options, during the period between April 21, 1999, and September 15, 1999.
The amended complaint alleges violations of Section 10(b) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5. Plaintiffs seek unspecified damages,
plus costs and expenses, including attorneys' fees and experts' fees. We
believed the claims to be without merit and intended to defend the suit
vigorously. Accordingly, we and the named officers and directors filed a motion
to dismiss the amended complaint. Immediately prior to the hearing scheduled on
February 6, 2001, on the motion to dismiss, the parties agreed to settle the
lawsuit. The parties have negotiated a memorandum of understanding and the
settlement is before the court for approval.
On January 26, 2001, a purported class action lawsuit was filed in the
State Court of Richmond County, Georgia, naming Novartis Pharmaceuticals Corp.,
Pharmed Inc., Debra Brown, Bruce I. Diamond and Quintiles Laboratories Limited,
one of our subsidiaries, on behalf of 185 Alzheimer's patients who participated
in drug studies involving an experimental drug manufactured by defendant
Novartis and their surviving spouses. The complaint alleges claims for breach of
fiduciary duty, civil conspiracy, unjust enrichment, misrepresentation, Georgia
RICO violations, infliction of emotional distress, battery, negligence and loss
of consortium as to class member spouses. The complaint seeks unspecified
damages, plus costs and expenses, including attorneys' fees and experts' fees.
We believe the claims to be without merit and intend to defend the suit
vigorously.
On February 25, 2001, we initiated a lawsuit in Superior Court of Wake
County, North Carolina against WebMD Corporation. Our complaint alleged that
WebMD's suspension of the delivery of data to us on February 24, 2001 was a
material breach of the Data Rights Agreement we entered into with WebMD in May
2000, and we requested a preliminary injunction to require WebMD to continue
providing the data to us pending final resolution of the action. We obtained a
temporary restraining order on February 25, 2001 requiring WebMD to continue the
delivery of data to us pursuant to the Data Rights Agreement. WebMD removed the
suit to the United States District Court for the Eastern District of North
Carolina on March 1, 2001 and moved to dissolve the temporary restraining order.
On March 5, 2001, the court denied the defendant's motion to dissolve the
temporary restraining order and, subsequently extended the temporary restraining
order through March 16, 2001. On March 16 and March 21, the court entered a
preliminary
20
21
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
injunction requiring WebMD to continue the unaltered and uninterrupted flow of
data, which WebMD appealed to the United States Court of Appeals for the Fourth
Circuit on April 16, 2001. On April 7, 2001, at the request of the parties, the
court entered a stay of the trial court proceedings through May 4, 2001 to
facilitate settlement negotiations. The court extended the stay on April 27,
2001 through June 4, 2001. We intend to vigorously pursue the protection of our
rights under the Data Rights Agreement.
On May 8, 2001, Joseph Lewis renewed his civil lawsuit in the State
Court of Fulton County, State of Georgia naming as defendants Richard L.
Borison, Bruce I. Diamond, Janssen Pharmaceutica, Inc., Novartis
Pharmaceuticals Corporation and Quintiles Laboratories Limited, one of our
subsidiaries. The plaintiff alleges that he suffered from schizophrenia and
that he was given experimental drugs for this condition in connection with
numerous clinical drug trials conducted by defendants Borison and Diamond
between January 1988 and June 1996. The plaintiff alleges that the defendants
and their agents conspired to conduct these drug trials on him, and that they
improperly supervised, monitored and regulated the trials, causing him to have
violent adverse reactions to the drugs involved in the trials. The plaintiff
seeks to recover his actual damages in unspecified amounts, medical expenses,
attorney fees, litigation costs and punitive damages. The plaintiff previously
had dismissed his claims against us, without prejudice. We believe the claims
to be without merit and intend to defend the suit vigorously.
We are also a party in certain other pending litigation arising in the
normal course of our business. While the final outcome of such litigation cannot
be predicted with certainty, it is the opinion of management that the outcome of
these matters would not materially affect our consolidated financial position or
results of operations.
21
22
Item 2. Changes in Securities - Not applicable
Item 3. Defaults upon Senior Securities -- Not applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not applicable
Item 5. Other Information -- Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
10.01 Executive Employment Agreement, dated March 13, 2001,
by and between Pamela J. Kirby and Quintiles
Transnational Corp.
(b) During the three months ended March 31, 2001, the Company
filed or furnished four reports on Form 8-K.
The Company filed a Form 8-K, dated January 25, 2001, including its press
release announcing the Company's earnings information for the period ended
December 31, 2000.
The Company furnished a Form 8-K to the Securities and Exchange Commission,,
dated February 24, 2001, disclosing that it had received notice that WebMD
Corporation had interrupted the delivery of the data it is obligated to provide
pursuant to the Data Rights Agreement dated May 26, 2000.
The Company furnished a Form 8-K to the Securities and Exchange Commission,
dated March 14, 2001, disclosing that the Board of Directors authorized the
repurchase of up to $100 million of the Company's Common Stock.
The Company furnished a Form 8-K to the Securities and Exchange Commission,
dated March 21, 2001, including the Order of U.S. District Court, Eastern
District of North Carolina requiring WebMD Corporation to provide data to the
Company pursuant to the Data Rights Agreement dated May 26, 2000.
The reports on Form 8-K dated February 24, 2001, March 14, 2001 and March 21,
2001 were provided pursuant to Regulation FD. These reports shall not be deemed
to be incorporated by reference into this Form 10-Q or filed hereunder for
purposes of liability under the Securities Exchange Act of 1934.
No other reports on Form 8-K were filed or furnished during the three months
ended March 31, 2001.
22
23
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Quintiles Transnational Corp.
-----------------------------
Registrant
Date May 15, 2001 /s/ Dennis B. Gillings
-------------------- -----------------------------------------
Dennis B. Gillings, Chairman
Date May 15, 2001 /s/ James L. Bierman
-------------------- -----------------------------------------
James L. Bierman, Chief Financial Officer
23
24
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Description
------- -----------
10.01 Executive Employment Agreement, dated March 13, 2001,
by and between Pamela J. Kirby and Quintiles
Transnational Corp.
24