Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2001
Commission file number 000-23520
QUINTILES TRANSNATIONAL CORP.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1714315
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4709 Creekstone Dr., Suite 200
Durham, NC 27703-8411
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(Address of principal executive offices) (Zip Code)
(919) 998-2000
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(Registrant's telephone number, including area code)
N/A
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(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
September 30, 2001 was 119,612,095.
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets -
September 30, 2001 and December 31, 2000 3
Condensed consolidated statements of
operations - Three months ended September
30, 2001 and 2000; nine months
ended September 30, 2001 and 2000 4
Condensed consolidated statements of
cash flows - Nine months ended
September 30, 2001 and 2000 5
Notes to condensed consolidated financial
statements - September 30, 2001 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 26
Part II. Other Information
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults upon Senior Securities - Not Applicable 27
Item 4. Submission of Matters to a Vote of Security
Holders - Not Applicable 27
Item 5. Other Information - Not Applicable 27
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
Exhibit Index 30
2
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31
2001 2000
------------ -----------
(unaudited) (Note 1)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 441,912 $ 330,214
Trade accounts receivable and unbilled services, net 450,438 413,992
Investments in debt securities 27,369 31,080
Prepaid expenses 30,169 31,984
Other current assets and receivables 31,158 29,405
----------- -----------
Total current assets 981,046 836,675
Property and equipment 647,394 602,950
Less accumulated depreciation (260,099) (210,990)
----------- -----------
387,295 391,960
Intangibles and other assets:
Intangibles, net 176,453 194,814
Investments in debt securities 9,502 76,732
Investments in marketable equity securities 204,052 384,040
Deferred income taxes 153,902 29,175
Deposits and other assets 64,350 48,182
----------- -----------
608,259 732,943
----------- -----------
Total assets $ 1,976,600 $ 1,961,578
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ -- $ 44
Accounts payable and accrued expenses 304,086 255,238
Credit arrangements, current 15,057 20,027
Unearned income 193,916 194,201
Income taxes payable 8,856 51,284
Deferred income taxes 4,399 4,774
Other current liabilities 2,151 2,423
----------- -----------
Total current liabilities 528,465 527,991
Long-term liabilities:
Credit arrangements, less current portion 21,879 18,965
Other liabilities 8,279 9,916
----------- -----------
30,158 28,881
----------- -----------
Total liabilities 558,623 556,872
Shareholders' equity:
Preferred stock, none issued and outstanding
at September 30, 2001 and December 31, 2000,
respectively -- --
Common stock and additional paid-in capital, 119,612,095
and 115,933,182 shares issued and outstanding at
September 30, 2001 and December 31, 2000, respectively 913,921 876,407
Retained earnings 516,566 622,985
Accumulated other comprehensive loss (12,510) (94,686)
----------- -----------
Total shareholders' equity 1,417,977 1,404,706
----------- -----------
Total liabilities and shareholders' equity $ 1,976,600 $ 1,961,578
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
statements.
3
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- -----------------------------
2001 2000 2001 2000
--------- ---------- ----------- -----------
(in thousands, except per share data)
Net revenue $ 407,103 $ 412,344 $ 1,215,873 $ 1,250,296
Costs and expenses:
Direct 242,745 247,577 724,859 755,887
General and administrative 128,089 141,042 392,208 421,768
Depreciation and amortization 24,597 22,934 71,143 68,805
Restructuring 52,023 -- 54,169 58,592
Write-off of goodwill and other assets 20,120 -- 20,120 --
Disposal of business -- -- -- 17,325
--------- ---------- ----------- -----------
467,574 411,553 1,262,499 1,322,377
--------- ---------- ----------- -----------
(Loss) income from operations (60,471) 791 (46,626) (72,081)
Impairment of investments (341,949) -- (345,048) --
Gain on sale of investments, net 235 1,387 4,702 1,387
Other income 3,580 4,635 14,433 9,776
--------- ---------- ----------- -----------
Total other (expense) income (338,134) 6,022 (325,913) 11,163
--------- ---------- ----------- -----------
(Loss) income from continuing operations before
income taxes (398,605) 6,813 (372,539) (60,918)
Income tax (benefit) expense (132,694) 2,248 (124,093) (20,102)
--------- ---------- ----------- -----------
(Loss) income from continuing operations (265,911) 4,565 (248,446) (40,816)
Income from discontinued operation, net of income taxes -- -- -- 16,770
Extraordinary gain from sale of discontinued operation,
net of income taxes 142,030 -- 142,030 436,327
--------- ---------- ----------- -----------
Net (loss) income $(123,881) $ 4,565 $ (106,416) $ 412,281
========= ========== =========== ===========
Basic net (loss) income per share:
(Loss) income from continuing operations $ (2.22) $ 0.04 $ (2.11) $ (0.35)
Income from discontinued operation -- -- -- 0.14
Extraordinary gain from sale of discontinued operation 1.19 -- 1.21 3.77
--------- ---------- ----------- -----------
Basic net (loss) income per share $ (1.03) $ 0.04 $ (0.90) $ 3.56
========= ========== =========== ===========
Diluted net (loss) income per share:
(Loss) income from continuing operations $ (2.22) $ 0.04 $ (2.11) $ (0.35)
Income from discontinued operation -- -- -- 0.14
Extraordinary gain from sale of discontinued operation 1.19 -- 1.21 3.77
--------- ---------- ----------- -----------
Diluted net (loss) income per share $ (1.03) $ 0.04 $ (0.90) $ 3.56
========= ========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated
statements.
4
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
2001 2000
--------- ----------
(In thousands)
OPERATING ACTIVITIES
Net (loss) income $(106,416) $ 412,281
Income from discontinued operation, net of income taxes -- (16,770)
Gain on the sale of discontinued operation, net of income taxes (142,030) (436,327)
--------- ---------
Loss from continuing operations (248,446) (40,816)
Adjustments to reconcile loss from continuing operations
to net cash provided by (used in) operating activities:
Depreciation and amortization 71,143 68,805
Restructuring charge accrual, net 32,872 50,874
Loss on disposal of business -- 17,325
Loss (gain) from impairments and sales of investments, net 340,346 (1,387)
Benefit from deferred income taxes (229,256) (8,437)
Change in operating assets and liabilities 134,445 (146,299)
Other 1,332 1,203
--------- ---------
Net cash provided by (used in) operating activities 102,436 (58,732)
INVESTING ACTIVITIES
Proceeds from disposition of property and equipment 7,460 6,379
Acquisition of property and equipment (59,769) (73,323)
Proceeds from disposal of discontinued operation, net of expenses -- 391,500
Acquisition of businesses, net of cash acquired (6,620) (15,169)
Proceeds from redemption of (purchases of) debt securities, net 71,882 (2,160)
Purchases of equity investments, net (25,836) (6,092)
Other -- (3)
--------- ---------
Net cash (used in) provided by investing activities (12,883) 301,132
FINANCING ACTIVITIES
(Decrease) increase in lines of credit, net (44) 10,351
Principal payments on credit arrangements, net (12,466) (156,402)
Issuance of common stock, net 46,050 14,394
Repurchase of common stock (7,709) (13,455)
Dividend from discontinued operation -- 17,086
Other -- 1
--------- ---------
Net cash provided by (used in) financing activities 25,831 (128,025)
Effect of foreign currency exchange rate changes on cash (3,686) (6,120)
--------- ---------
Increase in cash and cash equivalents 111,698 108,255
Cash and cash equivalents at beginning of period 330,214 191,653
--------- ---------
Cash and cash equivalents at end of period $ 441,912 $ 299,908
========= =========
The accompanying notes are an integral part of these condensed consolidated
statements.
5
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
September 30, 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 nine
month period ended September 30, 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. During the first nine months
of 2001, the Company repurchased 520,000 shares of its Common Stock for an
aggregate price of approximately $8.6 million.
4. Significant Customers
One customer accounted for 10.2%, 10.6% and 10.5% of consolidated net revenue
for the three and nine months ended September 30, 2001 and the three months
ended September 30, 2000, respectively. No one customer accounted for greater
than 10% of consolidated net revenue for the nine months ended September 30,
2000. These revenues were derived from each of the Company's segments.
6
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
5. Restructuring Charges
During the third quarter of 2001, the Company adopted a restructuring plan
which resulted in the recognition of a restructuring charge of $50.9 million.
In addition, the Company recognized a restructuring charge of approximately
$1.1 million as a revision of an estimate to a 2000 restructuring plan. The
restructuring charge consists of $31.1 million related to severance payments,
$8.2 million related to asset impairment write-offs and $12.7 million of exit
costs. As part of this restructuring, approximately 1,000 positions worldwide
will be eliminated and as of September 30, 2001, 561 individuals have been
notified of their termination. Positions will be eliminated in each of our
segments.
During the second quarter of 2001, the Company recognized a $2.1 million
restructuring charge relating primarily to a reorganization of the Internet
initiative and the commercialization group in the United States. All of the 40
positions to be eliminated as a part of this restructuring were terminated as
of June 30, 2001.
As of September 30, 2001, the following amounts were recorded for the 2001
restructurings (in thousands):
Activity Nine-Months Ended
September 30, 2001
--------------------------------------------------------------------------
Balance at Write-Offs/ Balance at
December 31, 2000 Accruals Payments September 30, 2001
----------------- -------- ----------- ------------------
Severance and related costs $ -- $ 33,104 $ (6,637) $26,467
Exit costs -- 11,743 (1,306) 10,437
Asset impairment write-offs -- 8,237 (8,237) --
------- -------- -------- -------
$ -- $ 53,084 $(16,180) $36,904
======= ======== ======== =======
During 2000, the Company adopted a restructuring plan in January ("January 2000
Plan") and a follow-on restructuring plan later in the year, which resulted in
the recognition of an aggregate restructuring charge of $58.6 million. Of the
approximately 990 positions that were to be eliminated under these two plans,
909 positions have been terminated as of September 30, 2001, which includes 764
positions under the January 2000 Plan.
Activity during the first nine months of 2001 is as follows for the 2000
restructurings (in thousands):
Balance at Write-Offs/ Balance at
December 31, 2000 Accruals Payments September 30, 2001
----------------- -------- ----------- ------------------
Severance and related costs $ 8,867 $ -- $ (7,265) $1,602
Exit costs 5,788 1,085 (3,767) 3,106
------- -------- -------- ------
$14,655 $ 1,085 $(11,032) $4,708
======= ======== ======== ======
7
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
6. Write-off of Goodwill and Other Assets
In the third quarter of 2001, the Company recognized a $20.1 million charge to
write-off goodwill and other operating assets primarily relating to goodwill
recorded in four separate acquisitions in the commercialization segment. The
goodwill was deemed impaired and written-off due to changing business
conditions and strategic direction.
7. Impairment of Investments
The Company continually reviews declines in fair value of investments in
marketable equity securities for declines that may be other than temporary. In
connection with this, the Company recognized a loss of approximately $345.0
million for the nine months ended September 30, 2001 to establish a new cost
basis for certain investments, primarily WebMD Corporation ("WebMD").
8. Discontinued Operation
During the third quarter of 2001, the Company completed a tax basis study for
ENVOY Corporation ("ENVOY") which was sold to WebMD during 2000. As a result of
this study, the Company's tax basis in ENVOY was determined which resulted in
an approximate $142.0 million reduction in the income taxes provided on the
sale of ENVOY.
9. Net Income Per Share
The following table sets forth the computation of the weighted-average shares
used when calculating the basic and diluted net income per share (in
thousands):
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
2001 2000 2001 2000
------- ------- ------- -------
Weighted average shares:
Basic weighted average shares 119,838 115,702 117,786 115,711
Effect of dilutive securities:
Stock options -- 2,437 -- --
------- ------- ------- -------
Diluted weighted average shares 119,838 118,139 117,786 115,711
======= ======= ======= =======
The effect of options to purchase approximately 27.7 million shares of common
stock outstanding during the three and nine months ended September 30, 2001
were not included in the computation of diluted net income per share because
the effect on loss from continuing operations would have been antidilutive.
The effect of warrants to purchase 10 million shares of common stock
outstanding during the three and nine months ended September 30, 2001 were not
included in the computation of diluted net income per share because the effect
on loss from continuing operations would have been antidilutive.
8
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
10. Comprehensive Income
The following table represents the Company's comprehensive income for the three
and nine months ended September 30, 2001 and 2000 (in thousands):
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
2001 2000 2001 2000
--------- -------- --------- ---------
Net (loss) income $(123,881) $ 4,565 $(106,416) $ 412,281
Other comprehensive income (loss):
Reclassification adjustment, WebMD common
stock, net of income taxes 206,155 -- 206,155 --
Unrealized (loss) gain on marketable securities,
net of income taxes (89,109) 49,617 (116,354) 116,240
Foreign currency adjustment 13,722 (11,984) (7,622) (31,473)
--------- -------- --------- ---------
Comprehensive income (loss) $ 6,887 $ 42,198 $ (24,237) $ 497,048
========= ======== ========= =========
9
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
11. 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. 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, charges relating to restructurings,
write-off of goodwill and other assets and disposal of business, other
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 September 30 Nine Months Ended September 30
------------------------------- ---------------------------------
2001 2000 2001 2000
--------- ----------- ----------- -----------
Net revenue:
Product development $ 222,519 $ 201,610 $ 664,151 $ 604,575
Commercialization 171,595 196,167 508,620 602,780
Informatics 12,989 14,339 43,069 42,143
Internet initiative -- 228 33 798
--------- ----------- ----------- -----------
$ 407,103 $ 412,344 $ 1,215,873 $ 1,250,296
========= =========== =========== ===========
Income from operations:
Product development $ 10,376 $ 2,220 $ 28,166 $ (11,610)
Commercialization 9,007 11,433 24,666 43,813
Informatics (5,433) (4,017) (12,543) (11,784)
Internet initiative (2,278) (8,845) (12,626) (16,583)
--------- ----------- ----------- -----------
$ 11,672 $ 791 $ 27,663 $ 3,836
========= =========== =========== ===========
10
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
12. Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," that requires all business combinations initiated after June 30,
2001 to be accounted for as purchases. The Company adopted SFAS No. 141 as
required on July 1, 2001. The adoption did not have a material impact on the
Company's financial position or results of operations.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," requiring that all intangible assets without a contractual life no
longer be amortized but reviewed at least annually for impairment. The Company
will adopt SFAS No. 142 when required to do so on January 1, 2002. The adoption
of SFAS No. 142 is expected to reduce the Company's amortization expense before
income taxes by approximately $2.0 million per quarter. The Company has not
assessed the impact of any impairment under the new tests prescribed by the
standard.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed of" and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The statement is effective for fiscal years beginning after
December 15, 2001. The Company is currently assessing the provisions of this
statement to determine their impact on the Company's results of operations and
financial position.
13. Subsequent Event
On October 12, 2001, the Company jointly announced with WebMD the settlement of
litigation and the resolution of the disputes between the companies. As part of
the settlement, WebMD agreed to pay the Company $185 million in cash for all 35
million shares of WebMD common stock owned by the Company. The Company will also
receive an additional payment from WebMD if, on or before June 30, 2004, WebMD
is acquired for a price greater than $4.00 per share or ENVOY is acquired for a
price greater than $500 million. In addition, as part of the settlement, the
outstanding warrant to purchase up to 10 million shares of the Company's common
stock, at $40 per share, held by WebMD, was cancelled.
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 Exchange 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,"
11
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
"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 that the market for our products and services will not grow
as we expect, the risk that our PharmaBio transactions will not generate
revenues, profits or return on investment at the rate or levels we expect, our
ability to efficiently distribute backlog among project management groups and
match demand to resources, our actual operating performance, the actual savings
and operating improvements resulting from our restructuring activities, our
ability to maintain large client contracts or to enter into new contracts,
changes in trends in the pharmaceutical industry, and our 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. See "Risk Factors" below for additional factors that could cause
actual results to differ.
Results of Continuing Operations
Three Months Ended September 30, 2001 and 2000
Net revenue for the third quarter of 2001 was $407.1 million, a decrease of
$5.2 million or (1.3%) as compared to the third quarter of 2000 net revenue of
$412.3 million. Net revenue decreased as a result of large commercialization
contracts that were terminated or converted in-house by our customers instead
of being renewed. Net revenue was also negatively impacted due to the travel
restrictions implemented after the terrorist acts on September 11, 2001 and
reduced data management activities as a result of the Nimda virus. The decrease
was partially offset by an increase of approximately $2.9 million from our
Phase I development services. Net revenue in the Asia Pacific region increased
$10.4 million or 31.6% to $43.2 million but decreased $20.8 million or 8.7% to
$217.5 million in the Americas region primarily resulting from the decline in
the commercialization segment. Net revenue in the Europe and Africa region
increased $5.2 million or 3.6% to $146.5 million. The growth in net revenue was
negatively impacted by approximately $9.9 million due to the effect of foreign
currency fluctuations related to the strengthening of the US Dollar relative to
the euro, other European currencies and the Japanese yen.
Direct costs, which include compensation and related fringe benefits for
billable employees, and other expenses directly related to contracts, were
$242.7 million or 59.6% of net revenue for the third quarter of 2001 versus
$247.6 million or 60.0% of net revenue for the third 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 $128.1 million or
31.5% of net revenue for the third quarter of 2001 versus $141.0 million or
34.2% of net revenue for the third quarter of 2000. General and administrative
expenses decreased primarily due to the effects of reductions relating to our
restructuring activities including a decrease in spending on our Internet
initiative. These reductions were partially offset by an increase of $2.5
million in costs associated with the continued implementation of our shared
service center initiative and $2.3 million in costs associated with the
realignment of business development.
12
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Depreciation and amortization were $24.6 million or 6.0% of net revenue for the
third quarter of 2001 versus $22.9 million or 5.6% of net revenue for the third
quarter of 2000. Depreciation expense increased $1.6 million due to the
increase in our capitalized asset base.
During the third quarter of 2001, we announced a strategic plan that we are
implementing across each service line and geographic area of our business which
we believe will allow us to meet the changing needs of our customers and to
increase our opportunity for growth by committing ourselves to innovation,
quality and efficiency. We intend to successfully implement this plan through:
- partnering structures
- leveraging technology and information
- realigning business development
- hiring and retaining quality employees
- creating efficiencies through shared service centers and real
time human resource management
In connection with this plan, we recognized a $50.9 million restructuring
charge. In addition, we recognized a restructuring charge of approximately $1.1
million as a revision of an estimate to a 2000 restructuring plan. The
restructuring charge consists of $31.1 million related to severance payments,
$8.2 million related to asset impairment write-offs and $12.7 million of exit
costs. As part of this restructuring, approximately 1,000 positions will be
eliminated and as of September 30, 2001, 561 individuals have been notified of
their termination. We are targeting the restructuring to result in annualized
cost savings of approximately $50 million to $55 million.
Also, in the third quarter of 2001, we recognized a $20.1 million charge to
write-off goodwill and other operating assets primarily relating to goodwill
recorded in four separate acquisitions in our commercialization segment. The
goodwill was deemed impaired and written-off due to changing business
conditions and strategic direction.
Loss from operations was $60.5 million for the third quarter of 2001 versus
income from operations of $791,000 for the third quarter of 2000. Excluding the
$52.0 million restructuring charge and $20.1 million write-off of goodwill and
other assets, income from operations was $11.7 million for the third quarter of
2001.
Other expense was $338.1 million for the third quarter of 2001. Included in
other expense for the third quarter of 2001 was a $341.9 million write-down of
our cost basis in investments held by us, primarily WebMD Corporation, which
management deemed to be an other than temporary decline in their fair value.
Excluding this charge, other income for the third quarter of 2001 was $3.8
million versus $6.0 million for the third quarter of 2000. The decrease was
primarily the result of a $2.1 million decrease in net interest income, due to
a decline in interest rates and a $1.2 million decrease in gains from the sale
of investments.
The effective income tax rate for the third quarter of 2001 was (33.3%) versus
a 33.0% effective income tax rate for the third quarter of 2000. Since we
conduct operations on a global basis, our effective income tax rate may vary.
13
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Analysis by Segment:
The following table summarizes the operating activities for our three reportable
segments for the three months ended September 30, 2001 and 2000. We do not
include net revenue and expenses relating to the Internet initiative, charges
related to restructurings, write-off of goodwill and other assets and disposal
of a business, other income (expense) and income tax expense (benefit) 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 $222.5 $201.6 10.4% $10.4 4.7% $ 2.2 1.1%
Commercialization 171.6 196.2 (12.5) 9.0 5.2 11.4 5.8
Informatics 13.0 14.3 (9.4) (5.4) (41.8) (4.0) (28.0)
------ ------ ----- -----
$407.1 $412.1 (1.2)% $14.0 3.4% $ 9.6 2.3%
====== ====== ===== =====
The product development group's financial performance improvement was a result
of several factors, including process enhancements and cost reduction efforts
in the American operations and growth in our Phase I development services.
These improvements were partially offset by the effects of lost revenue,
estimated to be approximately $2.2 million, due to the September 11, 2001
terrorist acts and the Nimda virus.
The commercialization group's financial performance was negatively impacted
during the quarter by the continuing effects of large contracts converted
in-house or terminated by our customers instead of being renewed.
The decrease in net revenues and operating margins in our informatics group was
due, in part, to our restructuring plans and the uncertainty that such plans
created among the employees in the informatics group. As a percentage of our
total number of employees, the employees in our informatics group represent by
far the largest group of our employees impacted by the restructuring plans. As
a result, since the announcement of our restructuring plans, the net revenues
and operating margins in our informatics group have been negatively impacted
more than other segments of our business. The details of the strategic plan and
related restructuring, which is being communicated to the employees, are
expected to reduce the uncertainty surrounding our overall restructuring plans
and the related impact such plans will have on the employees of this group.
Nine Months Ended September 30, 2001 and 2000
Net revenue for the nine months ended September 30, 2001 was $1.22 billion, a
decrease of $34.4 million or (2.8%) as compared to the nine months ended
September 30, 2000 net revenue of $1.25 billion. Net revenue decreased
primarily as a result of large commercialization contracts that were terminated
or converted in-house by our customers instead of being renewed. The decrease
was partially offset by an increase of approximately $10.6 million from our
Phase I development services. Net revenue in the Asia Pacific region increased
$29.4 million or 33.5% to $117.1 million but decreased $70.2 million or 9.7% to
$654.0 million
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
in the Americas region primarily resulting from the decline in the
commercialization segment. Net revenue in the Europe and Africa region
increased $6.5 million or 1.5% to $444.8 million. The growth in net revenue was
negatively impacted by approximately $43.4 million due to the effect of foreign
currency fluctuations related to the strengthening of the US Dollar relative to
the euro, other European currencies and the Japanese yen.
Direct costs, which include compensation and related fringe benefits for
billable employees, and other expenses directly related to contracts, were
$724.9 million or 59.6% of net revenue for the first nine months of 2001 versus
$755.9 million or 60.5% of net revenue for the first nine months 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 $392.2 million or
32.3% of net revenue for the first nine months of 2001 versus $421.8 million or
33.7% of net revenue for the first nine months of 2000. General and
administrative expenses decreased primarily due to the effects of reductions
relating to our restructuring activities including a decrease in the spending
for our Internet initiative. These reductions were partially offset by an
increase of $4.9 million in costs associated with the realignment of our
internal business development structure and $8.1 million in costs associated
with the continued implementation of our shared service center initiative.
During 2001, we opened our finance shared service center in Scotland. We
anticipate the implementation of the global finance and human resources shared
service centers to continue during the remainder of 2001.
Depreciation and amortization were $71.1 million or 5.9% of net revenue for the
first nine months of 2001 versus $68.8 million or 5.5% of net revenue for the
first nine months of 2000. Depreciation expense increased $2.5 million due to
the increase in our capitalized asset base.
In response to a decrease in demand for our services, we announced a
restructuring plan during the nine months ended September 30, 2000, resulting
in a $58.6 million restructuring charge. This charge consisted of $33.2 million
related to severance payments, $11.3 million related to asset impairment
write-offs and $14.0 million in exit costs. As of September 30, 2001,
approximately 909 positions have been eliminated and approximately $3.6 million
remains to be spent in connection with the restructuring plan.
In connection with the aforementioned strategic plan announced during 2001, we
recognized $54.2 million of restructuring charges which included approximately
$1.1 million relating to a 2000 restructuring plan. The restructuring charges
consist of $33.1 million related to severance payments, $8.2 million related to
asset impairment write-offs and $12.9 million of exit costs. As part of these
restructurings, approximately 1,040 positions will be eliminated, and as of
September 30, 2001, approximately 601 individuals have been notified of their
termination.
For the nine months ended September 30, 2001, we recognized a $20.1 million
charge to write-off goodwill and other operating assets. For the nine months
ended September 30, 2000, we recognized a $17.3 million loss on the disposal of
a business.
Loss from operations was $46.6 million for the first nine months of 2001 versus
$72.1 million for the first nine months of 2000. Excluding the charges relating
to the restructurings, the write-off of goodwill and other
15
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
assets, and the disposal of a business, income from operations was $27.7
million for the first nine months of 2001 versus $3.8 million for the first
nine months of 2000.
Other expense was $325.9 million for the first nine months of 2001. Included in
other expense for the first nine months of 2001 was a $345.0 million write-down
of our cost basis in investments held by us, primarily WebMD, which management
deemed to be an other than temporary decline in their fair value. Excluding
this charge, other income for the nine months ended September 30, 2001 was
$19.1 million versus $11.2 million for the first nine months of 2000. The
increase was primarily due to a $3.3 million increase in gains from the sale of
investments and a $3.9 million increase in net interest income as a result of
an increase in investable funds and a decrease in debt which was partially
offset by the decline in interest rates.
The effective income tax rate for the first nine months of 2001 was (33.3%)
versus a (33.0%) effective income tax rate for the first nine months 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 nine months ended September 30, 2001 and 2000. We
do not include net revenue and expenses relating to the Internet initiative,
charges relating to restructurings, write-off of goodwill and other assets and
the disposal of a business, other income (expense) and income tax expense
(benefit) 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 $ 664.2 $ 604.6 9.9% $ 28.2 4.2% $ (11.6) (1.9)%
Commercialization 508.6 602.8 (15.6) 24.7 4.8 43.8 7.3
Informatics 43.1 42.1 2.2 (12.5) (29.1) (11.8) (28.0)
---------- ---------- -------- --------
$ 1,215.8 $ 1,249.5 (2.7)% $ 40.3 3.3% $ 20.4 1.6%
========== ========== ======== ========
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 by
several factors, including the effects of large contracts converted in-house or
terminated by our customers instead of being renewed and the effects of a
collection issue with a non-pharmaceutical customer receivable. These were
partially offset by the effects of cost reduction efforts, primarily in the
United States.
The informatics group's financial performance was impacted by the uncertainty
created among the employees in this group due to the strategic plan and related
restructuring and the costs associated with developing new data products.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Liquidity and Capital Resources
Cash provided by operations were $102.4 million for the nine months ended
September 30, 2001 versus cash used in operations of $58.7 million for the
comparable period of 2000. Included in cash provided by operations for the nine
months ended September 30, 2001 was an income tax refund of $47.6 million.
Investing activities, for the nine months ended September 30, 2001, consisted
primarily of capital asset and equity investment purchases. These expenditures
were offset by proceeds from the redemption of debt securities. Capital asset
purchases required an outlay of cash of $59.8 million for the nine months ended
September 30, 2001 compared to an outlay of $73.3 million for the same period
in 2000. In 1999, we acquired substantial assets of Aventis' Kansas City-based
Drug Innovation and Approval Facility. Subsequent to September 30, 2001, we
paid approximately $58 million, which constitutes the remainder of the purchase
price for that facility.
Total working capital was $452.6 million as of September 30, 2001, an increase
of $143.9 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 $256.5 million at September 30, 2001 as
compared to $219.8 million at December 31, 2000. As of September 30, 2001,
trade accounts receivable were $253.2 million versus $246.3 million at December
31, 2000. Unbilled services were $197.2 million at September 30, 2001 versus
$167.7 million at December 31, 2000, offset by unearned income balances of
$193.9 million and $194.2 million, respectively. The number of days revenue
outstanding in trade accounts receivable and unbilled services, net of unearned
income, were 49 days at September 30, 2001, as compared to 43 days at December
31, 2000, as a result of customer payment patterns.
Investments in debt securities were $36.9 million at September 30, 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 $70.9 million decrease is a result
of investments being called by the issuer.
Investments in strategic marketable equity securities at September 30, 2001
were $204.1 million, a decrease of $180.0 million, as compared to $384.0
million at December 31, 2000. This decrease is primarily due to the decline in
the market price of WebMD Corporation common stock. Excluding the decline in
the market price of WebMD common stock, investments in marketable equity
securities decreased approximately $51.2 million due to unrealized losses on
the portfolio as a result of market price declines. In accordance with our
policy to continually review declines in fair value of our marketable equity
securities for declines that may be other than temporary, we recorded a loss of
approximately $345.0 million for the nine months ended September 30, 2001 to
establish a new cost basis for certain investments, primarily WebMD common
stock.
On October 12, 2001, we jointly announced with WebMD the settlement of
litigation and the resolution of the disputes between the companies. As part of
the settlement, WebMD agreed to pay us $185.0 million in cash for all 35
million shares of WebMD common stock owned by us. We will also receive an
additional payment from WebMD if, on or before June 30, 2004, WebMD is acquired
for a price greater than $4.00 per share or ENVOY is acquired for a price
greater than $500 million. As part of this settlement, we will continue to
receive data from WebMD only through February 28, 2002. In addition, as part of
the settlement, we have
17
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
terminated our existing contracts with WebMD, which, among other things,
absolves us from any obligation to fund WebMD up to $100 million to develop a
web-based suite of integrated products.
We have available to us a (pound)10.0 million (approximately $14.7 million)
unsecured line of credit and a (pound)1.5 million (approximately $2.2 million)
general banking facility with a U.K. bank. At September 30, 2001, we did not
have any outstanding balances on these facilities. Our $150 million senior
unsecured credit facility with a U.S. bank expired in August 2001 in accordance
with its terms.
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 nine months
of 2001, we entered into agreements to repurchase 520,000 shares for an
aggregate price of $8.6 million. Shareholders' equity at September 30, 2001 was
$1.42 billion versus $1.40 billion at December 31, 2000.
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.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
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 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.
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
19
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
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 developing an Internet platform for our product development and
commercialization services. We have entered into agreements with certain vendors
for them to provide web-enablement services to help us develop this platform. If
such vendors fail to perform as required or if there are substantial delays in
developing and implementing this platform, we may have to make substantial
further investments, internally or with third parties, to achieve our
objectives. Meeting our objectives is dependent on a number of factors which may
not take place as we anticipate, including obtaining adequate web-enablement
services, creating web-enablement services which our customers will find
desirable and implementing our business model with respect to these services.
Also, these expenditures are likely to negatively impact our profitability, at
least until our web-enabled products are operationalized. Over time, we envision
continuing to invest in extending and enhancing our Internet platform in other
ways to further support and improve our services. We cannot assure you that any
improvements in operating income resulting from our Internet capabilities will
be sufficient to offset our investments in the Internet platform. Our results
could be further negatively impacted if our competitors are able to execute
their services on a web-based platform before we can launch our Internet
services or if they are able to structure a platform that attracts clients away
from our services.
Our ability to provide informatics services depends on agreements with third
parties to access healthcare data.
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.
On October 12, 2001, we entered into a settlement agreement with WebMD which
ended the litigation and resolved the disputes between our two companies. In
connection with the settlement agreement, we will continue to receive
healthcare data from WebMD only through February 28, 2002. As a result, we have
begun to seek to obtain similar data from alternate sources. While we believe
that we will be able to secure alternative sources prior to February 28, 2002,
we cannot assure you that we will be able to do so, or that third parties which
provide data will be willing to negotiate or provide terms that are acceptable
to us, or will be able 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 acceptable terms, our informatics service group will not be
able to support its contracts with existing customers or continue development
projects as currently planned, which would have an adverse effect on our
business.
20
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
The potential loss or delay of our large contracts could adversely affect our
results.
Many of our customers can terminate our contracts upon 15-90 days' notice. In
the event of termination, our contracts often provide for fees for winding down
the project, but these fees may not be sufficient for us to maintain our
margins, and termination may result in lower resource utilization rates. Thus,
the loss or delay of a large contract or the loss or delay of multiple
contracts could adversely affect our net revenue and profitability. We believe
that this risk has potentially greater effect as we pursue larger outsourcing
arrangements with global pharmaceutical companies. Also, since 1999 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, $1.93 billion at June 30, 2001, 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:
- the variable size and duration of projects (some are
performed over several years);
- the loss or delay of projects; and
- 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.
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 arrangements with customers in
which we take on some of the risk of the potential success or failure of the
customer's product. These transactions may include a strategic investment in a
customer, providing financing to a customer, or taking an interest in the
revenues from a customer's product. For example, we may build 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 or payment from the product, investment or financing is less
than our costs of performance, investment or financing.
21
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
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.
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.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
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.
Proposed and final laws and regulations may create a risk of liability and
along with certain contractual obligations may increase the cost of our
business or limit our service offerings.
The confidentiality of individually identifiable health information and the
circumstances under which such individually identifiable health records may be
released for inclusion in our databases or used in other aspects of our
business are subject to substantial government regulation both domestically and
internationally. Additional U.S. 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 U.S. and international regulations governing individually
identifiable health 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 in the U.S. may adopt health information legislation or
regulations that contain privacy and security provisions that are more
burdensome than the proposed U.S. federal regulations. In the recently settled
dispute with WebMD, WebMD had opined that a number of state laws in the U.S.
could apply which may require modifications to access specifications for
particular data elements in de-identified health information. 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 privacy or
security of individually identifiable health information. In addition, in
connection with our settlement agreement with WebMD we have agreed to indemnify
WebMD for losses arising out of or in connection with the settlement agreement
itself, the cancelled Data Rights Agreement with WebMD, our data business, the
collection, accumulation, storage or use of data by ENVOY for the purpose
23
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
of transmitting or delivering data to us, any transmission or delivery by ENVOY
of data to us, or violations of law or contract attributable to any such event,
action or circumstance. Under the terms of our agreement, our indemnification
obligation for the first $20 million in aggregate losses is limited to 50%.
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:
- enhance our existing services;
- introduce new services on a timely and cost-effective basis
to meet evolving customer requirements;
- achieve market acceptance for new services; and
- respond to emerging industry standards and other
technological changes.
Exchange rate fluctuations may affect our results of operations and financial
condition.
We derive a large portion of our net revenue from international operations; 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:
- Foreign Currency Translation Risk. The revenue and expenses
of our foreign operations are generally denominated in local
currencies.
- Foreign Currency Transaction Risk. Our service contracts may
be denominated in a currency other than the currency in which
we incur expenses related to such contracts.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
We try to limit these risks through exchange rate fluctuation provisions stated
in our service contracts, or we may hedge our transaction risk with foreign
currency exchange contracts or options. Although we may hedge our transaction
risk, there were no open foreign exchange contracts or options relating to
service contracts at September 30, 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 10.2% and 10.6% of our net revenues for
the three and nine months ended September 30, 2001, respectively. 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 Health and Human Services, also referred
to as HHS, issued the final rule on Standards for Privacy of Individually
Identifiable Health Information to implement the privacy requirements for
HIPAA. This rule generally (1) imposes 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) establishes limitations on and procedures for (a)
the exercise of those individuals' rights, (b) the uses and disclosures of
protected health information and (c) language in contractual agreements between
covered entities and their business associates with regards to protected health
information. The effective date of the final rule was April 14, 2001 and the
compliance date is April 14, 2003. HHS' Office for Civil Rights, the
enforcement office for the rule, issued guidance in the form of questions and
answers on the rule in July 2001 and according to the Secretary, further
modifications and/or guidelines to the regulation will be forthcoming in the
next few months. If state or federal legislation or a more restrictive rule 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 (any such state law may be subject to enforceability challenges based
on constitutional and federal preemption issues). 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.
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.
If we are unable to submit electronic records to the FDA according to FDA
regulations, our ability to service our clients during the FDA approval process
could be adversely affected.
The United States Food and Drug Administration, also referred to as the FDA,
published 21 CFR Part 11 "Electronic Records; Electronic Signatures; Final Rule"
("Part 11") in 1997. Part 11 became effective in August 1997 and defines the
regulatory requirements that must be met for FDA acceptance of electronic
records and/or electronic signatures in place of the paper equivalents. Part 11
requires that those utilizing such electronic records and/or signatures employ
procedures and controls designed to ensure the authenticity,
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
integrity and, as appropriate confidentiality of electronic records and, in
certain circumstances, Part 11 requires those utilizing electronic records to
ensure that a person appending an electronic signature cannot readily repudiate
the signed record. Pharmaceutical and biotechnology companies are increasing
their utilization of electronic records and electronic signatures and are
requiring their service providers and partners to do likewise. Many of our
customers, or potential customers, are targeting 2003 for full compliance of all
their affected systems. Becoming compliant with Part 11 involves considerable
complexity and cost. Our ability to provide services to our customers in full
compliance with applicable regulations includes a requirement that, over time,
we become compliant with the requirements of Part 11. If we are unable to
achieve this objective, our ability to provide services to our customers which
meet FDA requirements may be adversely affected.
Item 3. Quantitative and Qualitative Disclosures 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. On October 5, 2001, the district court judge approved the settlement,
ending the dispute.
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
26
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
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 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 October 12, 2001, we entered into a settlement agreement
with WebMD which settled the litigation and resolved our dispute. The United
States District Court for the Eastern District of North Carolina approved the
conditional voluntary dismissal on October 17, 2001. Additionally, the United
States Court of Appeals for the Fourth Circuit dismissed the appeal on October
18, 2001.
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, based on
consultation with legal counsel, that the outcome of these matters would not
materially affect our consolidated financial position or results of operations.
Item 2. Changes in Securities and Use of Proceeds
During the three months ended September 30, 2001, options to purchase 8,512
shares of our common stock were exercised at an average exercise price of
$2.2258 per share in reliance on Rule 701 under the Securities Act of 1933. We
granted such options prior to becoming subject to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, as amended, pursuant to our
Non-qualified Employee Incentive Stock Option Plan.
Item 3. Defaults upon Senior Securities -- Not applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 5. Other Information -- Not applicable
27
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.01 Settlement Agreement, dated October 12, 2001,
between Quintiles Transnational Corp. and WebMD
Corporation
(b) During the three months ended September 30, 2001, the Company
filed two reports on Form 8-K.
The Company filed a Form 8-K, dated July 19, 2001, including its press release
announcing the Company's earnings information for the period ended June 30,
2001.
The Company filed a Form 8-K, dated September 11, 2001, including its press
release announcing the Company's operational and earnings targets for 2002.
No other reports on Form 8-K were filed during the three months ended September
30, 2001.
28
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Quintiles Transnational Corp.
---------------------------------------
Registrant
Date November 1, 2001 /s/ Dennis B. Gillings
------------------------- ----------------------------------
Dennis B. Gillings, Chairman
Date November 1, 2001 /s/ Pamela J. Kirby
------------------------- ----------------------------------
Pamela J. Kirby, Chief Executive
Officer
Date November 1, 2001 /s/ James L. Bierman
------------------------- ----------------------------------
James L. Bierman, Chief Financial
Officer
29
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Description
------- -----------
10.01 Settlement Agreement, dated October 12, 2001, between
Quintiles Transnational Corp. and WebMD Corporation
30