Item 1. Business
General
We are a market leader in providing a full range of integrated product
development and commercial development solutions to the pharmaceutical,
biotechnology and medical device industries. We also provide market research
solutions and strategic analyses to support healthcare decisions and healthcare
policy consulting to governments and other organizations worldwide. Supported by
our extensive information technology capabilities, we provide a broad range of
contract services to help our customers reduce the length of time from the
beginning of development to peak sales of a new drug or medical device.
Our product development group is one of the largest contract research
organizations, or CROs, globally, with particular strength in Phase II and
Phase III clinical trials, but with a presence in each phase of the drug
development life cycle and major geographic region. Our commercial services
group is one of the largest contract sales organizations, or CSOs, and the only
one with the ability to provide these services worldwide. We serve customers'
needs by offering a suite of services that carries their products from the
preclinical phase all the way through to post-launch. Our PharmaBio Development
group allows us to leverage our CSO and CRO expertise in combination with our
financial resources to partner with customers in specialty pharmaceutical or
co-promotion roles. We
Quintiles Transnational 2002 Annual Report 3
interact with our pharmaceutical and biotechnology customers at many points,
seeking to serve all of our customers' pharmaceutical outsourcing needs.
We were founded in 1982 by Dr. Dennis Gillings to offer biostatistics and
data management services to the pharmaceutical industry. We have continued over
time to expand the scope of our services and geographic presence to support the
needs of our customers on a worldwide basis. As part of this strategy, we
completed approximately 39 acquisitions over the past seven years to expand or
strengthen our services. While our acquisition rate has slowed in recent years,
with six completed over the past three years, we have focused our efforts on
reorganizing our operating units, creating new ways of marketing and selling our
services and moving our informatics business to a joint venture. In addition,
through the formation of our PharmaBio Development group in 2000, we have begun
to pursue strategic alliances with our customers which pair the services of our
commercial services and product development groups with funding support for our
customers. As part of our normal course of business, we also evaluate
opportunities to acquire specific products and/or marketing rights to products.
Over the past two years, we have implemented a global strategic plan that
we believe will allow us to meet the changing needs of our customers and
increase our opportunity for growth. Our strategy is built on the following
initiatives:
• Implementing strategic alliances. Through our PharmaBio Development group,
we are pursuing strategic alliances with customers in which we combine the
services of our commercial services and product development groups with
funding support for our customers. In appropriate circumstances, we may also
acquire the rights to receive royalties or commissions based on sales of the
customer's product.
• Leveraging technology and information. We are focusing on leveraging our
technology to increase the value of our services to our customers and to
increase our own efficiency. For example, our commercial services group is
using our iQLearning Network to deliver Internet based programs such as eCME
and E-detailing products to supplement office visits and allow us to reach
doctors who are not easily accessed. At the same time, we are able to
leverage our recruitment services across the iQLearning Network to drive
down our costs. Our product development group is focusing on gaining
operating efficiency in data management by eliminating duplicate offices and
shifting capabilities to low-cost, high quality regions and eventually
through the use of secure Internet links.
• Realigning business development. We are moving towards a business
development strategy which focuses on specific customers to acquire a better
understanding of the whole of that customer's needs. We may achieve this
understanding by acquiring some of the customer's infrastructure, bringing
along with it a relationship with the customer. In other cases, we may
expand existing customer relationships into preferred provider
relationships, such as by forming long-term clinical development alliances
designed to enable the customer to boost efficiencies in its drug
development programs.
• Hiring and retaining quality employees. Our employees are our business, and
we are dedicated to strengthening and stabilizing our workforce.
• Creating efficiencies through shared service centers and near real-time
human resources management. We believe we can create operational
efficiencies by centralizing our finance and human resources functions in
professional services centers that we established regionally in the United
States and Europe.
Services
We provide globally integrated contract research, sales, marketing and
healthcare policy consulting and health information management services to the
worldwide pharmaceutical, biotechnology, medical device and healthcare
industries. We currently operate in three reportable segments: product
development, commercial services, and PharmaBio Development. Our product
4 Quintiles Transnational 2002 Annual Report
development services include a full range of services focused on helping our
customers through the development and regulatory approval of a new drug or
medical device. Our commercial services, operating under our Innovex brand-name,
focus on helping our customers achieve commercial success for a new product or
medical device. Our commercial services group offers sales force deployment and
specialized marketing support services and also provides healthcare policy
research and management consulting services, which emphasize improving the
quality, availability and cost-effectiveness of healthcare. Our PharmaBio
Development group was created in 2000 to help enable us to better capitalize on
the success of new pharmaceutical product launches by entering into partnering
alliances with our customers. In certain circumstances, PharmaBio Development
will also acquire the rights to develop and market pharmaceutical products.
Prior to May 2002, when we formed Verispan, our joint venture with McKesson
Corporation, we operated a fourth reportable segment comprised of our
informatics group. Note 26 of the notes to our consolidated financial statements
includes financial information regarding each segment.
We currently provide our customers with a continuum of services which span
our three segments. We believe that the broad scope of our services allows us to
help our customers rapidly assess the viability of a growing number of new
drugs, cost-effectively accelerate development of the most promising drugs,
launch new drugs to the market quickly and evaluate their impact on healthcare.
The following discussion describes our service offerings in greater detail.
Product Development Offerings
Our largest business segment, the product development group, competes in
the CRO industry. Our product development group provides a wide range of
products and services to customers in the pharmaceutical, biotechnology, and
medical device industries. The group offers global expertise in drug development
from early compound analysis through regulatory submission. Our capabilities
span preclinical and toxicology testing and all phases of clinical testing. Our
product development segment is divided into two groups: Early Development and
Laboratory Services, which focuses on early stage pharmaceutical development and
laboratory services for the later phases, and Clinical Development Services,
which specializes in later stage clinical trials.
Early Development and Laboratory Services
Preclinical services. Our preclinical unit provides customers with a wide
array of early development services. These services are designed to produce the
data required to identify, quantify and evaluate the risks to humans resulting
from the manufacture or use of pharmaceutical and biotechnology products. Such
services include general toxicology, carcinogenicity testing, pathology,
efficacy and safety pharmacology, bioanalytical chemistry, drug metabolism and
pharmacokinetics. During 2001, we opened a safety pharmacology unit in Kansas
City, Missouri. The development of this capability in the United States during
2002, in combination with our Edinburgh, Scotland unit has allowed us to provide
full service safety pharmacology to our U.S. customers while further
strengthening our global position.
Formulation, manufacturing and packaging services. We offer services in
the design, development, analytical testing and commercial manufacture of
pharmaceutical dose forms. We provide study medications for preclinical and
clinical studies along with necessary good manufacturing practice, or GMP,
chemistry, manufacturing and controls, or CMC, and regulatory documentation. In
2002, we began construction of a new GMP sterile clinical supplies manufacturing
facility in Kansas City, Missouri. Medications for use in clinical (both pre-
and post-marketing) studies are packaged, labeled and distributed globally.
These services can expedite the drug development process because clinical trials
are often postponed by delays in the manufacture of study drug materials.
Phase I services. Phase I clinical trials involve testing a new drug on a
limited number of healthy individuals. Our Phase I services include dose
ranging, bioavailability/bioequivalence
Quintiles Transnational 2002 Annual Report 5
studies, pharmacokinetic/pharmacodynamic modeling, first administration to
humans, multiple dose tolerance, dose effect relationship and metabolism
studies.
Centralized clinical trial laboratories. Our centralized laboratories
provide globally integrated clinical laboratory services to support all phases
of clinical trials with facilities in the United States, Europe, South Africa
and Singapore. Services include the provision of protocol-specific study
materials, customized lab report design and specimen archival and management for
study sponsors. In addition to providing comprehensive safety and efficacy
testing for clinical trials, our centralized laboratories allow for global
standardization of clinical testing, database development and electronic data
transfer and provide direct electronic integration of laboratory data into
safety and efficacy reports for new drug application, or NDA, submissions.
Clinical Development Services
Clinical trial services. We offer comprehensive clinical trial services
throughout the lifecycle of a product. In addition to Phase I through III
studies, which are the basis for obtaining initial regulatory approval for drugs
and medical devices, we provide expertise in the development and execution of
Phase IIIb and IV studies, which includes drug safety, regulatory affairs,
clinical trial supplies, central laboratory services, quality assurance, health
economics, data management and biostatistics. On a global basis, our employees
are aligned with key customers to provide a full-range of management and
scientific services tailored to their specific requirements.
We coordinate our offerings through a customer-centric project management
structure. We have over 200 project managers with Phase II-IV drug development
and medical device experience spanning the therapeutic areas of the central
nervous system, cardiovascular, oncology, infectious, allergic and respiratory
diseases as well as within therapeutic areas of endocrinological,
gastroenterological, genitourinary, musculoskeletal diseases, and stroke, with
respect to clinical trials. Other specialized offerings include development
services in neonatal, pediatric and adolescent care. Our project management
processes and training are based on the Project Management Institute standard.
Because of our global presence and ability to coordinate clinical staff to
service customers on an international basis, we are experienced in managing
trials involving several thousand patients at hundreds of sites concurrently in
the Americas, Europe, the Asia-Pacific region and South Africa.
We provide our customers with one or more of the following core clinical
trial services:
Study design. We assist our customers in preparing the study protocol
and designing case report forms, or CRFs. The study protocol defines the
medical issues to be examined, the number of patients required to produce
statistically valid results, the period of time over which they must be
tracked, the frequency and dosage of drug administration and the study
procedures. A study's success often depends on the protocol's ability to
predict the requirements of the applicable regulatory authorities and to meet
the commercial needs for a successful launch.
Investigator recruitment. During clinical trials, the drug is
administered to patients by physicians, referred to as investigators, at
hospitals, clinics or other sites. We have access to several thousand
investigators who have conducted our clinical trials worldwide.
Patient recruitment. We assist our customers in recruiting patients to
participate in clinical trials through investigator relationships, media
advertising, use of web-based techniques and other methods. We also help to
ensure patients are retained for the duration of the studies.
Study monitoring. We provide study monitoring services which include
investigational site initiation, patient enrollment assistance, and data
collection and clarification. Site visits help to assure the quality of the
data, which are gathered according to good clinical practice, or GCP, and
International Conference on Harmonization, or ICH, regulations and
guidelines, and to meet the sponsors' and regulatory agencies' requirements
according to the study protocol.
Clinical data management and biostatistical services. We have extensive
experience in the creation and statistical analysis of scientific databases
for all phases of the drug development
6 Quintiles Transnational 2002 Annual Report
process. These databases include customized databases to meet
customer-specific formats, integrated databases to support NDA submissions
and databases in accordance with ICH guidelines.
Regulatory affairs services. We provide comprehensive medical and
regulatory services for our pharmaceutical and biotechnology customers. Our
medical services include medical oversight of studies, review and interpretation
of adverse experiences, medical writing of reports and study protocols and
strategic planning of drug development programs. Regulatory services for product
registration include regulatory strategy design, document preparation,
publishing, consultation and liaison with various regulatory agencies. Our
regulatory affairs professionals help to define the steps necessary to obtain
registration as quickly as possible. We are able to provide such services in
numerous countries to meet our customers' needs to launch products in multiple
countries simultaneously.
Late phase clinical studies. Designed to build physician awareness,
develop marketing messages, drive product usage, and deepen customers'
understanding of physician practices and product-adoption patterns, our late
phase clinical services include consulting customers on Phase IIIb and Phase IV
clinical trials, clinical experience trials, and patient registries. We provide
post-marketing safety surveillance programs and measure treatment satisfaction
and quality of life to help accelerate the commercialization process. This group
also offers specialized reimbursement support services and patient assistance
programs to facilitate coverage and payment for treatment, utilizing our
proprietary new technologies. In 2002, we integrated our Quintiles Late Phase
services into our product development line of business to bridge clinical
development and product commercialization.
Medical device services. We offer medical device services similar to our
offerings for the development and introduction of pharmaceutical products. Our
core medical device services include identification of regulatory requirements
in targeted markets; global clinical study design, planning, management and
monitoring, including data management and statistical analysis of report
preparations; preparation of regulatory filings and compliance with regulatory
requirements for market access and long range planning for product launches,
including pricing strategies.
Commercial Services Offerings
We provide our customers a comprehensive range of specialized pre-launch,
launch, and post-launch fee-for-service contract sales and strategic marketing
services. Our commercial services group includes our Quintiles Integrated
Strategic Services business and our Commercialization business. By expanding the
traditional paradigm of "commercialization" beyond contract sales to encompass
contract marketing and other services, our commercial services group has
enhanced our competitive position. This group delivers integrated strategic and
tactical solutions in sales and marketing across the product life cycle for
pharmaceutical, biotechnology, and medical device companies as well as for other
entities across the healthcare spectrum. In the United States, the integration
of core services through our iQLearning.com web portal provides physicians with
a broad range of educational resources and services available 24 hours a day,
seven days a week. In addition, we provide strategic health and human services
consulting for customers including hospitals, long-term care facilities,
foundations, managed care organizations, employers, the military and federal and
state governments.
We entered the contract sales organization industry in 1996 when we
acquired Innovex, a U.K.-based company with global operations, and grew the
business organically as well as through acquisitions. We continue to operate our
CSO business under the Innovex brand. We have specialist therapeutic expertise
in the areas of cardiovascular, central nervous system, gastrointestinal,
women's health, endocrinology, allergy-respiratory, anti-infectives, and
oncology.
Quintiles Integrated Strategic Solutions
Strategic marketing services. Our expert consultants support
pharmaceutical, biotechnology and medical device product commercialization
through a continuum of services. We begin in the
Quintiles Transnational 2002 Annual Report 7
conceptualization phase of development with strategic market research. Through a
combination of secondary data and qualitative primary research, we assist
customers in making development decisions. Once a product proceeds to
large-scale clinical trials, this group creates product positioning, pricing and
formulary access/ reimbursement strategies based on extensive primary research
with providers, patients, payors and other administrative decision-makers.
Finally, in support of product marketing at launch, we create health economic
models to justify price to formulary decision-makers, and, post-launch, we track
actual product costs and outcomes through medical claims data, medical records
and patient interviews. The combination of these services provides our customers
with the marketing, economic and reimbursement support they need to help to
maximize commercial potential at each stage of the product lifecycle.
Healthcare policy research and consulting. Our management consulting
services focus on improving the quality, availability and cost-effectiveness of
healthcare in the highly regulated and rapidly changing healthcare industry.
These services include corporate strategic planning and management, program and
policy development, financial and cost-effectiveness analyses, evaluation
design, microsimulation modeling and data analysis. They represent the core
competencies of The Lewin Group, an internationally recognized management
consulting firm with more than three decades of experience solving problems for
organizations in the public, non-profit and private sectors.
Regulatory and compliance consulting. We supply regulatory and compliance
consulting services to the pharmaceutical and biotechnology, medical device
development and manufacturing industries. Services include global regulatory
consulting, quality systems and engineering and validation. We assist companies
in preparing for the United States Food and Drug Administration, or the FDA,
interactions, including inspections and resolution of enforcement actions;
complying with current GMP, GCP and Quality Systems regulations; meeting process
and software validation requirements; and bringing new medical devices to
market.
Strategic medical communications. Our strategic medical communications
group offers a range of pre-launch, launch, and post-launch services, beginning
in the early stages of product development and continuing until the product
reaches peak penetration. Services include communications strategies and
planning, product positioning and branding, opinion leader development, faculty
training, symposia, continuing medical education programs, promotional programs,
sponsored publications, new media-based programs, patient education and clinical
experience programs (e.g., patient starter programs and compliance programs). As
early as Phase I and Phase II clinical trials, we can begin to disseminate
scientific information and develop and present educational forums to help gain
opinion leader support for a new drug.
Commercialization Offerings
Our customized sales and marketing services are designed to accelerate the
commercial success of pharmaceutical, biotechnology, veterinary and other
health-related products.
Contract sales. Highly skilled, web-integrated primary care, specialty,
and innovative promotional alternative sales teams provide our customers with a
flexible resource which is able to respond quickly and effectively to a changing
marketplace at a variable cost to the customer. We provide our customers with a
variety of staffing options, including direct hire, flexible work arrangement,
leave of absence, and "strike force" arrangements (in which a team is deployed
to a particular territory to capitalize on a market niche opportunity). We use a
proprietary review process and a variety of techniques, including our extensive
computerized databases and candidate referrals, to recruit candidates for our
contract sales teams. Our training and development services integrate
traditional and web-based services. Our contract sales unit helps our customers
design or revamp their existing sales programs to meet marketplace demands.
Customers may contract for dedicated or syndicated sales teams. When
dedicated teams are deployed, we take on a primary management role or a
supporting role to the customer's field management, depending on the customer's
needs. In certain circumstances, dedicated teams may be
8 Quintiles Transnational 2002 Annual Report
transferred to the customer for an additional placement fee included in the
contract. Our syndicated teams promote a number of non-competing drugs for
different customers simultaneously. We always maintain direct management of our
syndicated sales teams.
Marketing services. We provide customized product marketing services for
pharmaceutical and biotechnology companies designed to influence the decisions
of patients and physicians and accelerate the acceptance of drugs into treatment
guidelines and formularies. We assess markets, conduct research, develop
strategies and tactics, assist in discussions with regulatory bodies, identify
distribution channels and coordinate vendors in every region of the country. Our
industry experts, with experience in many therapeutic areas, can provide
marketing insight into a wide range of geographic markets while working to
optimize commercial success.
Internet-based sales and marketing services. Innovex e-Health Solutions
Group, launched in October 2001, provides Internet-based sales and marketing
services for the pharmaceutical, biotechnology and medical device industries.
The group's first product, iQLearning.com, was launched in January 2002.
iQLearning.com is an Internet service portal that further expands our range of
healthcare information resources and services to physicians in the United States
and currently has a membership of more than 90,000 United States physicians. The
group's second and third products were launched in August 2002. The eOP product
is an online process for identifying key opinion leaders within designated
specialty areas utilizing the iQLearning service portal. Our third product is
the iQBroadband program, which leverages the iQLearning service portal to
provide state-of-the-art live net meeting software and high speed Internet
connectivity for live sales presentations, speaker training meetings and
web-based symposia. The group also brought the full capability of the iQLearning
service portal to Innovex in the fourth quarter of 2002 by delivering online
training and messaging to a contract sales force.
In the United Kingdom, in partnership with Synigence Plc, we have
developed a number of services which utilize web enabled technology to support
the pharmaceutical industry's marketing programs. These include both live and
virtual e-detailing. Innovex UK in collaboration with Synigence Plc can now gain
access to a significant number of primary care physicians within the United
Kingdom via a secured network system.
Health management services. We also provide teams of healthcare
professionals, including nurses, pharmacists and physicians, who are dedicated
to assisting customers with disease-management issues. Our health management
services offer customized clinical solutions to bridge the gap between the
clinical and commercial phases of product development and to provide expertise
across a broad range of pre-launch, launch and post-launch opportunities. We
believe that our clinical and promotional expertise, commercial orientation and
international experience enable us to tailor these programs to meet the diverse
needs of the global pharmaceutical industry across a wide range of disciplines
and local market conditions.
Training. In various countries around the world we offer industry specific
training to professionals working in retail pharmacy, manufacture, distribution,
regulatory, sales and marketing. The training in many instances is outcomes
based, covers both knowledge and skills, and may be delivered via the Internet
or email, as well as hard copy.
PharmaBio Development Offerings
Our PharmaBio Development group works with our other service groups to
enter into strategic transactions that we believe will position us to explore
new opportunities and areas for potential growth. PharmaBio Development has
entered into a series of similarly structured transactions that typically
involve providing funding to the customer, either through direct payments or
loans. In some cases, the loans are convertible into capital stock of the
customer. We also may invest in the customer's capital stock, and sometimes we
receive warrants to purchase shares of our customer's capital stock. This
funding may be used by the customer to help pay for the services provided by us
through our product development or commercial services groups. In addition, the
customer may agree to pay us royalties or commissions based on sales of the
customer's product. At the end of
Quintiles Transnational 2002 Annual Report 9
2001, we expanded this business model to include the acquisition of rights to
market products. We believe this business model adds value for pharmaceutical
and biotechnology companies. Pharmaceutical companies gain additional resources
in support of their new and/or existing products, and biotechnology companies
gain capital and services. This model allows us to expand on the traditional
fee-for-service model of our core business by using available cash to create the
potential for a greater return on a customer relationship by direct investment,
allowing us to take advantage of our customer's growth, or participating in a
product revenue stream that may depend in part on how successful we are in
providing our services with regard to the product. Overall, our ultimate
revenues and operating income from these transactions depends on the performance
of the customer's capital stock or of its product, which in some cases has not
yet been approved by the FDA. We created PharmaBio Development in 2000, and have
since entered into multiple transactions that have opened new channels of
business for us.
Business Models
PharmaBio Development works within the following targeted investment
models:
• Risk-Based Commercialization. Risk-based commercialization investments
include transactions in which PharmaBio Development funds some or all of a
customer's cost for Innovex's commercialization services in exchange for
product royalty rights. In such transactions, we receive from our customers
the right to royalties on the sales of the products covered by the
agreements. Our compensation for the sales force may be reflected in the
royalties we receive, or it may be in addition to such royalties on a
fee-for-service basis. We use a variety of contract structures in our
risk-based commercialization transactions. Certain transactions may include
contractual minimum and/or maximum royalty amounts. In other instances, we
may have no guaranteed minimum royalty. Regardless of the structure, we
always seek to earn financial returns commensurate with the risks of the
transaction. In addition to providing superior operational excellence, we
believe that the key factors in the success of such transactions are sound
marketing and scientific research on the products, solid financial due
diligence on our partners, and sound contracting.
• Specialty Pharmaceutical Products. PharmaBio Development also acquires the
rights to market pharmaceutical products. We arrange for the manufacture of,
and directly market, a number of dermatology compounds, including SolarazeTM
and ADOXATM, through our Bioglan Pharmaceuticals Company subsidiary.
PharmaBio Development also has acquired the rights to several other products
in Europe, via licensing or distribution agreements, which involve a variety
of up-front or ongoing payments to the licensors. In these arrangements,
third parties manufacture the products for us and Innovex sells the
products. In all of these instances, PharmaBio Development recognizes the
revenues from the sales of these pharmaceutical products.
From time to time our PharmaBio Development group evaluates the purchase or
license of marketing rights to other products. Any such investments we may
make likely will not represent a commitment to a particular therapeutic
area; rather, under this model, we will rely on our due diligence to confirm
that the purchase of the rights to a single product can be successfully
marketed without the strength and support of an integrated therapeutic
capability.
• Strategic Investments. PharmaBio Development makes a variety of strategic
investments, including direct investments in both marketable and
non-marketable equities, debt, and indirect investments through such
vehicles as venture capital funds. In some cases, PharmaBio Development
makes investments in connection with risk-based commercialization
agreements, such as its arrangements with Columbia Laboratories, Inc. and
Discovery Laboratories, Inc. In other instances PharmaBio Development may
make its investments as independent transactions. As of December 31, 2002,
PharmaBio Development had a total of $111 million in such investments,
including $65 million of investments in marketable equities and $46 million
of
10 Quintiles Transnational 2002 Annual Report
investments in non-marketable equity securities and loans. PharmaBio
Development actively manages this portfolio, and makes trading decisions as
well as investments.
• Risk-Based Development Services. In such transactions, PharmaBio Development
would fund some or all of the clinical development services costs on behalf
of a partner in exchange for royalty rights in the product. We have not
consummated any risk-based development transactions.
Recent Strategic Alliances
PharmaBio Development entered into the following transactions during 2002.
• In January 2002, we entered into an agreement with Kos Pharmaceuticals, Inc.
to commercialize in the United States Kos's treatments for cholesterol
disorders, Advicor® and Niaspan®. We provide a dedicated sales force at our
own expense who, in combination with Kos's sales force, will commercialize
Advicor® and Niaspan® for two years. In return, we received warrants to
purchase shares of Kos's common stock at an agreed price. We will receive
commissions, subject to a minimum and maximum amount over the life of the
agreement, based on net sales of the product from 2002 through 2006.
• During the second quarter of 2002, we finalized an agreement with a large
pharmaceutical customer to market pharmaceutical products in Belgium,
Germany and Italy. We will provide, at our own expense, sales and marketing
resources over the five-year life of the agreement, in return for which the
customer will pay us royalties on product sales in excess of certain
baselines. Subsequent to December 31, 2002, we exercised our rights to
terminate this contract in Germany.
• In July 2002, we entered into an agreement with Eli Lilly and Company to
support its commercialization efforts for CymbaltaTM in the United States.
In return for providing sales representatives and making marketing and
milestone payments to Lilly, we will receive a percentage of sales over the
five-year service period followed by a royalty over the subsequent three
years.
• In July 2002, we entered into an agreement with Columbia Laboratories, Inc.
to assist them in the U.S. commercialization of the following women's health
products: ProchieveTM 8%, ProchieveTM4%, Advantage-S® and RepHreshTM. Under
the terms of the agreement, we purchased shares of Columbia common stock. We
also will pay Columbia four quarterly payments, which commenced in the third
quarter of 2002, in exchange for royalties on the sales of the four Columbia
products for a five-year period beginning in the first quarter of 2003. In
addition we will provide to Columbia, at Columbia's expense on a
fee-for-service basis, a sales force to commercialize the products.
• In December 2002, we entered into an agreement with a large pharmaceutical
customer to market two products in Belgium. Under the terms of the
agreement, we acquired the marketing and distribution rights to one of the
products and entered into a distribution agreement for the other product.
We review many candidates for strategic alliances under our PharmaBio
Development business models, and in addition to the transactions already under
way, we are continually evaluating new strategic possibilities, including
opportunities to acquire rights to market additional pharmaceutical products,
and we may enter into additional transactions in the future.
Informatics Offerings
Prior to May 2002, we had a fourth segment, consisting of our informatics
services. Our informatics group provided a broad range of knowledge-rich
products and services for use by the pharmaceutical, biotechnology, and medical
and surgical device industries, and healthcare provid-
Quintiles Transnational 2002 Annual Report 11
ers, payors and patients to improve the quality of care and to efficiently
manage the delivery of care at multiple points along the continuum of healthcare
delivery.
In May 2002, we completed the formation of our healthcare informatics
joint venture, Verispan, with McKesson. The joint venture is designed to
leverage the operational strengths of the healthcare information businesses of
each company. We are equal co-owners of a majority of the equity of Verispan
with McKesson with a portion of the equity in Verispan owned or to be issued to
key providers of de-identified healthcare data in exchange for the data. We
contributed the net assets of our informatics group and funded $10 million to
Verispan.
Several major data providers have contracted to provide de-identified
prescription or medical data to the joint venture. Verispan has licensed its
data products to McKesson and us for use in our respective core businesses.
Under the license arrangement, we continue to have access to Verispan's
commercially available market information and products, at no further cost to
us, to enhance service to and partnering with our customers.
Customers and Marketing
We coordinate our business development efforts across our service
offerings through integrated business development functions, which direct the
activities of business development personnel in each of our U.S. locations, as
well as other key locations throughout Europe, Asia-Pacific, Canada and Latin
America.
For the year ended December 31, 2002, approximately 43.1% of our net
service revenue from external customers was attributed to operations in the
United States and 56.9% to operations outside the United States. Please refer to
the notes to our consolidated financial statements included in Item 8 of this
Form 10-K for further details regarding our foreign and domestic operations.
Approximately 42.5%, 41.1%, and 36.4% of our net revenue was attributed to our
clinical development services in 2002, 2001 and 2000, respectively;
approximately 25.8%, 32.6% and 37.7% of our net revenue was attributed to our
commercialization services in 2002, 2001 and 2000, respectively; and
approximately 17.3%, 15.4% and 14.3% of our net revenue was attributed to our
early development and laboratory services in 2002, 2001 and 2000 respectively.
Neither our integrated strategic services, our commercial rights and royalties,
nor our informatics services accounted for more than 10% of our net revenue in
any of these years. ENVOY, our former electronic data interchange unit, is
accounted for as a discontinued operation as a result of its sale to WebMD in
May 2000; therefore, the results of ENVOY through the date of sale are not
included in our net revenue and are reported separately.
In the past, we have derived, and may in the future derive, a significant
portion of our service revenue from a relatively limited number of major
projects or customers. As pharmaceutical companies continue to outsource large
projects and studies to fewer full-service providers, the concentration of
business could increase. We may experience concentration in 2003 and in future
years. Aventis S.A. accounted for approximately 11%, 11% and 10% of our
consolidated net service revenue in 2002, 2001 and 2000, respectively.
Competition
The market for our product development services is highly competitive, and
we compete against traditional CROs and the in-house research and development
departments of pharmaceutical companies, as well as universities and teaching
hospitals. Among the traditional CROs, there are several hundred small,
limited-service providers, several medium-sized firms, and only a few
full-service companies with global capabilities. Consolidation among CROs likely
will result in greater competition among the larger contract research providers
for customers and acquisition candidates.
12 Quintiles Transnational 2002 Annual Report
Our primary CRO competitors include Covance Inc., PPD Inc. and PAREXEL
International Corp. Competitive factors for product development services
include:
• previous experience,
• medical and scientific experience in specific therapeutic areas,
• the quality of contract research,
• speed to completion,
• the ability to organize and manage large-scale trials on a global basis,
• the ability to manage large and complex medical databases,
• the ability to provide statistical and regulatory services,
• the ability to recruit investigators,
• the ability to integrate information technology with systems to improve the
efficiency of contract research,
• an international presence with strategically located facilities and
• financial viability and price.
In our commercial services, we compete against the in-house sales and
marketing departments of pharmaceutical companies and other contract sales
organizations in each country in which we operate. We also compete against
national consulting firms offering healthcare consulting and medical
communications services, including boutique firms specializing in the healthcare
industry and the healthcare departments of large firms. Our primary CSO
competitors in the United States include Ventiv Health and Professional
Detailing, Inc. Outside of the United States, we typically compete against
single country or regionally-focused commercial service providers. The primary
competitive factors affecting commercial services are the proven ability to
quickly assemble, train and manage large qualified sales forces to handle broad
scale launches of new drugs and price. Competitive factors affecting healthcare
consulting and medical communications services include experience, reputation
and price.
Because our PharmaBio Development group custom tailors its risk-based
service solutions to meet our customers' financial and strategic needs, it is
more difficult to assess its potential competitors. Theoretically, a financing
party could choose to fund such risk-based commercialization or development
efforts, as does PharmaBio Development. However, such a group would have to
contract with third parties for the provision of services. We are aware that
several commercial service firms, such as Ventiv Health and Professional
Detailing, Inc., have entered into risk-based commercialization transactions.
Our PharmaBio Development group has a large number of competitors for specialty
pharmaceutical products. The key competitive factors for PharmaBio Development
include access to capital, the quality of the services provided by our other
business units in connection with PharmaBio Development's transactions, and the
ability to perform detailed and accurate scientific, strategic, and financial
due diligence prior to completing transactions.
Competitors for our informatics services included IMS Health Incorporated
and NDC.
Notwithstanding all these competitive factors, we believe that the
synergies arising from integrating product development services with commercial
services, supported by global operations and information technology
differentiate us from our competitors.
Employees
As of January 31, 2003, we had approximately 15,548 full-time equivalent
employees, comprised of approximately 5,422 in the Americas, 8,114 in Europe and
Africa and 2,012 in the Asia-Pacific region. As of January 31, 2003, our product
development group had 8,696 full-time equivalent employees, our commercial
services group had 6,180 full-time equivalent employees, and
Quintiles Transnational 2002 Annual Report 13
our PharmaBio Development group had 94 full-time equivalent employees. In
addition, 578 full-time equivalent employees were in our centralized operations/
corporate office.
Backlog and Net New Business Reporting
We report backlog based on anticipated net revenue from uncompleted
projects which have been authorized by the customer, through a written contract
or otherwise. Once work begins on a project, net revenue is recognized over the
duration of the project. Using this method of reporting backlog, at December 31,
2002, backlog was approximately $1.7 billion, as compared to approximately
$2.0 billion at December 31, 2001. The backlog at December 31, 2002 includes
approximately $87 million of backlog related to services contracted from our
service groups, primarily commercialization, in connection with the strategic
alliances forged by our PharmaBio Development group. Backlog does not include
any product revenues, royalties and commissions related to our commercial
rights.
Net new business, which is anticipated net revenue from contracts which we
entered into during the period and adjusted for contracts which were cancelled
during the period, for the twelve months ended December 31, 2002 was
$1.2 billion, including $79 million of internal service contracts. Net new
business for our product development and commercial services groups during this
same period was $795 million and $451 million, respectively.
We believe that backlog may not be a consistent indicator of future
results because it can be affected by a number of factors, including the
variable size and duration of projects, many of which are performed over several
years. Additionally, projects may be terminated by the customer or delayed by
regulatory authorities. Moreover, the scope of work can change during the course
of a project. If our product revenues, royalties and commissions related to our
commercial rights increase, an increasing proportion of our revenues will not be
reflected in our reported backlog.
Potential Liability
In conjunction with our product development services, we contract with
physicians to serve as investigators in conducting clinical trials to test new
drugs on human volunteers. 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. Although we do not believe we are legally accountable for the
medical care rendered by third party investigators, it is possible that we could
be held liable for the claims and expenses 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. In
addition, as a result of our Phase I clinical trial facilities, we could be
liable for the general risks associated with a Phase I facility including, but
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 the services we perform through each of our service groups. For
example, we could be held liable for errors or omissions or breach of contract
if one of our labs inaccurately reports or fails to report lab results. We
believe that some of our risks are reduced by one or more of the following:
(1) indemnification provisions and provisions seeking to limit or exclude
liability contained in our contracts with customers and investigators,
(2) insurance maintained by customers and investigators and by us and
(3) various regulatory requirements, including the use of institutional review
boards and the procurement of each participant's informed consent to participate
in the study. The contractual indemnifications generally do not fully protect us
against certain of our own actions such as negligence. Contractual arrangements
are subject to negotiation with customers and the terms and scope of any
indemnification or limitation or exclusion of liability may vary from customer
to customer and from trial to trial. Additionally, financial performance of
these indemnities is not secured. Therefore, we bear the risk that the
indemnifying party may not have the financial ability to fulfill its
indemnification obligations. We maintain professional liability insurance that
covers worldwide territories in which we currently do business and includes drug
safety issues as well as data processing errors and omissions. We could be
materially and adversely
14 Quintiles Transnational 2002 Annual Report
affected if we were required to pay damages or bear the costs of defending any
claim outside the scope of or in excess of a contractual indemnification
provision or beyond the level of insurance coverage or in the event that an
indemnifying party does not fulfill its indemnification obligations. For
example, we are among the defendants in a purported class action by participants
in an Alzheimer's study seeking to hold us liable for alleged damages to the
participants arising from the study. Our insurance carrier to whom we paid
premiums to cover this type of risk has since filed suit against us seeking to
rescind the insurance policies or to have coverage denied for some or all of the
claims arising from the Alzheimer's study litigation. We believe these claims
are without merit and intend to contest them vigorously. See "Legal
Proceedings."
Our efforts to acquire the rights to commercialize and sell pharmaceutical
products also expose us to potential liabilities typically associated with
pharmaceutical companies. For example, we could face product liability claims in
the event users of any of the products we market or distribute now, or in the
future, experience negative reactions or adverse side effects or in the event
any of these products causes injury, is found to be unsuitable for its intended
purpose or is otherwise defective. While we believe we currently have adequate
insurance in place to protect against these risks, we may nevertheless be unable
to satisfy any claims for which we may be held liable as a result of the use or
misuse of products which we manufacture or sell. These risks may be augmented by
certain risks relating to our outsourcing of the manufacturing and distribution
of these products or any pharmaceutical product rights we may acquire in the
future. For example, as a result of our decision to outsource the manufacturing
and distribution of SolarazeTM, we are unable to directly monitor quality
control in the manufacturing and distribution processes.
Government Regulation
Our preclinical, laboratory and clinical trial supply services are subject
to various regulatory requirements designed to ensure the quality and integrity
of the data or products of these services. The industry standard for conducting
preclinical laboratory testing is embodied in the good laboratory practice, or
GLP, regulations. The requirements for facilities engaging in clinical trial
supplies preparation, labeling and distribution are set forth in the current
good manufacturing practices, or cGMP, regulations. GLP and cGMP regulations
have been mandated by the FDA and the Department of Health in the United
Kingdom, and adopted by similar regulatory authorities in other countries. GLP
and cGMP stipulate requirements for facilities, equipment, supplies and
personnel engaged in the conduct of studies to which these regulations apply.
The regulations require adherence to written, standardized procedures during the
conduct of studies and the recording, reporting and retention of study data and
records. To help assure compliance, we have established quality assurance
programs at our preclinical, laboratory and clinical trial supply facilities
which monitor ongoing compliance with GLP and cGMP regulations by auditing study
data and conducting regular inspections of testing procedures. Our clinical
laboratory services, to the extent they are carried out in the United States,
are subject to the requirements of the Clinical Laboratory Improvement
Amendments of 1988.
GCP regulations and guidelines contain the industry standard for the
conduct of clinical research and development studies. The FDA and many other
regulatory authorities require that study results and data submitted to such
authorities be based on studies conducted in accordance with GCP provisions.
These provisions include:
• complying with specific regulations governing the selection of qualified
investigators,
• obtaining specific written commitments from the investigators,
• ensuring the protection of human subjects by verifying that Institutional
Review Board or independent Ethics Committee approval and patient informed
consent are obtained,
• instructing investigators to maintain records and reports,
• verifying drug or device accountability,
Quintiles Transnational 2002 Annual Report 15
• reporting of adverse events,
• adequate monitoring of the study for compliance with GCP requirements and
• permitting appropriate regulatory authorities access to data for their
review.
Records for clinical studies must be maintained for specified periods for
inspection by the FDA and other regulators. Significant non-compliance with GCP
requirements can result in the disqualification of data collected during the
clinical trial. We are also obligated to comply with regulations issued by
national and supra-national regulators such as FDA and the European Medicines
Evaluation Agency, or EMEA. By way of example, these regulations include FDA's
regulations on electronic records and signatures (21 CFR Part 11) which set out
requirements for data in electronic format supporting any submissions made to
FDA and EMEA's Note For Guidance "Good Clinical Practice for Trials on Medicinal
Products in the European Community."
We write our standard operating procedures related to clinical studies in
accordance with regulations and guidelines appropriate to the region where they
will be used, thus helping to ensure compliance with GCP. Within Europe, we
perform our work subject to the European Community Note for Guidance "Good
Clinical Practice for Trials on Medicinal Products in the European Community."
Studies to be submitted to the EMEA must meet the requirements of the ICH - GCP.
In addition, FDA regulations and guidelines serve as a basis for our North
American standard operating procedures. Our offices in the Asia-Pacific region
have developed standard operating procedures in accordance with their local
requirements and in harmony with our North American and European operations.
Our commercial services are subject to detailed and comprehensive
regulation in each geographic market in which we operate. Such regulation
relates, among other things, to the distribution of drug samples, the
qualifications of sales representatives and the use of healthcare professionals
in sales functions. In the United States our commercial services are subject to
the Prescription Drug Marketing Act, or PDMA, with regard to the distribution of
drug samples. In the United Kingdom, they are subject to the Association of the
British Pharmaceutical Industry Code of Practice for the Pharmaceutical
Industry, which prescribes, among other things, an examination that must be
passed by sales representatives within two years of their taking up employment.
We follow similar regulations which are in effect in the other countries where
we offer commercial services.
Our United States laboratories are subject to licensing and regulation
under federal, state and local laws relating to hazard communication and
employee right-to-know regulations, the handling and disposal of medical
specimens and hazardous waste and radioactive materials, as well as the safety
and health of laboratory employees. All of our U.S. laboratories are subject to
applicable federal and state laws and regulations relating to the storage and
disposal of all laboratory specimens including the regulations of the
Environmental Protection Agency, the Nuclear Regulatory Commission, the
Department of Transportation, the National Fire Protection Agency and the
Resource Conservation and Recovery Act. The use of controlled substances in
testing for drugs of abuse is regulated by the United States Drug Enforcement
Administration, or the DEA. For example, accounting for drug samples that
contain controlled substances is subject to regulation by the DEA. Some of our
facilities have been audited by the DEA. In one case, the DEA indicated that it
found that we miscounted certain drugs. While no final audit report or action
has been taken, the DEA could pursue one or more courses of action, including a
re-audit of the facility, the assessment of civil fines, or, in extreme cases,
criminal penalties. The regulations of the United States Department of
Transportation, the Public Health Service and the Postal Service apply to the
surface and air transportation of laboratory specimens. Our laboratories also
are subject to International Air Transport Association regulations, which govern
international shipments of laboratory specimens. Furthermore, when the materials
are sent to a foreign country, the transportation of such materials becomes
subject to the laws, rules and regulations of such foreign country. Our
laboratories outside the United States are subject to applicable national laws
governing matters such as licensing, the handling and disposal of medical
specimens, hazardous waste and radioactive materials, as well as the health and
safety of laboratory employees.
16 Quintiles Transnational 2002 Annual Report
In addition to its comprehensive regulation of safety in the workplace,
the United States Occupational Safety and Health Administration has established
extensive requirements relating to workplace safety for healthcare employers
whose workers may be exposed to blood-borne pathogens such as HIV and the
hepatitis B virus. These regulations, among other things, require work practice
controls, protective clothing and equipment, training, medical follow-up,
vaccinations and other measures designed to minimize exposure to chemicals, and
transmission of blood-borne and airborne pathogens. Furthermore, certain
employees receive initial and periodic training to ensure compliance with
applicable hazardous materials regulations and health and safety guidelines.
Although we believe that we are currently in compliance in all material respects
with such federal, state and local laws, failure to comply could subject us to
denial of the right to conduct business, fines, criminal penalties and other
enforcement actions.
Our disease management and healthcare information management services
relate to the diagnosis and treatment of disease and are, therefore, subject to
substantial governmental regulation. In addition, 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 heavily regulated. Legislation has been
proposed at both the state and federal levels that may require us to implement
security measures that could involve substantial expenditures or limit our
ability to offer some of our products and services.
The Health Insurance Portability and Accountability Act of 1996, or HIPAA,
requires the use of standard transactions, privacy and security standards and
other administrative simplification provisions and instructs the Secretary of
Health and Human Services, or HHS, to promulgate regulations implementing these
standards in the United States. Final rules requiring standardized electronic
transactions of health information were published by the Secretary in August
2000. The initial compliance deadline was October 16, 2002, but a covered entity
may file for an extension until October 16, 2003.
On December 28, 2000, the Secretary issued the final rule on Standards for
Privacy of Individually Identifiable Health Information to implement the privacy
requirements for HIPAA. These regulations, as amended on August 14, 2002,
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 procedures for (a) the exercise of those individuals' rights,
(b) the uses and disclosure of protected health information by the covered
entity, and (c) the methods permissible for de-identification of health
information. The effective date of the final rule was April 14, 2001 and, unless
properly extended by Congress or the current Administration, the compliance date
is April 14, 2003. The final regulation for the HIPAA security standards is to
be issued in the Federal Register on February 20, 2003.
We are not a "covered entity" under the HIPAA Standards for Privacy of
Individually Identifiable Health Information (also known as the HIPAA Privacy
Rule). We do receive identifiable health information from various sources,
including from investigators on research studies who are covered entities or who
are employed by covered entities. In order for covered entities to disclose
identifiable health information to us for research purposes, there must be an
applicable permission under the HIPAA Privacy Rule. Depending on the facts, the
possible permissions include where a patient signs an authorization; an
institutional review board waives the authorization requirement; the review of
the information is conducted under specific conditions preparatory to research
or with respect to decedents; or the information is stripped of direct
identifiers and is disclosed to us pursuant to a limited use agreement. Covered
entities may also provide "deidentified" health information to us. We are
engaged in ongoing communications with HIPAA covered entities from whom we
receive identifiable health information with respect to coordination of
disclosure of such information to us and the covered entities' compliance with
the HIPAA Privacy Rule. Based on our communications with our investigators and
other covered entities from whom we receive identifiable health information, we
believe that we will continue to be able to obtain such information, consistent
with requirements of the Privacy Rule. However, if the covered entities do not
understand the
Quintiles Transnational 2002 Annual Report 17
permissions for disclosure of information for research purposes, it is possible
that they could object to providing identifiable health information to us, which
could have an adverse effect on our ability to obtain such information in a
timely manner for our business operations relating to research.
The impact of such legislation and regulations relating to identifiable
health information in the United States cannot be predicted. Other countries
have or are in the process of putting privacy laws into place. For instance, the
European Data Protection Directive applies standards for the protection of all
personal data, not just health information, in the European Union (EU) and
requires the EU member states to enact national laws implementing this
Directive. Such legislation or regulations could materially affect our business.
Available Information
We maintain a Web site at the address www.quintiles.com. We are not
including the information contained on our Web site as a part of, or
incorporating it by reference into, this Annual Report on Form 10-K. We make
available free of charge through our Web site our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments
to these reports, as soon as reasonably practicable after we electronically file
such material with, or furnish such material to, the Securities and Exchange
Commission. We did not file any such reports, or amendments thereto, between
November 14, 2002 and December 31, 2002.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to each of our
executive officers who serve in such capacities as of the filing date of this
Form 10-K. There are no family relationships between any of our directors or
executive officers.
Name Age Position with the Company
---------------------------- ------ --------------------------------------------
Dennis B. Gillings 58 Chairman
Pamela J. Kirby 49 Chief Executive Officer
James L. Bierman 50 Executive Vice President and Chief Financial
Officer
John S. Russell 48 Executive Vice President, General Counsel
and Head Global Human Resources
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Dennis B. Gillings, Ph.D. founded the Company in 1982 and has served as
Chairman of the Board of Directors since its inception and as Chief Executive
Officer from its inception until April 2001.
Pamela J. Kirby, Ph.D. became the Company's Chief Executive Officer in
April 2001. Previously, she served as Head of Global Strategic Marketing and
Business Development department of the Pharmaceuticals Division of
F. Hoffmann-La Roche Ltd. in Basel, Switzerland. Dr. Kirby served from 1996
until 1998 as global commercial director with British Biotech plc, a drug
development company. Dr. Kirby is a director of Smith & Nephew, plc.
James L. Bierman was appointed Chief Financial Officer in February 2000.
Mr. Bierman joined the Company in June 1998 as Senior Vice President of
Corporate Development and had global responsibility for all mergers,
acquisitions, strategic investments, and joint ventures. Prior to joining the
Company, Mr. Bierman spent 22 years with Arthur Andersen LLP, working with a
diversified base of companies solving complex business problems, whether
operational, financial, or accounting-related in nature.
John S. Russell serves as Executive Vice President and General Counsel and
Head Global Human Resources. He also serves as the Corporate Secretary and
directs the Company's government relations. Mr. Russell joined the Company in
1998 after 12 years in private practice as a partner in the Raleigh office of
the Moore and Van Allen law firm, where he was head of the Corporate Practice
group.
18 Quintiles Transnational 2002 Annual Report
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