ITEM 1. BUSINESS

GENERAL

Covance Inc. is a leading contract research organization providing a wide range of product development services on a worldwide basis to the pharmaceutical, biotechnology and medical device industries. We also provide health economics and outcomes services for managed care organizations, hospitals and other health care providers and laboratory testing services to the chemical, agrochemical and food industries. The services Covance provides constitute two segments for financial reporting purposes: early development services which includes preclinical and Phase I clinical service capabilities, and late-stage development services which includes clinical development, clinical support, biomanufacturing and commercialization services. We believe Covance is one of the largest biopharmaceutical contract research organizations, based on annual net revenues, and one of a few that are capable of providing comprehensive global product development services.

On May 13, 1996, the Board of Directors of Corning Incorporated approved a plan to distribute, in a tax free distribution to all Corning stockholders of record on December 31, 1996, all of the Company's outstanding Common Stock, and that of Quest Diagnostics Inc. The Distributions were effected as of the close of December 31, 1996 and Covance, as well as Quest, became an independent, publicly-traded company on such date.

Most of the service offerings that constitute Covance's business were initially acquired by our former parent, Corning and later by Covance, as part of a strategy to create a global and full service product development company. Covance has continued to acquire certain capabilities by strategic acquisition as well as through in-house development. Our more recent acquisitions include our November 1998 acquisitions of GDXI, Inc., a company located in Reno, Nevada (now known as Covance Central Diagnostics Inc.), which provides centralized electrocardiogram analysis for clinical trials and Berkeley Antibody Company, Inc. (now a subsidiary of Covance Research Products Inc.), a company located in Richmond, California, which provides contract services in custom antibody production, applied immunology, and custom animal research to support the medical device industry and preclinical evaluations.

We maintain offices in 17 countries. Most recently we opened offices in Canada, Argentina, and Poland in 1997, and China in 1998.

CONTRACT RESEARCH ORGANIZATION INDUSTRY OVERVIEW

The contract research organization industry provides independent product development services to the pharmaceutical, biotechnology and medical device industries. In general, contract research organizations derive substantially all of their revenue from the research, development and marketing expenditures of these industries. Full service contract research organizations design and manage preclinical and clinical and periapproval studies and trials, and provide health economics and outcome services. Contract research organizations may also provide other services including pharmaceutical packaging, central laboratory, biomanufacturing and other services required to develop and market new pharmaceutical and biotechnology products.

TRENDS AFFECTING THE CONTRACT RESEARCH ORGANIZATION INDUSTRY

We believe that the outsourcing of drug development activities by pharmaceutical and biotechnology companies has been increasing and will continue to increase as a result of the factors described below.

COST CONTAINMENT PRESSURES. Market forces and governmental initiatives have placed downward pressure on pharmaceutical and biotechnology companies' drug prices. We believe that the pharmaceutical industry is responding to these pressures by converting some of the fixed costs of maintaining research and development personnel and facilities to variable costs, which can be increased or decreased as needed, by outsourcing drug development activities to contract research organizations. Pharmaceutical companies may find that they do not have sufficient internal development resources when a large number of prospective drugs emerge from the research process and need to undergo development. These resource shortages increase demand for the services of contract research organizations. We also believe that many of these companies are attempting to shorten the new drug development cycle time by using contract research organizations, which may have greater expertise in a therapeutic area and/or offer greater

efficiency at a lower cost. Please also see "Competition" in "Management's Discussion and Analysis of Financial Condition and Results of Operations."

MARKETPLACE GLOBALIZATION. Pharmaceutical and biotechnology companies are increasingly attempting to expand the market for new drugs by applying for regulatory approvals in multiple countries simultaneously rather than sequentially as they have in the past. We believe that contract research organizations with a global presence, such as Covance, will continue to benefit from these trends.

REVENUE ENHANCEMENT THROUGH FASTER DRUG DEVELOPMENT. We believe that contract research organizations, by providing specialized development services, are often able to perform the needed services with a higher level of expertise or specialization, and more quickly than a pharmaceutical or biotechnology company could perform such services internally.

PHARMACEUTICAL COMPANY CONSOLIDATION. Business combinations such as mergers and acquisitions by pharmaceutical companies present an opportunity for contract research organizations, as companies resulting from business combinations often seek to reduce costs. Once combined, many pharmaceutical companies aggressively manage costs by reducing jobs, decentralizing the research and development process and outsourcing to contract research organizations in an effort to reduce the fixed costs of internal drug development.

INCREASINGLY STRINGENT REGULATION. Regulatory requirements throughout the world have become more stringent and there is a trend toward global standardization of these requirements. This has led to an increase in the need for broader, global regulatory expertise. We believe that the pharmaceutical and biotechnology industries are outsourcing to global contract research organizations to take advantage of their capabilities and geographic presence.

THERAPEUTIC FOCUS. We believe that the economics of the marketplace require increased research and development expenditures as pharmaceutical and biotechnology companies become focused on innovative new products. These include drugs for an aging population and drugs for the treatment of chronic disorders and life threatening conditions. The development of therapies for chronic disorders, such as Alzheimer's disease or arthritis, requires complex clinical trials to demonstrate the therapies' effectiveness and to determine whether the drugs cause any long-term side effects. We believe that contract research organizations with the requisite therapeutic experience and the ability to manage complex trials will present an attractive development alternative for biopharmaceutical companies.

INCREASING COMPETITIVE PRESSURES IN THE PHARMACEUTICAL INDUSTRY. A report issued in late 1998 by the accounting firm PricewaterhouseCoopers stated that if recent trends continue, the research and development costs of the top 20 pharmaceutical companies will more than double by the year 2005. If the growth in research and development budgets keeps pace with revenue growth, which PricewaterhouseCoopers believes is more likely, they conclude that research and development costs per drug will have to be reduced to provide their shareholders with the investment returns they have experienced through much of the 1990's. We believe that to meet these pressures, large pharmaceutical companies will have to develop drugs more quickly and less expensively and that should lead to an increasing reliance on the services of contract research organizations.

BIOTECHNOLOGY INDUSTRY GROWTH. The United States biotechnology industry has grown rapidly over the last twelve years and is introducing new therapies which require regulatory approval. Many biotechnology companies do not have the necessary capital, equipment or personnel experience to conduct preclinical studies and clinical trials. Accordingly, many biotechnology companies have chosen to outsource to contract research organizations rather than expend significant time and resources to develop an internal preclinical or clinical development or biomanufacturing capability.

THE NEW DRUG DEVELOPMENT PROCESS--OVERVIEW

Before a new drug may be marketed to the public, it must undergo extensive testing and regulatory review to determine that the drug has the required quality and is both safe and effective for its intended purpose. The drug development process and typical corresponding time periods for these processes in the United States are described below. Similar extensive testing and regulatory reviews are required in most countries throughout the world.

PRECLINICAL RESEARCH--6 MONTHS TO 3 YEARS. IN VITRO, or test tube, and IN VIVO, or animal, studies are conducted to establish the basic pharmacokinetic effect and safety of a drug including the toxicity of the drug over a wide range of

doses. Pharmacokinetics is the study of how a drug is metabolized or absorbed and digested in the body. Initially, acute, or short term, toxicology studies are conducted to ascertain any noxious characteristics of the drug. In the United States, if results warrant continuing development of the drug, the manufacturer, also known as the sponsor, will file an Investigational New Drug application, whereupon the United States Food and Drug Administration ("FDA") may grant permission to begin human trials. Human trials are also known as "clinical trials". Preclinical studies may continue after the start of clinical trials to determine the longer term effects of a drug.

CLINICAL RESEARCH--3.5 TO 6 YEARS.

- PHASE I--6 MONTHS TO 1 YEAR. This phase involves the initial basic safety and pharmacokinetic testing in approximately 20 to 100 human subjects, usually healthy volunteers in a closely monitored setting. These studies determine the side effect profile of the drug, how the drug works, how it is affected by other drugs, where it goes in the body, how long it remains active and how it is broken down and eliminated from the body.

- PHASE II--1 TO 2 YEARS. This phase involves basic efficacy, or effectiveness, and dose-range testing in approximately 100 to 400 carefully selected patients suffering from the disease or condition under study. These studies help determine the best effective dose, confirm that the drug works as expected and provide additional safety data. The trials are typically well controlled and usually involve a placebo. A placebo is an identical dosage form such as a tablet or solution which lacks the active substance under investigation.

- PHASE III--2 TO 3 YEARS. This phase involves efficacy and safety studies in broader populations of hundreds or thousands of patients at many investigational sites. Investigational sites are the places that enroll the patients participating in the trial, where the drug is provided and where progress is monitored. Investigators are physicians treating the patients enrolled in the study. These services may involve placebo-controlled trials, in which the new drug is compared with a placebo; controlled trials, in which the new drug is compared with one or more drugs with established safety and efficacy profiles in the same therapeutic category; or uncontrolled trials, where there is no comparison to a placebo or another drug. Generally, Phase III studies are intended to provide additional information on drug safety and efficacy, an evaluation of the risk-benefit relationship for the drug, and information for the adequate labeling of the product.

NEW DRUG APPLICATION PREPARATION AND SUBMISSION. Upon completion of Phase III trials, the sponsor or contract research organization assembles the tabulated and statistically analyzed data from all phases of development into a single large document, called the New Drug Application in the United States. New Drug Applications are, on average, approximately 100,000 pages.

REGULATORY REVIEW AND APPROVAL. At this stage, the regulatory agency will scrutinize data from all phases of development to confirm that the sponsor has complied with regulations and that the drug has the required quality and is safe and effective for the specific use, or indication, under study. Product labeling is also approved at this stage, which serves as a guideline to the sponsor about how its product can be promoted in the marketplace.

TREATMENT INVESTIGATIONAL NEW DRUG--MAY SPAN LATE PHASE II, PHASE III AND FDA REVIEW. When results from Phase II or Phase III show special promise in the treatment of a serious condition for which existing therapeutic options are limited or are of minimal value in the United States, the FDA may allow the manufacturer to make the new drug available to a larger number of patients through the regulated mechanism of a Treatment Investigational New Drug application. Although less scientifically rigorous than a controlled clinical trial, a Treatment Investigational New Drug Application may enroll and collect data from thousands of patients, which data provides short and long term safety information useful in defining the product's profile.

POST-MARKETING SURVEILLANCE AND PHASE IV STUDIES--PERIAPPROVAL. United States Federal regulations require the sponsor to collect and periodically report to the FDA additional safety data on the drug for as long as the sponsor markets the drug. In some cases, it may be necessary to undertake an evaluation of specific aspects of safety. These are known as Phase IV studies and are sometimes referred to as post-marketing surveillance. If the drug is marketed outside the United States, these reports must include data from all countries in which the drug is sold. Additional studies may be undertaken after initial approval to find new uses for the drug or to test new dosage formulations. All of these studies are types of periapproval studies, or studies performed around or after a regulatory authority's approval to let the sponsors sell the drug commercially.

BUSINESS STRATEGY

We believe we are one of the largest pharmaceutical and biotechnology contract research organizations, based on annual net revenues, and one of a few that are capable of providing comprehensive global product development services. Our strategy is to provide high quality, cost effective, integrated, comprehensive and innovative services to assist our pharmaceutical and biotechnology clients to develop, produce, obtain approval for and enhance the commercial success of their new therapeutic products worldwide. As this strategy unfolds, we will increasingly focus attention on customers who are biased towards development approaches that are flexible and innovative. We believe these customers would be more likely to use more than one of our services or retain us for a project that may involve more than one of our services.

HIGH QUALITY, COST EFFECTIVE, INTEGRATED, COMPREHENSIVE AND INNOVATIVE SERVICES. We believe that contract research organizations capable of offering a full range of biopharmaceutical drug development and manufacturing services are better able to compete for three reasons: (1) a full range of services provides a client with the choice of using just one provider to secure all of the client's development needs; (2) an organization which can integrate these services can provide economies of scale and accelerate the development of the client's product through more comprehensive planning of the development process; and (3) early stage development provides the contract research organization with access to the client sooner in the development cycle and may promote the client's use of later stage development services.

We strive to continually improve our existing services. We have implemented a total quality management system throughout our operations which assists us in our goal of producing error-free services on time and within the client's budget. Relatedly, we have piloted a customer satisfaction and loyalty initiative in connection with our Clinical Development Services that we intend to expand to our other service offerings. Furthermore, some of our United States and European subsidiaries have received ISO 9000 and 9001 certifications based on quality standards established by the International Standards Organization. The ISO 9000 standards define the international requirements for creating a quality assurance system that is intended to result in the provision of consistent service. We have also initiated a program designed to maximize customer satisfaction and loyalty.

We also focus on providing our clients new, value-added services, including those that involve integrated services relying on multi-disciplinary teams drawn from our various operations. For instance, we are duplicating in the United States a strategic product development program developed in Europe that has successfully reduced the estimated time from preclinical testing to the first human studies using both preclinical and clinical expertise.

Our new service offerings arise as a result of both "home-grown" activities and through strategic acquisitions and alliances. As examples of home-grown activities, we have invested in the creation of a multi-use biomanufacturing facility which became operational in 1997 and have created a clinical trial management system utilizing an interactive voice response system. We have also recently developed a Strategic Consulting Group which helps pharmaceutical companies assess a compound's potential and identify the best therapeutic indications and market position for a new drug candidate. As to recent acquisitions, we acquired our U.S. pharmaceutical packaging capabilities in 1995, European pharmaceutical packaging capabilities in 1996 and health and economics and outcomes capabilities in 1996. In addition, in 1998 we added centralized electrocardiogram analysis capabilities through the acquisition of GDXI, Inc. and we enhanced our custom animal research and antibody production capabilities through the acquisition of Berkeley Antibody Company, Inc.

We expect to continue developing services internally and making strategic acquisitions that are complementary to our existing services and that will expand our ability to serve our clients. Complimentary businesses are those that will enhance our existing services either qualitatively or geographically, or add new services which can be integrated with our existing services.

STREAMLINING THE DRUG DEVELOPMENT PROCESS. In 1999, as an outgrowth of its Clinical Trials Research and Development Group, Covance initiated eCRO Services, a group devoted to reducing the time and cost of clinical trials through the use of improved processes, better information, and technology based services such as internet-based applications. eCRO Services will also increase Covance's use of electronic data capture tools to facilitate real-time information gathering and data access during clinical trials. These tools, some of which Covance already uses, are intended to provide a method for more rapid data entry and query resolution during clinical trials, allowing Covance to reduce the cost of the data gathering process. We presently use electronic data capture to retrieve data directly from investigator sites.

In 1997, we created the Covance Clinical Research Alliance to identify and form alliances with leading investigators and institutions throughout North America and Europe to accelerate the start of studies, to increase patient and data access and to improve the timeliness and quality of data. Over 60 member organizations, encompassing over two hundred active investigators in North America, are currently part of the Covance Investigator Alliance. Our management intends to continue to expand the number of Covance Investigator Alliance sites in North America, Europe and Asia.

In continually examining ways to improve the drug developmental process, our information technology strategy is to capitalize on our proprietary computer systems by customizing them where appropriate for client specific requirements and incorporating new systems and technologies to meet changing demands in a timely and cost effective manner such as with eCRO Services. An example of an information technology development is our Trial Tracker(SM) Information Access System. This system provides clients with 24-hour access to study data, such as study patient enrollment progress, patient visit information, case report form status, serious adverse event experiences and other useful clinical trial information. Our drug supply management system based on interactive voice response system technology allows clients to more efficiently manage the distribution of their experimental compounds to investigational sites. In addition, we are pursuing the development and implementation of internet-based systems that may reduce the time and cost of clinical development. With respect to technical resources, we have over 400 information systems professionals working in 14 regional and 22 satellite information system centers. Virtually all of our employees, both domestic and international, as well as our file server and desktop computer systems, are connected by a wide area network that provides global access to the expertise, technologies and data contained in the regional information system centers. These systems help us provide integrated services and connect us to our clients.

GEOGRAPHIC EXPANSION. We intend to continue our strategy of establishing new or enhancing existing operations in significant pharmaceutical and biotechnology markets. We expect this will occur as a result of internal growth and through strategic acquisitions. For example, in 1997, we opened new offices in Montreal, Canada, Buenos Aires, Argentina and Warsaw, Poland, and in 1998 we opened our Beijing, China office.

We believe that it is becoming increasingly important to provide our full range of drug research and development services in all major and many developing pharmaceutical and biotechnology markets, especially given industry trends to conduct clinical trials in multiple countries simultaneously. Through our offices, regional monitoring sites, laboratories and manufacturing sites in over 38 locations in 17 different countries and field work in many other countries, we believe we are a leader among contract research organizations in our ability to deliver services globally. Currently, approximately 34% of our employees are based outside of the United States.

Besides conducting studies in the Asia Pacific region, we are also focusing on increasing the number of clinical trials we conduct there. By working with various science and technology boards and local ministries, we are training local health professionals on western drug development regulations and procedures. For instance, we are continuing our collaboration with the Singapore National Science and Technology Board concerning the Singapore government's initiative to form the Asia Pacific Economic Cooperation Coordinating Center for Good Clinical Practice. Good Clinical Practice embodies the industry standards for the conduct of clinical research and development studies. We are currently teaching Good Clinical Practices to key physicians and investigators in select Chinese hospitals and clinical pharmacology centers. This training is expected to be expanded in future years to include Good Laboratory Practices and Good Manufacturing Practices.

SERVICES

We provide a wide range of product development services on a worldwide basis to the pharmaceutical, biotechnology and medical device industries. We also provide health economics and outcomes services for managed care organizations, hospitals and other health care providers and laboratory testing services to the chemical, agricultural chemical and food industries. The services we provide constitute two segments for financial reporting purposes: early development, which includes preclinical and Phase I clinical service capabilities, and late-stage development, which includes clinical development, clinical support, biomanufacturing and commercialization services.

EARLY DEVELOPMENT

PRECLINICAL AND PHASE I CLINICAL SERVICES

We have four major laboratories, located in Madison, Wisconsin and Vienna, Virginia in the United States and Harrogate, United Kingdom and Munster, Germany in Europe. We also have an administrative and sales office in Tokyo, Japan. The preclinical services offered are wide-ranging, and include:

- IN VIVO toxicology studies which are studies of the toxic effects of drugs in animals;

- genetic toxicology studies which include studies of the toxic effects of drugs on chromosomes, as well as on genetically modified mice; and

- chemistry services that analyze the components of compounds.

Our preclinical area has also been a source of innovation by introducing new technologies for client access to data, electronic animal identification, multimedia study reports and animal and test tube measures of induced cell proliferation, or reproduction. Our preclinical group also works closely with the Phase I and II operations of the Early Development and Clinical Development Services groups to minimize product development time and to provide clients with early data on the safety and efficacy of new molecules. This data allows clients to make an early decision about whether to continue, modify or cease their development programs.

As part of our preclinical services, we have duplicated in the United States the Strategic Product Development ("SPD") program developed in Europe. This program has successfully reduced the time from preclinical testing to the first human studies. SPD involves an integrated process and team drawn from our preclinical and Phase I and II areas. In an SPD program, the compound is researched from initial preclinical evaluation through its first dosing in humans, including the filing and attainment of an Investigational New Drug application. The process includes all aspects of preclinical services including formulation and dose delivery testing, product metabolism, chemistry, toxicology and safety testing.

We also provide purpose-bred animals for biomedical research. These research animals are required by pharmaceutical and biotechnology companies, university research centers and contract research organizations as part of their preclinical animal safety and efficacy testing. Through a variety of processes, technology and specifically constructed facilities, we are able to provide both purpose-bred and specific pathogen free animals that meet our clients' rigorous quality control requirements. A pathogen is a microbe or organism that causes disease. Although our preclinical research facilities maintain procedures in accordance with applicable government regulations and our own policies for the quarantine and handling of imported animals, including primates, there is a risk that these animals may be infected with diseases that may be harmful and even lethal to themselves and humans.

We are also a provider of custom polyclonal and monoclonal antibody services and we own and operate a state-of-the-art antibody serum production facility that complies with both Good Manufacturing Practices and Good Laboratory Practices. Monoclonal antibodies recognize only one type of virus or bacteria, while polyclonal antibodies are a group of antibodies each of which recognize different parts of a virus or bacteria. In November 1998, we augmented this capability with the acquisition of Berkeley Antibody Company, Inc., which produces custom antibodies as well as offers animal research services to the medical device industry. Berkeley Antibody Company, Inc. also provides preclinical evaluations and services in the area of applied immunology, which is research relating to the immune process.

We offer immunotoxicology services in which we assess the impact of drugs or chemicals on the structure and function of the immune system. In 1999, we opened a new immunotoxicology and cell culture laboratory featuring online data capture capabilities and Good Laboratory Practices compliant instrumentation monitoring systems.

We also provide laboratory testing services to the chemical, agricultural chemical and food industries. We offer a complete range of services to agricultural chemical manufacturers to determine the potential risk to humans, animals and the environment from plant protection products such as pesticides. We also offer a broad range of services to the food industries, including nutritional analysis and nutritional content fact labels. In 1998 we began offering testing services to the growing nutriceutical industry. Generally, nutriceuticals are natural products such as vitamin supplements or botanical products used for pharmaceutical purposes.

LATE-STAGE DEVELOPMENT

CLINICAL DEVELOPMENT SERVICES

We offer a comprehensive range of clinical trial services, including Phase II through III clinical studies. We have extensive experience in a number of therapeutic areas, including the following:

- diseases of the cardiovascular and central nervous system;

- diseases of the endocrine and respiratory systems;

- oncology; and

- infectious diseases including AIDS.

We have extensive experience in managing small, medium and large trials in the United States and in many parts of the world. These trials may be conducted separately or simultaneously as part of a multinational development plan. We can manage every aspect of clinical trials. Examples of the services that we provide to clients include:

- clinical development plans and protocol design;

- site, investigator and patient enrollment;

- clinical and data management and processing;

- regulatory consulting and filings;

- information systems and drug development strategy;

- European study submissions;

- New Drug Applications;

- product license applications;

- European submission dossiers;

- preparation and submission of Investigational New Drug applications;

- monitoring and safety evaluation management and reporting;

- statistical analyses and report writing, medical writing; and

- Good Clinical Practice, Good Laboratory Practice and Good Manufacturing Practice audits.

Clinical trials are managed by a dedicated project team, which, in each case, is led by a project director or manager who supervises all aspects of the clinical trial.

We provide, either on an individual or integrated basis depending on client needs, as part of conducting clinical trials the following core services:

STUDY DESIGN. In the critical area of study design, we prepare study protocols and case report forms. The study protocol (1) defines the medical issues to be examined in evaluating the safety and efficacy of the drug under study, (2) specifies the number of patients required to produce statistically valid results, (3) specifies the clinical tests to be performed in the study,
(4) specifies the time period over which the study will be conducted,
(5) specifies the frequency and dosage of drug administration and (6) sets forth the exact inclusion and exclusion criteria for enrolling patients in the study.

The success of the study depends on the ability of the protocol to accurately reflect requirements of regulatory authorities and to fit coherently with the other aspects of the development process including the ultimate marketing strategy for the drug. Marketing strategy considerations include outcomes and pharmacoeconomic concerns and reimbursement planning, topics discussed in greater detail in the description of "HEALTH ECONOMICS AND OUTCOMES SERVICES". When study protocols are being finalized, we develop case report forms to record the desired study information and ensure that valid data are acquired in a form that is most efficient for the investigator. Individuals representing all of the disciplines involved in the drug development process, including epidemiology, data management, statistics and regulatory affairs, must work closely with the clinical trial management project team to assure that

the right data are acquired, and in the form which is most efficient for subsequent data entry, management analyses and reporting.

INVESTIGATOR RECRUITMENT. During a clinical trial, physicians, also referred to as investigators, supervise the administration of the drugs to patients at hospitals, clinics or other locations, also referred to as investigational sites. The success of a clinical trial depends, in large part, on the performance of these investigators. We solicit the participation of investigators, who contract directly with either us or our clients-the sponsors. We maintain, and continually expand and refine, our investigator databases. Our databases contain information regarding our experience with these investigators, including factors relevant to rapid study initiation.

STUDY MONITORING. We provide study monitoring services by visiting investigational sites. These services include investigator recruitment and education, patient enrollment assistance and data collection. These visits also ensure that data is gathered according to Good Clinical Practice, the requirements of the client, and other applicable regulations. We focus, at an early stage, on quickly completing the critical steps of screening and selecting investigators, processing pre-study regulatory paperwork, obtaining institutional review board approvals and scheduling investigational site initiation visits.

CLINICAL DATA MANAGEMENT AND BIOSTATISTICAL ANALYSIS. Our data management and biostatistical analysis services assist clients in managing and analyzing the information produced in clinical trials. These services are managed by professionals with pharmaceutical and biotechnology industry experience in the design and construction of local and multinational clinical trial databases. These services are offered either as discrete products or as part of an integrated drug development program. During the design of development plans and protocols, we offer consulting services related to the determination of sample size for patient enrollment, and the development of data analysis plans. During the conduct of a clinical trial, we assist in the rapid acquisition of accurate study data. Following completion of the clinical trial, we assist in preparing reports and regulatory submissions. Our biostatisticians may also participate with clients in meetings with the FDA to present and discuss biostatistical analyses prepared by us. We have expertise in electronically capturing and using diverse study data from different locations.

MEDICAL WRITING AND REGULATORY SERVICES. We provide medical report writing and regulatory services to our clients. We write integrated clinical/statistical reports, manuscripts, risk/benefit assessment reports, package inserts, quality assurance and environmental risk assessments. These services are fully integrated with our other clinical services and are designed to reduce overall drug development time.

CLINICAL SUPPORT SERVICES

CENTRAL LABORATORY SERVICES. We believe that the ability to provide high quality and sophisticated central laboratory services is an integral aspect of a full service contract research organization. We have two laboratories, one located in the United States and the other in Switzerland, that provide central laboratory services dedicated to biotechnology and pharmaceutical studies. These facilities provide clients with data in studies that can be conducted separately, or multinationally and simultaneously. The data we provide from these central laboratories is combinable because we use consistent laboratory methods, the same reagent manufacturers and the identical equipment calibration and clinical trial reference ranges. Clinical trial reference ranges are the laboratory values that would be considered normal in a typical population. Combinable data eliminates the need for statistical correlation among different laboratories. We also employ a proprietary clinical trials management system, which we believe is unique, that enables us to enter a sponsor's protocol requirements directly into our database. This system, based on protocol requirements, coordinates many aspects of clinical trials including:

- constructing the drug kits that will go to the investigational sites and the requisition forms for additional drug kits;

- facilitating proper laboratory specimen collection from the investigational sites;

- sequencing of study participants visits and investigator ordering of additional tests, ensuring that all demographic data is complete and accurate; and

- producing the client reports that are customized to their specifications.

The laboratory data can be easily audited because all laboratory data can be traced to source documents. In addition, the laboratories are capable of delivering customized data electronically within 24 hours of test completion and provide safety test results within 48 hours of test completion from most locations.

As the need for central laboratory services expands geographically, we have expanded the reach of our central laboratories services through contractual arrangements, one with a leading South African laboratory and the other with a leading Australian laboratory. Each of these relationships allows us to combine the testing capabilities of the laboratory with our own proprietary systems. In June 1998, we completed a significant expansion of our United States laboratory to further accommodate expanding operations and expected future demand.

CENTRALIZED ELECTROCARDIOGRAM SERVICES. In November 1998, we expanded our ability to collect and centralize clinical trial data with the purchase of GDXI, Inc. (now known as Covance Central Diagnostics Inc.) which undertakes the capture and interpretation of electrocardiograms. An electrocardiogram is a recording of electrical signals from the heart. Electocardiogram analysis, one of the most frequently used tools in clinical trials, is included in more than one-half of clinical trials as part of the study protocol. Covance Central Diagnostics Inc. distributes a proprietary hand-held electrocardiogram device to clinical trial sites. The device can be used anywhere in the world and collects the data, performs a real-time quality check, and transmits the information by telephone to a full-time central operations center. In 1999, Covance introduced ambulatory cardiac monitoring capabilities, often referred to as Holter monitoring. Holter monitoring involves the ambulatory monitoring of cardiac activity and permits long-term monitoring-often 24 to 48 hours as opposed to the ten seconds of data typically provided by stationary ECGs, and therefore may reveal certain conditions which may not be discovered by a stationary ECG.

PHARMACOGENOMIC TESTING SERVICES. In 1999, Covance entered into a collaborative agreement with Variagenics, Inc. to offer an array of technologies for the rapid discovery and detection of genetic variation to optimize drug treatments and to develop safer and more effective pharmaceutical products. We will offer Variagenics' pharmacogenomic testing technologies in conjunction with our central laboratory services. These technologies focus on the rapid identification of normal variance in human gene sequences and testing for these variances in clinical trial populations. We anticipate that the use of genetic variation during drug development will facilitate the adjustment of treatment regimens and improve disease definition.

CLINICAL DEVELOPMENT TECHNOLOGIES. To expedite the drug development process and to help reduce costs, we created a proprietary interactive clinical trial management system utilizing an interactive voice response system. This system uses touch-tone telephone technology for data entry purposes and assists our clients in managing clinical trials on a real time basis and in reducing product waste with just-in-time inventory processing. This system is multi-lingual and is available world-wide through toll-free numbers seven days per week, 24 hours per day. The most frequently used functions include patient screening, patient enrollment, patient randomization, drug assignments, drug inventory management, unblinding, discontinuations and patient diaries. Clients can realize substantial cost savings through this information technology, by reducing and better managing clinical supply requirements and controlling waste. In addition, real time data access expedites the clinical trial process by offering clients precise and accurate information for quick analysis. We offer this system both in conjunction with clinical trials we conduct and as a stand alone service.

PHARMACEUTICAL PACKAGING SERVICES. We offer full service contract drug packaging in the United States and Europe. These services include drug package development and design, overencapsulation and blinding of products, coldformed and thermoformed blister units, multi-blister packaging, multi-dose bottle filling, clinical labeling, wallet packaging, storage and site distribution of clinical supplies and return services for unused supplies. We believe that by integrating packaging services with our other clinical and clinical support services we can accelerate the drug development process for our clients through operational efficiencies that arise from the upfront coordination of clinical trial design.

BIOMANUFACTURING SERVICES

We own 78% of the voting capital stock of Covance Biotechnology Services Inc. Covance Biotechnology is a company formed in 1995 to manufacture recombinant proteins for biotechnology and pharmaceutical clients for preclinical and clinical trials as well as for commercial sales. Recombinant proteins are biologically based compounds that result from the combination of the human genes that make the protein and the DNA of non-human cells that can be grown rapidly, such as bacteria, yeast, or animal cells. Through this recombination, proteins capable of treating a disease can be rapidly grown. Covance Biotechnology's services include the development of processes suitable for

manufacturing these proteins according to Good Manufacturing Practices regulations. Covance Biotechnology also provides full analytical testing, quality control, quality assurance and regulatory affairs support. Covance Biotechnology is able to produce multiple compounds for multiple clients simultaneously and on a scale, we believe, greater than most other contract biomanufacturers. Covance Biotechnology provides an alternative for clients who might otherwise have to design, finance and construct their own facility to manufacture a biopharmaceutical compound for clinical trials or commercial sale. By retaining Covance Biotechnology, a client can avoid the expense, time delay and risk of making additional significant investments for a product whose safety, efficacy and commercial success are uncertain. This allows clients to lower the financial risk of drug development.

The remaining 22% of Covance Biotechnology's capital stock is owned by minority stockholders. Our ownership in Covance Biotechnology could be reduced to approximately 68% if all of the stock options granted to Covance Biotechnology executives were exercised in full.

Our company, Covance Biotechnology and its minority stockholders have entered into a capital contribution and stockholder agreement. This agreement limits the minority stockholders' right to transfer their common stock, grants us a right of first refusal on shares of minority stockholders' common stock, and grants us the right to purchase the common stock held by the minority stockholders in amounts of one-third each within 60 days of December 31, 1998, 1999 and 2000. If we do not exercise our purchase right, the minority stockholders have the right to require Covance Biotechnology to use its best efforts to arrange for the sale of those shares on terms specified in the agreement. Our company and the minority stockholders elected not to exercise our respective rights in 1999. We have elected not to exercise our rights in 2000. In October 1997, our company and the minority stockholders entered into an additional agreement obligating us and the minority stockholders to make, upon request by Covance Biotechnology, (1) additional capital contributions to Covance Biotechnology of an aggregate amount of $12.0 million in proportion to our respective ownership interests and (2) at our option after these capital contributions have been made, additional capital contributions of up to an aggregate amount of $18.0 million also in proportion to our respective ownership interests. In March 1999, our company and the minority stockholders agreed to increase this funding mechanism for Covance Biotechnology from the original $30.0 million to a total of $60.0 million upon the same terms. Through December 31, 1999, aggregate capital contributions of $48.0 million have been made to Covance Biotechnology pursuant to this agreement. Our share of the capital contributions has totaled approximately $37.4 million and we have loaned to the minority stockholders approximately $10.6 million in the aggregate to fund their required capital contributions. These loans are secured by the Covance Biotechnology stock owned by the minority stockholders and are the only assets available to us to satisfy the loans in the event the minority stockholders do not repay the loans.

COMMERCIALIZATION SERVICES

PERIAPPROVAL SERVICES. Periapproval trials are studies conducted "around approval", generally after a drug has successfully undergone clinical efficacy and safety testing and the New Drug Application has been submitted to the FDA. We offer a range of periapproval services, including:

- Treatment Investigational New Drug applications ("TINDs");

- Phase IIIb clinical studies, which involve studies conducted after New Drug Application submission, but before regulatory approval is obtained;

- Phase IV clinical studies which are studies conducted after initial approval of the drug; and

- other types of periapproval studies such as post-marketing surveillance studies and prescription to over-the-counter switch studies.

A TIND is an application, the associated procedure of which allows broader populations of patients to receive treatment with an investigational new drug for a serious or immediate life-threatening disease, for which no comparable or satisfactory therapy is available. Examples of these diseases include AIDS and cancer. This treatment is provided during the clinical trial phase of development but does not typically use controlled clinical trials. We are experienced with TINDs and have developed specialized systems for prompt initiation and effective operation of TIND programs. These systems include computerized patient screening, optical scanning of Case Report Forms and drug management systems. We also provide project specific information to physicians, patients and patient advocacy groups, and data processing, management, analyses and reporting systems relating to TINDs. Our expanded access program, which is conducted pursuant to a TIND, is a mechanism that allows innovative new therapies for life-threatening diseases to be given to expanded populations before FDA approval.

Post-marketing surveillance studies are evaluations of the use of products in actual medical practice using a broad range of patients. These studies use practicing physicians to evaluate primarily the safety profile of the product under actual medical practice conditions. Post-marketing surveillance studies are large, typically involving over 1,000 physicians and thousands of patients, and usually focus on evaluating a small number of key clinical outcomes, such as a particular side effect.

In prescription to over-the-counter switch studies, we gather the necessary safety data and other information including patients' ability to self diagnose, and their interpretation and comprehension of label instructions, to obtain regulatory permission for the sale of a drug without the need of a prescription. These studies are also large, well-controlled programs.

We also field and process telephone calls and inquiries relating to adverse experiences with a drug while we perform the safety services in the context of periapproval studies. In 1999 we have increased our focus on offering these services on a stand alone basis.

HEALTH ECONOMICS AND OUTCOMES SERVICES. We offer a wide range of health economics services, including outcomes and pharmacoeconomic studies, reimbursement planning and reimbursement advocacy programs. Pharmaceutical, biotechnology and medical device manufacturers purchase these services from us to help optimize their return on research and development investments. These services provide our clients with information as to the economic impact of drugs for the purpose of enhancing the economic performance of the providers' medical practices.

Outcomes and pharmacoeconomic services include performing studies to determine the cost effectiveness of a particular disease treatment compared with alternative treatments. Quality of life studies analyze the effects of drug treatment on a patient's daily life. Outcomes studies may be conducted before the marketing of a drug, often in conjunction with clinical trials, or after the marketing of a drug has begun. These studies enable clients to demonstrate the value of their product to regulators, insurers and care providers. To help inform client's drug development decisions and marketing strategies, we believe the ability to perform outcomes and pharmacoeconomic studies will become increasingly important because of the competitive pressures affecting the pharmaceutical industry and the rising need to more rigorously demonstrate the value of new drugs, both in their own right and as compared to other drugs and treatment regimes.

We also offer our customers strategic reimbursement and market planning services. We analyze who will pay for a medical product, such as private insurance companies or federal programs like Medicare, and what economic barriers or opportunities exist for the product, exploring issues such as claims coding, coverage policy and payment amounts. We often offer our reimbursement planning activities in conjunction with marketing planning services that evaluate existing and potential market size, pricing, distribution and economic impact.

In addition, we provide full service reimbursement case management programs on behalf of manufacturers. These programs generally consist of toll-free telephone hotlines offering one or more of the following services:
(1) contacting insurers to investigate specific coverage and benefit matters, resolving denied claims and educating insurers; (2) assisting manufacturers in designing and effectively running their indigent patient programs, under which costly new products are made available to patients who cannot afford them because of inadequate insurance coverage or other cost reasons; (3) designing and administering transition programs for manufacturers, which includes obtaining third-party payment for a product for patients who had previously received it free as part of a clinical trial; and (4) conducting reimbursement training seminars for clients and their customers.

In 1998, we added an additional service offering known as the Payer Alliance Group-TM-, which utilizes field-based representatives to intervene with major third party payers to secure favorable coverage and reimbursement policies.

CUSTOMERS AND MARKETING

We provide product development services on a global basis to, among others, the pharmaceutical and biotechnology industries. In 1999, we served approximately 300 biopharmaceutical companies, including nearly all of the world's 50 largest pharmaceutical companies and most of the largest biotechnology companies.

No single customer accounts for more than ten percent of our aggregate net revenues. However, our late-stage development segment has two customers which each account for more than five but less than ten percent of the aggregate net revenues of that segment. The loss of either of these customers could have a material adverse effect on the business and results of operations of that segment.

For net revenues from external customers and assets attributable to each of our business segments, please review Note 12 of the Notes to Consolidated Financial Statements.

For net revenues from external customers and long-lived assets attributable to operations in the United States, United Kingdom and other countries for each of the last three fiscal years, please review Note 13 of the Notes to Consolidated Financial Statements.

Our global sales activities are conducted by more than 70 sales personnel based in our operations in the United States, Canada, Europe, Australia, Japan and Singapore. Most of our business development personnel have technical or scientific backgrounds. In 1999, we reorganized our sales force by creating a global organization covering both Clinical Development Services and Clinical Support Services. Early Development, Biomanufacturing and Commercialization maintain their own sales organizations.

Our sales force consists primarily of account executives, account managers and, with respect to Clinical Development Services and Clinical Support Services, client opportunity leaders. Account executives and account managers are each responsible for optimizing business opportunities for specific clients and fostering long-term relationships. Client opportunity leaders are focused on providing timely responses to client requests for information and developing comprehensive proposals for clinical trials.

CONTRACTUAL ARRANGEMENTS

Most of our contracts with our clients are either fixed price, or fee-for-service with a cap. To a lesser extent, some of our contracts are fee-for-service without a cap. In cases where the contracts are fixed price, we generally bear the cost of overruns, but we benefit if the costs are lower than we anticipated. In cases where our contracts are fee-for-service with a cap, the contracts contain an overall budget for the trial based on time and cost estimates. If our costs are lower than anticipated, the customer keeps the savings, but if our costs are higher than estimated, we are responsible for the overrun unless the increased cost is a result of a change requested by the customer, such as an increase in the number of patients to be enrolled or the type or amount of data to be collected. Contracts may range from a few months to several years depending on the nature of the work performed. In some cases for multi-year contracts, a portion of the contract fee is paid at the time the study or trial is started with the balance of the contract fee payable in installments over the study or trial duration. Sometimes the installments are tied to meeting performance milestones. For example, in clinical and periapproval trials, installment payments may be related to investigator recruitment, patient enrollment or delivery of a database.

Most of our contracts may be terminated by the customer either immediately or upon notice. Contracts may be terminated for a variety of reasons, including the failure of a product to satisfy safety requirements, unexpected or undesired results of the product, the customer's decision to forego or terminate a particular study, insufficient enrollment or investigator recruitment, or our failure to properly discharge our obligations.

BACKLOG

Some of our studies and projects are performed over an extended period of time, which may be as long as several years. We maintain an order backlog to track anticipated net revenues for work that has yet to be earned. However, we do not maintain an order backlog for other services that are performed within a short period of time or where it is not otherwise practical or feasible to maintain an order backlog.

Backlog usually includes work to be performed under letters of intent and contracts. Once work under a letter of intent or contract begins, net revenues are recognized over the life of the contract. In some cases, however, we will work on a project before executing a letter of intent and backlog may include the net revenues expected from that project. Some of our studies and projects are performed over an extended period of time, which may be as long as several years.

We cannot assure you that we will be able to realize all or any net revenues included in backlog. Although backlog can provide meaningful information to our management with respect to a particular study where study-specific information is known, such as study duration, performance clauses and other study-specific contract terms, we believe that our aggregate backlog as of any date is not necessarily a meaningful indicator of our future results for a variety of reasons, including the following. First, studies vary in duration. For instance, some studies that are included in 1999 backlog may be completed in 2000, while others may be completed in later years. Second, the scope of studies may change, which may either increase or decrease their value. Third, studies included in backlog may be subject to bonus

or penalty payments. Fourth, trials under verbal approvals, letters of intent or contracts included in backlog may be terminated or delayed at any time by the client or regulatory authorities. Terminations or delays can result from a number of reasons. Delayed contracts remain in our backlog until a determination of whether to continue, modify or cancel the study has been made.

For years prior to 1999, backlog associated with large dollar value projects in our central laboratory (i.e., those projects with values exceeding $1.0 million) excluded the portion of the project valued in excess of $1.0 million. Because our experience has indicated that backlog is more meaningful if calculated without such exclusions, beginning in 1999, backlog is now computed using the full value of those large central laboratory projects. Based upon the foregoing, our aggregate backlog at December 31, 1999, 1998 and 1997 was approximately $957 million, $852 million and $678 million, respectively. The amounts at December 31, 1998 and December 31, 1997 have been revised for the definitional change described above. Had we not changed our method of computing backlog in 1999, we would have reported, using consistent methodology, total backlog of $859 million at December 31, 1999 as compared to $780 million and $625 million, reported under that same methodology at December 31, 1998 and 1997, respectively.

COMPETITION

The contract research organization industry has many participants ranging from hundreds of small, limited-service providers to a few full service contract research organizations with global capabilities. We primarily compete against in-house departments of pharmaceutical companies, full-service and limited service contract research organizations and, to a lesser extent, universities and teaching hospitals. We believe, based on net revenues, that the four largest contract research organizations besides us include Quintiles Transnational Corp., Parexel International Corporation, Pharmaceutical Product Development, Inc. and Phoenix International Life Sciences Inc.

There is competition among the larger contract research organizations for both customers and acquisition candidates. Companies may also choose to limit the contract research organizations with whom they are willing to work. In addition, there are few barriers to entry for small, limited-service providers considering entry into the contract research organization industry. Contract research organizations compete on the basis of several factors, including the following:

- reputation for on-time quality performance;

- expertise and experience in specific therapeutic areas;

- scope of service offerings;

- strengths in various geographic markets;

- price;

- technological expertise and efficient drug development processes;

- the ability to acquire, process, analyze and report data in a time-saving and accurate manner;

- the ability to manage large-scale clinical trials both domestically and internationally;

- expertise and experience in health economics and outcomes services; and

- size.

We believe that we compete favorably in most of these areas.

GOVERNMENT REGULATION

Our laboratory, manufacturing and packaging services are subject to various regulatory requirements designed to ensure the quality and integrity of the testing, manufacturing and packaging processes. The industry standards for conducting preclinical laboratory testing are embodied in the Good Laboratory Practice (GLP) and Good Manufacturing Practice (GMP) regulations and for central laboratory operations in the Clinical Laboratory Improvement Amendments of 1988. Our central laboratory in Switzerland has also been certified by the College of American Pathologists. GMP sets forth the requirements for manufacturing facilities. The standards of GLP and GMP are required by the FDA, by the Department of Health in the United Kingdom and by similar regulatory authorities in other parts of the world. GLP and GMP stipulate requirements for facilities, equipment and professional staff. The

regulations require standardized procedures for conducting studies including procedures for recording and reporting data and for retaining appropriate records. To help satisfy its compliance obligations, Covance has established quality assurance controls at its laboratory and manufacturing facilities which monitor ongoing compliance with GLP and GMP regulations and the Clinical Laboratory Improvement Amendments, as applicable, by auditing test data and conducting inspections of testing and manufacturing procedures.

The industry standards for the conduct of clinical research and development studies are embodied in the regulations for Good Clinical Practice (GCP). The FDA and other regulatory authorities require that test results submitted to such authorities be based on studies conducted in accordance with GCP. These regulations require, but are not limited to, the following:

- complying with specific requirements governing the selection of qualified investigators;

- obtaining specific written commitments from the investigators;

- verifying that appropriate patient informed consent is obtained;

- ensuring adverse drug reactions are medically evaluated and reported;

- monitoring the validity and accuracy of data;

- verifying drug or device accountability;

- instructing investigators and studies staff to maintain records and reports; and

- permitting appropriate governmental authorities access to data for their review.

We must also maintain reports for each study for specified periods for auditing by the study sponsor and by the FDA. As with GLP and GMP, noncompliance with GCP can result in the disqualification of data collection during the clinical trial.

Covance's standard operating procedures are written in accordance with regulations and guidelines appropriate to the region and the nation where they will be used. All clinical research is carried out in accordance with the International Conference on Harmonization-Good Clinical Practice Guidelines, and the requirements of the applicable country. Although the U.S. is a signatory to these guidelines, the FDA has not adopted all of the guidelines as statutory regulations, but has currently adopted them only as guidelines. From an international perspective, when applicable, we have implemented common standard operating procedures across regions to assure consistency whenever it is feasible and appropriate to do so.

Our animal import and breeding facilities are also subject to a variety of federal and state laws and regulations, including The Animal Welfare Act and the rules and regulations promulgated thereunder by the United States Department of Agriculture ("USDA"). These regulations establish the standards for the humane treatment, care and handling of animals by dealers and research facilities. Our breeding and animal import facilities maintain detailed standard operating procedures and the documentation necessary to comply with applicable regulations for the humane treatment of the animals in its custody. Besides being licensed by the USDA as both a dealer and research facility, this business is also accredited by the American Association for the Accreditation of Laboratory Animal Care and has registered assurance with the United States National Institutes of Health Office of Protection for Research Risks.

The use of controlled substances in testing for drugs with a potential for abuse is regulated by the U.S. Drug Enforcement Administration. All Covance laboratories and packaging sites using controlled substances for testing or packaging purposes are licensed by the U.S. Drug Enforcement Administration.

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 to the safety and health of laboratory employees. All of our 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. Although we believe that Covance is currently in compliance in all material respects with such federal, state and local laws, failure to comply could subject Covance to denial of the right to conduct business, fines, criminal penalties and other enforcement actions.

In addition to its comprehensive regulation of safety in the workplace, the Occupational Safety and Health Administration has established extensive requirements relating to workplace safety for health care 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, relevant Covance employees receive initial and periodic training focusing on compliance with applicable hazardous materials regulations and health and safety guidelines.

The regulations of the U.S. Department of Transportation, the U.S. Public Health Service and the U.S. Postal Service apply to the surface and air transportation of laboratory specimens. Covance's laboratories also comply with the 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.

INTELLECTUAL PROPERTY

We have developed certain computer software and technically derived procedures that provide separate services and are intended to maximize the quality and effectiveness of our services. Although our intellectual property rights are important to our results of operations, we believe that such factors as the technical expertise, knowledge, ability and experience of our professionals are more important, and that, overall, these technological capabilities provide significant benefits to our clients.

EMPLOYEES

At December 31, 1999, we had approximately 7,100 full-time employees, approximately 34% of whom are employed outside of the United States. Approximately 50 of our employees hold M.D. degrees, 193 hold Ph.D. degrees, 15 hold Pharm.D. degrees, 23 hold D.V.M. degrees and 582 hold masters or other postgraduate degrees. We believe that Covance's relations with its employees are good.