QUINTILES TRANSNATIONAL CORP - Annual Report (10-K) PART I

Information set forth in this Annual Report on Form 10-K contains various “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward looking statements represent our judgment concerning the future and are subject to risks and uncertainties that could cause our actual operating results and financial position to differ materially. Such forward looking statements can be identified by the use of forward looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” or “target” or the negative thereof or other variations thereof or comparable terminology.

We caution you that any such forward looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those in the forward looking statements, including without limitation, uncertainties arising in connection with the process of our Board of Director’s special committee, including the possibility that our operations may be adversely affected by the impact of the process on our employees or customers, that transactions recommended by our Board of Directors following the special committee process will not be approved or completed, that litigation may continue, and that, in the case of a sale of our company, investors might no longer be able to freely trade our shares on the public market. Uncertainty pending the outcome of the special committee’s process, as well as the result of that process, could impact our results of operations and financial condition in ways that we are not able to predict. Additional uncertainties that could cause our actual operating results to differ materially from those in the forward looking statement include the risk that the market for our products and services will not grow as we expect, the risk that our PharmaBio Development transactions will not generate revenues, profits or return on investment at the rate or levels we expect or that royalty revenues under our PharmaBio Development arrangements may not be adequate to offset our upfront and on-going expenses in providing sales and marketing services or in making milestone and marketing payments, our ability to distribute backlog among project management groups and match demand to resources, our actual operating performance, variation in the actual savings and operating improvements resulting from previous restructurings, our ability to maintain large customer contracts or to enter into new contracts, changes in trends in the pharmaceutical industry, the ability to operate successfully a new line of business, the risk that Verispan, our joint venture with McKesson Corporation relating to the informatics business, will not be successful, and liability risks associated with our business which could result in losses or indemnity to others not covered by insurance. See “Risk Factors” below for additional factors that could cause actual results to differ.

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

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:

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

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.

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.

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

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 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:

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.

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.

Strategic marketing services. Our expert consultants support pharmaceutical, biotechnology and medical device product commercialization through a continuum of services. We begin in the

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.

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

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.

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

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.

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.

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-

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.

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.

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.

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.

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

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.

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

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 Solaraze ^TM , we are unable to directly monitor quality control in the manufacturing and distribution processes.

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:

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.

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

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.

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.

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.

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.

As of January 31, 2003 we had approximately 109 offices located in 48 countries. Our executive headquarters is located adjacent to Research Triangle Park, North Carolina. We maintain substantial offices serving our product development group in Durham, North Carolina; Kansas City, Missouri; Smyrna, Georgia; Bracknell, England; Irene, South Africa; Tokyo, Japan; and Singapore. We also maintain substantial offices serving our commercial services group in Parsippany, New Jersey; Falls Church, Virginia; Hawthorne, New York; Marlow, England, and Tokyo, Japan. We own facilities that serve our product development group in Lenexa, Kansas; Kansas City, Missouri; Riccarton, Scotland; Bathgate, Scotland; Glasgow, Scotland; Livingston, Scotland; Freiburg, Germany; and Pretoria, South Africa. We also own a facility in Gotenba City, Japan, which is subject to a mortgage, that serves our product development and commercial services groups. All of our other offices are leased. We believe that our facilities are adequate for our operations and that suitable additional space will be available when needed.

On January 26, 2001, a purported class action lawsuit was filed in the State Court of Richmond County, Georgia, naming Novartis Pharmaceuticals Corp., Pharmed Inc., Debra Brown, Bruce I. Diamond and Quintiles Laboratories Limited, one of our subsidiaries, on behalf of 185 Alzheimer’s patients who participated in drug studies involving an experimental drug manufactured by defendant Novartis and their surviving spouses. The complaint alleges claims for breach of fiduciary duty, civil conspiracy, unjust enrichment, misrepresentation, Georgia RICO violations, infliction of emotional distress, battery, negligence and loss of consortium as to class member spouses. The complaint seeks unspecified damages, plus costs and expenses, including attorneys’ fees and experts’ fees. The parties are in the discovery phase of the litigation. We believe the claims to be without merit and are defending the suit vigorously.

On January 22, 2002, Federal Insurance Company and Chubb Custom Insurance Company filed suit against us, Quintiles Pacific, Inc. and Quintiles Laboratories Limited, two of our subsidiaries, in the United States District Court for the Northern District of Georgia. In the suit, Chubb, our primary commercial general liability carrier, and Federal, our excess liability carrier, seek to rescind the policies issued to us for coverage years 2000-2001 and 2001-2002 based on an alleged misrepresentation by us on our policy application. Alternatively, Chubb and Federal seek a declaratory judgment that there is no coverage under the policies for some or all of the claims asserted against us and our subsidiaries in the litigation described in the prior paragraph and, if one or more of such claims is determined to be covered, Chubb and Federal request an allocation of the defense costs between the claims they contend are covered and non-covered claims. We have filed an answer with counterclaims against Federal and Chubb in response to their complaint. Additionally, we have amended our pleadings to add AON Risk Services as a counterclaim defendant, as an alternative to our position that Federal and Chubb are liable under the policies. We believe the allegations made by Federal and Chubb are without merit and are defending this case vigorously.

In October 2002, seven purported class action lawsuits were filed in Superior Court, Durham County, North Carolina by shareholders seeking to enjoin the consummation of a transaction proposed by Pharma Services Company, a newly formed company wholly owned by Dennis B. Gillings, Ph.D., to acquire all of our outstanding shares for $11.25 per share in cash. All of the lawsuits were subsequently transferred to the North Carolina Business Court. The lawsuits name as defendants Dr. Gillings, other members of our Board of Directors, our company and, in some cases, Pharma Services Company. The complaints allege, among other things, that the directors breached their fiduciary duties with respect to the proposal. The complaints seek to enjoin the transaction proposed by Pharma Services Company, and the plaintiffs seek to recover damages. On November 11, 2002, a special committee of our Board of Directors announced its rejection of the proposal by Pharma Services Company and its intention to investigate strategic alternatives available to us for purposes of enhancing shareholder value, including the possibility of a sale of our company and alternatives that would keep us independent and publicly owned. On January 6, 2003, the North

Carolina Business Court entered a Case Management Order consolidating all seven lawsuits for all purposes and staying the lawsuits until March 29, 2003 or until we provide notice of a change-of-control transaction involving our company. Based upon our preliminary review, we believe the lawsuits are without merit and intend to defend them vigorously.

We are currently a party to other legal proceedings incidental to our business. While management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our consolidated financial statements, litigation is subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs.