S-1 1 d483912ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on February 15, 2013

Registration No. 333-        

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

QUINTILES TRANSNATIONAL HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

North Carolina   8731   27-1341991

(State or other

jurisdiction of
incorporation or

organization)

  (Primary Standard Industrial
Classification Code Number)
 

(I.R.S. Employer

Identification Number)

4820 Emperor Blvd.

Durham, North Carolina 27703

(919) 998-2000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Thomas H. Pike, Chief Executive Officer

James H. Erlinger III, Executive Vice President, General Counsel and Secretary

Quintiles Transnational Holdings Inc.

4820 Emperor Blvd.

Durham, North Carolina 27703

(919) 998-2000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

Copies to:

Gerald Roach, Esq.

Amy M. Batten, Esq.

Smith, Anderson, Blount, Dorsett,

Mitchell & Jernigan, L.L.P.

150 Fayetteville Street, Suite 2300

Raleigh, NC 27601

Telephone: (919) 821-1220

Facsimile: (919) 821-6800

 

Joshua Ford Bonnie, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, NY 10017

Telephone: (212) 455-2000

Facsimile: (212) 455-2502

  Colin Diamond, Esq.
White & Case LLP
1155 Avenue of the Americas
New York, NY 10036
Telephone: (212) 819-8200
Facsimile: (212) 354-8113

As soon as practicable after the effective date of this Registration Statement.

(Approximate date of commencement of proposed sale to the public)

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    ¨       Accelerated filer    ¨  
Non-accelerated filer    x       Smaller reporting company    ¨  
(Do not check if a smaller reporting company)        

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities to be registered  

Proposed maximum

aggregate offering price

 

Amount of

registration fee

Common Stock, $0.01 par value per share

  $600,000,000 (1)   $81,840 (2)

 

 

(1) Estimated solely for the purpose of determining the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2) Calculated pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said section 8(a), may determine.


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and neither we nor the selling shareholders are soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated February 15, 2013

PROSPECTUS

            Shares

 

LOGO

COMMON STOCK

 

 

Quintiles Transnational Holdings Inc. is offering             shares of common stock. The selling shareholders identified in this prospectus are offering an additional             shares of common stock. This is our initial public offering, and no public market currently exists for our common stock. We anticipate that the initial public offering price will be between $             and $             per share. We will not receive any proceeds from sales by the selling shareholders.

We intend to apply to list our common stock on the              under the symbol “                 .”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 17 to read about factors you should consider before buying our common stock.

 

    

Price to Public

  

Underwriting
Discounts and
Commissions

    

Proceeds to
Quintiles

    

Proceeds to Selling
Shareholders

 

Per Share

   $                                   $                                 $                                 $                           

Total

   $                                   $                                 $                                 $                           

The underwriters have an option to purchase up to an additional                      shares of common stock from us and                      shares from the selling shareholders at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on or about                     .

 

 

 

MORGAN STANLEY   BARCLAYS   J.P. MORGAN

 

CITIGROUP   GOLDMAN, SACHS & CO.   WELLS FARGO SECURITIES

 

BofA MERRILL LYNCH   DEUTSCHE BANK SECURITIES

 

BAIRD       WILLIAM BLAIR       JEFFERIES
PIPER JAFFRAY   UBS INVESTMENT BANK                        

                , 2013


Table of Contents

Table of Contents

 

Prospectus Summary

     1   

Risk Factors

     17   

Forward-Looking Statements

     36   

Market and Other Industry Data

     37   

Use of Proceeds

     38   

Dividend Policy

     39   

Capitalization

     40   

Dilution

     41   

Selected and Pro Forma Consolidated Financial Data

     43   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     52   

Business

     78   

Government Regulations

     97   

Management

     102   

Executive Compensation

     112   

Certain Relationships and Related Person Transactions

     154   

Principal and Selling Shareholders

     160   

Description of Certain Indebtedness

     165   

Description of Capital Stock

     171   

Shares Eligible for Future Sale

     178   

Material United States Federal Income and Estate Tax Consequences to Non-United States Holders

     180   

Underwriting

     184   

Legal Matters

     190   

Experts

     191   

Where You Can Find More Information

     192   

Index to Financial Statements

     F-1   

You should rely only on the information contained in this prospectus or in any free writing prospectus filed with the Securities and Exchange Commission, or the SEC. Neither we, the selling shareholders nor the underwriters have authorized anyone to provide you with additional or different information. If anyone provides you with additional, different or inconsistent information, you should not rely on it. Neither we, the selling shareholders nor the underwriters are making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus or such other date stated in this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including             (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

In this prospectus, unless otherwise stated or the context otherwise requires, references to “Quintiles,” “we,” “us,” “our,” or similar references mean Quintiles Transnational Holdings Inc. and its subsidiaries on a consolidated basis. References to “Quintiles Holdings” refer to Quintiles Transnational Holdings Inc. on an unconsolidated basis. References to “Quintiles Transnational” refer to Quintiles Transnational Corp., Quintiles Holdings’ wholly-owned subsidiary through which we conduct our operations.

Quintiles® is our principal registered trademark. This prospectus also includes references to other trademarks and service marks, and those trademarks and service marks are the property of their respective owners.


Table of Contents

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that is important to you. Before investing in our common stock, you should read this prospectus carefully in its entirety, especially the risks of investing in our common stock that we discuss in the “Risk Factors” section of this prospectus and our consolidated financial statements and related notes beginning on page F-1.

Quintiles

We are the world’s largest provider of biopharmaceutical development services and commercial outsourcing services. We are positioned at the intersection of business services and healthcare and generated $3.7 billion of service revenues in 2012, conduct business in approximately 100 countries and have more than 27,000 employees. We use the breadth and depth of our service offerings, our global footprint and our therapeutic, scientific and analytics expertise to help our biopharmaceutical customers, as well as other healthcare customers, navigate the increasingly complex healthcare environment to improve efficiency and to deliver better healthcare outcomes.

Since our founding over 30 years ago, we have grown to become a leader in the development and commercialization of new pharmaceutical therapies. Our Product Development segment is the world’s largest contract research organization, or CRO, as ranked by 2011 reported service revenues, and is focused primarily on Phase II-IV clinical trials and associated laboratory and analytical activities. Our Integrated Healthcare Services segment includes one of the leading global commercial pharmaceutical sales and service organizations. Integrated Healthcare Services provides a broad array of services, including commercial services, such as providing contract pharmaceutical sales forces in key geographic markets, as well as a growing number of healthcare business services for the broader healthcare sector, such as outcome-based and payer and provider services. Product Development contributed approximately 74% and Integrated Healthcare Services contributed approximately 26% to our 2012 service revenues. Additional information regarding our segments is presented in Note 23 to our audited consolidated financial statements included elsewhere in this prospectus.

Our global scale and capabilities enable us to work with the leading companies in the biopharmaceutical sector that perform trials and market their products all around the world. During each of the last 10 years, we have worked with the 20 largest biopharmaceutical companies ranked by 2011 reported revenues. We have provided services in connection with the development or commercialization of the top 50 best-selling biopharmaceutical products and the top 20 best-selling biologic products, as measured by 2011 reported sales. Of the new molecular entities, or NMEs, and new biologic applications, or BLAs, approved from 2004 through 2011, we helped develop or commercialize 85% of the central nervous system drugs, 76% of the oncology drugs and 72% of the cardiovascular drugs.

We have extensive scientific and therapeutic expertise, including more than 800 employees globally who are medical doctors with experience across a number of fields. We also have substantial statistical, quantitative, analytical and applied technology skills, with more than 850 employees possessing a Ph.D. or equivalent. Our experts enable us to add sophisticated statistical, process development and advanced technology applications into our clinical development services to meet the needs of the broader healthcare industry for appropriate endpoints, adaptive trials, drug therapy analysis, outcome and real-world research and evidence-based medicine. Our scientific and medical expertise allows us to conduct biomarker discovery, perform gene sequencing and expression analysis, create assays that can be duplicated on a global scale and support the evolving fields of translational science and personalized medicine. Moreover, our flexible business solutions and commitment to our customers’ objectives enable us to provide our customers with customized operational delivery models to meet their particular needs.

 

 

1


Table of Contents

In 2012, our service revenues were $3.7 billion, our net income was $177.5 million, our non-GAAP adjusted net income was $208.9 million, and our non-GAAP adjusted EBITDA was $543.7 million. In addition, our 2012 net new business was $4.5 billion, and we ended the year with $8.7 billion in backlog. From 2008 to 2012, our non-GAAP adjusted service revenues grew at a 7.3% compound annual growth rate, or CAGR, and our non-GAAP adjusted EBITDA grew at a 13.9% CAGR. During this period, our service revenues experienced year-over-year increases each year and our annual book-to-bill ratio was between 1.19x and 1.27x. During the last five years, we have had at least eight customers in each year from whom we earned more than $100 million in service revenues. No single customer represents more than 10% of our 2012 revenues. For additional information regarding these financial measures, including a reconciliation of our non-GAAP measures to the most directly comparable measure presented in accordance with United States generally accepted accounting principles, or GAAP, see “Selected and Pro Forma Consolidated Financial Data” included elsewhere in this prospectus.

Our Markets

The market served by Product Development consists primarily of biopharmaceutical companies, including medical device and diagnostics companies, that are seeking to outsource clinical trials and other product development activities. We estimate that total biopharmaceutical spending on drug development was approximately $91 billion in 2011, of which we estimate that our addressable market (clinical development spending excluding preclinical spending) was approximately $48 billion. The portion of this $48 billion that was outsourced in 2011, based on our estimates, was approximately $16 billion. We estimate that the potential market for Product Development’s services will experience a CAGR of 5%-8% from 2012 through 2015 as a result of increased R&D spending by biopharmaceutical companies and the increased outsourcing of this spending as compared to 2011. In addition, many compounds in the global product development pipeline relate to the therapeutic areas of oncology, central nervous system and cardiovascular diseases and disorders, which are our largest therapeutic areas as measured by service revenues.

Integrated Healthcare Services primarily addresses markets related to the use of approved pharmaceutical products. We estimate that total spending related to approved drugs, including biopharmaceutical spending on commercialization of these drugs and expenditures by participants in the broader healthcare market on real-world research and evidence-based medicine, exceeded $88 billion in 2011. Integrated Healthcare Services links product development to healthcare delivery. This segment’s services include commercial services such as recruiting, training, deploying and managing a global sales force, channel management, patient engagement services, market access consulting, brand communication and medical education. In addition, Integrated Healthcare Services offers outcome-based and payer and provider services such as observational studies, comparative effectiveness studies and product and disease registry services which are intended to help increase the quality and cost-effectiveness of healthcare. We believe that a combination of cost pressure in healthcare systems around the world and the increasing focus on the appropriateness and efficacy of pharmaceutical therapy provide us many opportunities to grow our revenues and expand our service offerings by improving the cost-effectiveness of drug therapies.

We believe that we are well-positioned to benefit from current trends in the biopharmaceutical and healthcare industries that affect our markets, including:

Trends in R&D Spending.    We estimate that R&D spending was approximately $135 billion in 2012 and will grow to approximately $139 billion in 2015, with development accounting for approximately 68% of total expenditures. R&D spending trends are impacted as a result of several factors, including major biopharmaceutical companies’ efforts to replenish revenues lost from the so-called “patent cliff” of recent years, increased access to capital by the small and midcap biotechnology industry, and recent increases in

 

 

2


Table of Contents

pharmaceutical approvals by regulatory authorities. In 2012, there were approximately 4,028 drugs in the Phase I-III pipeline, an increase of 18% since 2008, and there were 39 NME approvals by the United States Food and Drug Administration, or FDA, which was 1.3 times the number of NME approvals in 2011 and nearly 1.9 times the number of approvals in 2010. We believe that further R&D spending, combined with the continued need for cost efficiency across the healthcare landscape, will create new opportunities for biopharmaceutical services companies, particularly those with a global reach, to help biopharmaceutical companies with their pre- and post-launch product development and commercialization needs.

Growth in Outsourcing.    We estimate that clinical development spending outsourced to CROs in Phases I-IV in 2011 was approximately $16 billion and will grow to approximately $22 billion by 2015. We expect outsourced clinical development to CROs to grow 5%-8% annually during this period. Of this annual growth, we believe that up to 2% will be derived from increased R&D expenditures, with the remainder coming from increased outsourcing penetration. We estimate that overall outsourcing penetration in 2011 was 33%. The market served by Integrated Healthcare Services is diverse, which makes it difficult to estimate the current amount of outsourced integrated healthcare services and the expected growth in such services. However, based on our knowledge of these markets we believe that, while the rate of outsourcing penetration varies by market within Integrated Healthcare Services, the current outsourcing penetration of the estimated $88 billion addressable market is not more than 15%. As business models continue to evolve in the healthcare sector we believe that the growth rate for outsourcing across the Integrated Healthcare Services markets will be similar to the growth in clinical development.

Over the longer term, we believe that we are well positioned for the future evolution of the healthcare sector as increasing demand from governments and other payers around the world for quality, accountability and value for money drive biopharmaceutical companies, providers and other healthcare organizations to transform their value chain away from a vertically integrated model and focus on their core competencies. In order to do this, healthcare organizations will need to move towards variable cost structures, lower risk and improve returns. In particular, we believe that the following trends will result in increased outsourcing to global biopharmaceutical services companies:

 

   

Maximizing Productivity and Lowering Costs.    The combined impact of declining R&D productivity, increased development costs and diminished returns on marketing and sales have negatively impacted biopharmaceutical companies’ margins and short-term earnings. We believe that the need to maximize R&D productivity and lower costs will cause biopharmaceutical companies to look to partners and increase outsourcing penetration in the mid-to-long term as they enter into outsourcing arrangements to improve efficiency, improve clinical success rates and turn fixed costs into variable costs across their R&D and commercial operations.

 

   

Managing Complexity.    Improved standards of care in many therapeutic areas and the emergence of new types of therapies, such as biologics, genetically targeted therapies, gene and stem cell therapies, and other treatment modalities have led to more complex development and regulatory pathways. We believe that companion diagnostics, genomics and biomarker expertise will become a more critical part of the development process as biopharmaceutical companies require more customized clinical trials and seek to develop treatments that are more tailored to an individual’s genetic profile or a disease’s profile. As biopharmaceutical companies are increasingly devoting a larger percentage of their R&D budgets and resources to the development of personalized medicines, we believe they will need to partner with service providers that can apply data and analytics expertise, particularly in the planning stages, and provide highly productive and reliable delivery solutions that integrate more sophisticated approaches to managing complexity. We believe that our global clinical development capabilities, including our expertise in biomarkers and genomics and our global laboratory network, position us well to help biopharmaceutical companies manage the complexities inherent in an environment where this type of expertise is important.

 

 

3


Table of Contents
   

Providing Enhanced Value for Patients.    As healthcare costs rise globally, governments and third-party payers have looked for ways both to control healthcare expenditures and increase the quality, safety and effectiveness of drug therapies. Governments and regulatory bodies have adopted, and may continue to adopt, healthcare legislation and regulations that may significantly impact the healthcare industry by demanding more value for money spent and financial accountability for patient outcomes. Such legislation and regulations may tie reimbursement to the demonstrated clinical efficacy of a therapy, require payers and providers to demonstrate efficacy in the delivery of healthcare services and require more evidence-based decisions, all of which we believe will increase the demand for our outcome research and data analytics services.

 

   

Increased Importance of Product Development in Local Markets.    Increasingly, regulators require trials involving local populations as part of the process for approving new pharmaceutical products, especially in certain Asian and emerging markets. Understanding the epidimeological and physiological differences in different ethnic populations and being able to conduct trials locally in certain geographies will be important to pharmaceutical product growth strategies, both for multinational and local/regional biopharmaceutical companies. We believe that our global clinical development capabilities and unmatched presence in Asia will make us a strong partner for biopharmaceutical companies managing the complexities of international drug development.

 

   

Increasing Number and Complexity of Phase II-IV Clinical Trials.    Biopharmaceutical companies are devoting increasing resources to Phase II-IV trials. Based on the current and expected composition of the global drug development pipeline, we believe that spending on Phase II-IV clinical trials will increase at a faster rate than spending on preclinical research and early stage clinical trials. As the number of large Phase II-IV trials increases, especially those that focus on rare diseases or that require large numbers of patients with specific disease conditions, trial sponsors increasingly seek to recruit patients with specific characteristics for clinical trials on a global basis. We believe that this increased spending and the demand for global patient recruitment will favor the limited number of biopharmaceutical services companies that have both the capabilities to administer large, complex global clinical trials and relationships with thought-leading investigators and trial sites around the world. As the largest and most global CRO, we believe that we are well-positioned to serve biopharmaceutical companies with these increasingly demanding requirements.

Increase in Strategic Collaborations.    Larger CROs are able to provide a greater variety of services of value to the biopharmaceutical community. Biopharmaceutical companies are continuing to enter into long-term strategic collaborations with global CROs that enable them to utilize flexible business models to deliver on their strategic priorities. We believe that biopharmaceutical companies have historically preferred, and will continue to prefer, financially sound, global CROs with broad therapeutic and functional expertise such as our company when selecting strategic providers.

Our Competitive Strengths

We believe that we are positioned to be the partner of choice to biopharmaceutical companies worldwide and a key resource to other healthcare industry participants who are looking to improve operational, therapeutic and patient outcomes. We differentiate ourselves from others in our industry through our competitive strengths, which include:

Leadership and Global Scale.    We believe that our industry leading size, global scale and significant technology and process capabilities differentiate us by enabling us to effectively manage increasingly complex and global clinical trials with continuous clinical data monitoring and niche pools of participants from around the world. Based on reported 2012 consolidated service revenues, we are nearly 1.7 times the size of our closest

 

 

4


Table of Contents

CRO competitor. We have earned a reputation as an industry and thought leader, which is reflected in our financial and operational performance. We believe we have the largest share of the outsourced global clinical and commercialization markets. Based on our competitors’ 2012 reported service revenues, we believe we are the market leader in the United States, Japan and Europe, the three largest biopharmaceutical markets in the world. In 2012, we had revenues of nearly $800 million in the Asia-Pacific region, where we have had a presence since 1993. In addition, as of December 31, 2012, we had over 27,000 employees with the majority located outside the United States, including significant numbers in Japan and Europe. We also have a significant presence in fast growing emerging markets, such as Brazil, Russia, India and China, or the “BRIC” markets. Our scale allows us to leverage our global capabilities while maintaining customer confidentiality.

Broad, Deep and Diverse Relationships.    Our customer, investigator and other provider relationships contribute to our industry leading position in the biopharmaceutical services market. During each of the last 10 years, we have worked with the 20 largest biopharmaceutical companies, as measured by their respective 2011 reported revenues. In 2012, we had nine customers from whom we earned at least $100 million in service revenues. During the last five years, we have had at least eight customers in each year from whom we earned more than $100 million in service revenues. We also work with over 400 small, mid-size and other biopharmaceutical companies outside the 20 largest by revenues, and these customers accounted for approximately 47% of our net new business during 2012. In 2012, we provided services across both our Product Development and Integrated Healthcare Services segments to all of our top 25 key customers. We also have broad, deep and diverse relationships with clinics, large hospitals and health systems through which we have access to thousands of investigators and other providers worldwide.

Therapeutic and Scientific Expertise.    We have continued to invest in developing world-class scientific capabilities to help our customers leverage rapidly changing science to better understand disease causality, develop drugs and diagnostics, and deliver safer, more effective therapies. We have 13 therapeutic centers of excellence in our company that are designed to bring together the scientific expertise across our service lines as needed to achieve an optimal therapeutic solution for our customers. These capabilities, coupled with our biomarker development research labs and assay development and validation services, provide a comprehensive set of services to support the development of drug therapies across the therapeutic spectrum, including the emerging field of personalized medicine. We have product development capabilities across a range of therapeutic areas, with a focus on oncology, cardiovascular, central nervous system and internal medicine. These four therapeutic areas represented 50% of the total biopharmaceutical product pipeline in 2011 and are generally more complex and require significant scientific expertise and global scale.

Integrated Services to Enable Better Decision-making in the Broader Healthcare Market.    Our core market is product development, and we have deep and global expertise across the phases of this market. Our services are designed to provide integrated solutions that address the complex challenges faced by a broad range of healthcare industry participants. We believe that our significant capabilities and expertise will enable us to meet the research and analytical needs of healthcare industry participants from traditional and emerging biopharmaceutical companies to payers, providers and other stakeholders. As the healthcare market continues to demand greater accountability for outcomes and value for money, we intend to increasingly deploy our capabilities in the broader healthcare market to help healthcare industry participants rapidly assess the viability of new drugs, cost-effectively accelerate development of the most promising drugs, launch new drugs to the market quickly, evaluate their impact on healthcare, and make better reimbursement and prescription decisions.

Experienced, Highly Trained Management and Staff.    Our senior management team includes executives with experience from inside and outside the biopharmaceutical and biopharmaceutical services industries who use their decades of experience to serve our customers and grow our company. Each of our executive officers has more than 25 years of experience in large, multinational organizations. Our management and staff are comprised

 

 

5


Table of Contents

of over 27,000 employees worldwide, of whom more than 800 are medical doctors and more than 850 possess a Ph.D. or equivalent. At this time, we have over 5,600 contract medical sales representatives, a sales force that is comparable in size to the sales forces of many large biopharmaceutical companies.

Technology Solutions and Process/Data Capabilities.    For over 30 years, we have been devoted to advancing state of the art technology, processes and analytics. We have focused on investment in quality data, including de-identified electronic health records, or EHR, and we currently have access to EHR data representing more than 40 million patient lives. In addition, we have established a substantial digital network of approximately 3 million individual registered users with whom we communicate regularly. Because data are only as good as the analytics used to analyze them, we have also invested heavily in data analytics products, services and professionals. As part of this investment, we created our proprietary data integration tool, Quintiles Infosario™, which is a suite of services that integrates data from across multiple source systems to provide us and our customers with current, quality and comprehensive information regarding clinical trials, allowing decisions to be made quickly and efficiently. In addition, we have developed a planning and design platform with Eli Lilly and Company, or Lilly, and are jointly developing software solutions with Allscripts Healthcare Solutions, Inc., or Allscripts, to enable improvements to the drug development process and demonstrate the value of biopharmaceutical products in the real world. We have obtained or applied for more than 60 patents in connection with the development of our proprietary technology, systems and processes.

Our Growth Strategy

The key elements of our growth strategy across Product Development and Integrated Healthcare Services include:

Leverage Our Leadership Position and Scale.    We are the global market leader in providing drug development, commercialization and outcome analytics services, and we have substantially larger service revenues and more employees around the world than reported by any of our CRO competitors. We plan to continue to grow organically and through selected acquisitions to expand our services and capabilities. We intend to leverage our global scale from our scientific and therapeutic expertise, global investigator network, central laboratory and data library to help our customers reduce costs, improve efficiency and effectiveness, and deliver better healthcare outcomes.

Build Upon Our Customer Relationships.    We believe that the breadth and depth of our global operations, service offerings, therapeutic expertise, analytics experience and technology, combined with our existing relationships with participants across the healthcare industry, position us well to capture a significant share of the large “untapped” biopharmaceutical spending not historically available to biopharmaceutical services companies. For example, over the past several years, we have built dedicated customer relationship teams around each of our largest customers. In addition, we continue to evolve our relationships with small, mid-size and other biopharmaceutical customers outside the 20 largest by revenues, of which we have over 400 around the world. The breadth and depth of our service offerings allow us to develop relationships with key decision makers throughout our customers’ organization. We intend to leverage our strong customer relationships to further penetrate new opportunities as our customers seek to reduce and variabalize their cost structures.

Continue to Enable Innovative and Flexible Business Solutions.    We use our extensive scope of services to design innovative and flexible solutions tailored for our customers’ needs in an increasingly complex environment. We believe that sustainable and growing revenue can be achieved through differentiation of services, coupled with deeper and broader relationships and a commitment to structuring flexible and innovative solutions to meet the diversified and changing needs of the healthcare industry. We intend to leverage our people, processes and technologies to provide significant value to our customers through customized outsourcing, shifting more of the responsibility for managing development to us and other arrangements that can save our customers time and money and contribute to our profitable growth.

 

 

6


Table of Contents

Use Our Therapeutic, Scientific and Domain Expertise to Improve Outcomes.    We believe our deep scientific, therapeutic and domain expertise enables us to help customers deliver and demonstrate enhanced value for patients and solve the complex challenges inherent in drug development and commercialization. Quintiles Outcome demonstrates our thought and scientific leadership in the area of observational research, currently leading the Good ReseArch for Comparative Effectiveness (GRACE) initiative, which is the leading resource in this area. We use our therapeutic, scientific and domain expertise to help our customers reach optimal outcomes in the ever-changing healthcare landscape. For example, we recently implemented a program for a large biopharmaceutical company to educate over 670,000 patients and staff to increase patient compliance with a customer’s diabetes drug. We intend to leverage our scientific expertise and innovative technologies to improve value for our customers.

Leverage Our Global Footprint and Presence in Significant Emerging Markets.    We have some of the broadest global capabilities in the biopharmaceutical services industry, with a presence in all of the major biopharmaceutical markets, including the United States, Japan, Europe and each of the BRIC countries. We believe there is a significant opportunity to increase our penetration and grow our revenues in both developed and developing markets as we adapt to meet the evolving needs of the biopharmaceutical industry as it seeks to serve the needs of an expanding and aging global population. Our business model allows us to react quickly to the unique market needs of multinational biopharmaceutical companies as well as regional and local market participants. For example, we are able to support our customers in the Asia-Pacific region with a large regional workforce, which we believe is significantly larger than that of any of our competitors. We are also able to use our global footprint to help biopharmaceutical companies in developed markets leverage their costs, including our recent implementation of a global monitoring solution based in Bangalore, India, for a United States biopharmaceutical company. We intend to continue to leverage our global footprint to deliver services broadly and effectively as the needs of our customers evolve.

Capitalize on Emerging Growth Opportunities in the Broader Healthcare Market.    We believe that healthcare stakeholders, such as regulatory authorities, payers, providers and patients, are transforming the delivery of healthcare by increasingly seeking evidence to support drug approval, reimbursement, prescribing and consumption decisions in a manner that will afford us opportunities to use our competitive strengths in new markets, including payer and provider services. We plan to leverage our deep experience in interventional Phase IIIb/IV trials, our broad array of consulting expertise and our observational research capabilities to help meet the increasing need for real-world and late phase research to assist our customers in monitoring safety, proving efficacy, evaluating benefit-risk, demonstrating effectiveness and gaining market access. We also plan to continue to focus on integrating data to enable more successful development of compounds and solutions for payers and providers. We intend to utilize our existing capabilities to expand our reach into adjacent market opportunities that are complementary to our historical focus.

Risk Factors

Our business is subject to numerous risks, including without limitation the following:

 

   

Most of our contracts may be terminated on short notice, and we may be unable to maintain large customer contracts or to enter into new contracts.

 

   

The historical indications of the relationship of our backlog to revenues may not be indicative of their future relationship.

 

   

The market for our services may not grow as we expect.

 

   

We may underprice our contracts or overrun our cost estimates, and if we are unable to achieve operating efficiencies or grow our revenues faster than our expenses, our operating margins will be adversely affected.

 

 

7


Table of Contents
   

We may be unable to maintain our information systems or effectively update them.

 

   

Customer or therapeutic concentration could harm our business.

 

   

Our business is subject to risks associated with international operations, including economic, political and other risks, such as compliance with a myriad of foreign laws and regulations, complications from conducting clinical trials in multiple countries simultaneously and changes in exchange rates.

 

   

Government regulators or our customers may limit the scope of prescription or withdraw products from the market, and government regulators may impose new regulatory requirements or may adopt new regulations affecting the biopharmaceutical industry.

 

   

We may be unable to successfully develop and market new services or enter new markets.

 

   

Our failure to perform services in accordance with contractual requirements, regulatory standards and ethical considerations may subject us to significant costs or liability, which could also damage our reputation and cause us to lose existing business or not receive new business.

 

   

Our services are related to treatment of human patients, and we could face liability if a patient is harmed.

 

   

We have substantial indebtedness and may incur further indebtedness each of which could adversely affect our financial condition.

 

   

Our current investors will retain significant influence over us and key decisions about our business following the offering that could limit other shareholders’ ability to influence the outcome of matters submitted to shareholders for a vote.

These and other risks are more fully described in the section entitled “Risk Factors” beginning on page 17. We urge you to carefully consider all the information presented in “Risk Factors” and elsewhere in this prospectus before purchasing our common stock.

Our History and Corporate Information

We were founded in 1982 by Dennis B. Gillings, CBE, Ph.D., who was a biostatistics professor at the University of North Carolina at Chapel Hill. Dr. Gillings and his cofounder pioneered the use of sophisticated statistical algorithms to improve the quality of data used to determine the efficacy of various drug therapies. We expanded internationally into Europe in 1987 and into Asia in 1993. In 1994, we had grown to over $90 million in revenues and completed an initial public offering through Quintiles Transnational. As a public company, we grew both organically and through acquisitions, adding a variety of new capabilities. By 1996, we significantly expanded our service offerings by acquiring companies that added commercial and consulting capabilities to our business. In September 2003, we completed a going private transaction, with Quintiles Transnational becoming owned by a group of investors that included Dr. Gillings.

In January 2008, Quintiles Transnational engaged in what we refer to as the Major Shareholder Reorganization, which resulted in our ownership by:

 

   

Dr. Gillings (and his affiliates);

 

   

funds advised by Bain Capital Partners, LLC, together with their affiliates, Bain Capital;

 

   

affiliates of TPG Global, LLC, or the TPG Funds (we refer to TPG Global, LLC as “TPG Global” and, together with its affiliates, “TPG”);

 

 

8


Table of Contents
   

affiliates of 3i Corporation, or 3i;

 

   

an affiliate of Temasek Holdings (Private) Limited, or Temasek;

 

   

certain other shareholders who participated in the going private transaction; and

 

   

various members of our management.

(We refer to each of the private investment firms of Bain Capital, TPG, 3i and Temasek, together with any of their respective affiliates who own our shares, as a “Sponsor.”)

In December 2009, we completed what we refer to as the Holding Company Reorganization, whereby we formed Quintiles Holdings as the parent company of Quintiles Transnational.

 

 

Our principal executive offices are located at 4820 Emperor Boulevard, Durham, North Carolina 27703. Our telephone number at that address is (919) 998-2000.

 

 

9


Table of Contents

The Offering

 

Common stock we are offering

                shares

 

Common stock being offered by the selling shareholders

                shares

 

Common stock to be outstanding immediately after this offering

                shares (                 shares if the underwriters exercise their option to purchase additional shares in full)

 

Option to purchase additional shares

The underwriters have a 30-day option to purchase a maximum of additional shares of common stock.

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $             million, or approximately $             if the underwriters exercise their option to purchase additional shares in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use $            million of the net proceeds to us from this offering to pay all amounts outstanding under the $300.0 million term loan obtained by Quintiles Holdings in February 2012, including any related fees and expenses, to pay an additional $             million of term loans under our senior secured credit facilities and for general corporate purposes, including supporting our strategic growth opportunities in the future. We will not receive any proceeds from the sale of shares by the selling shareholders. See “Use of Proceeds.”

 

Risk factors

You should read the “Risk Factors” section of this prospectus for a discussion of the factors to consider carefully before deciding to purchase any shares of our common stock.

 

Proposed trading symbol

“                 .”

The number of shares to be outstanding after this offering is based on                     shares of common stock outstanding as of                 , 2013, and the                 shares of common stock we are offering. This number of shares excludes                 shares of common stock issuable upon the exercise of outstanding stock options at a weighted-average exercise price of $         per share as of                 , of which                 were exercisable, and up to shares of common stock reserved for future issuance under our stock incentive plans following this offering.

Except as otherwise indicated herein, all information in this prospectus, including the number of shares that will be outstanding after this offering, assumes:

 

   

an initial public offering price of $         per share of common stock, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus;

 

   

no exercise of the outstanding options described above; and

 

   

no exercise of the underwriters’ option to purchase additional shares of common stock.

 

 

10


Table of Contents

Summary Consolidated Financial Data

We have derived the following consolidated statement of income data for 2012, 2011 and 2010 and consolidated balance sheet data as of December 31, 2012 and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. You should read the consolidated financial data set forth below in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of our results to be expected in any future period.

 

     Year Ended December 31,  
     2012     2011      2010  
     (in thousands, except per share data)  

Statement of Income Data:

       

Service revenues

   $ 3,692,298      $ 3,294,966       $ 3,060,950   

Reimbursed expenses

     1,173,215        1,032,782         863,070   
  

 

 

   

 

 

    

 

 

 

Total revenues

     4,865,513        4,327,748         3,924,020   

Costs, expenses and other:

       

Costs of revenues

     3,632,582        3,185,787         2,804,837   

Selling, general and administrative

     817,755        762,299         698,406   

Restructuring costs

     18,741        22,116         22,928   

Impairment charges

            12,295         2,844   
  

 

 

   

 

 

    

 

 

 

Income from operations

     396,435        345,251         395,005   

Interest expense, net

     131,304        105,126         137,631   

Loss on extinguishment of debt

     1,275        46,377           

Other (income) expense, net

     (3,572     9,073         15,647   
  

 

 

   

 

 

    

 

 

 

Income before income taxes and equity in earnings of unconsolidated affiliates

     267,428        184,675         241,727   

Income tax expense

     93,364        15,105         77,582   
  

 

 

   

 

 

    

 

 

 

Income before equity in earnings of unconsolidated affiliates

     174,064        169,570         164,145   

Equity in earnings from unconsolidated affiliates

     2,567        70,757         1,110   
  

 

 

   

 

 

    

 

 

 

Net income

     176,631        240,327         165,255   

Net loss (income) attributable to noncontrolling interests

     915        1,445         (4,659
  

 

 

   

 

 

    

 

 

 

Net income attributable to Quintiles Transnational Holdings Inc.

   $ 177,546      $ 241,772       $ 160,596   
  

 

 

   

 

 

    

 

 

 

 

 

11


Table of Contents
     Year Ended December 31,  
     2012     2011     2010  
     (in thousands, except per share data)  

Earnings per share attributable to common shareholders:

      

Basic

   $ 1.53      $ 2.08      $ 1.38   

Diluted

   $ 1.51      $ 2.05      $ 1.36   

Weighted average common shares outstanding:

      

Basic

     115,710        116,232        116,418   

Diluted

     117,796        117,936        118,000   

Unaudited Pro Forma Data(1):

      

Basic income per common share

   $         

Diluted income per common share

   $         

Weighted average common shares outstanding:

      

Basic

      

Diluted

      

Unaudited As Adjusted Pro Forma Data(1):

      

Net income

   $         

Basic income per common share

   $         

Diluted income per common share

   $         

Weighted average common shares outstanding:

      

Basic

      

Diluted

      

Statement of Cash Flow Data:

      

Net cash provided by (used in):

      

Operating activities

   $ 335,701      $ 160,953      $ 378,160   

Investing activities

     (132,233     (224,838     (141,434

Financing activities

     (146,873     (59,309     (153,081

Other Financial Data:

      

Adjusted service revenues(2)

   $     3,692,298      $     3,294,966      $     2,996,752   

EBITDA(2)

     499,587        452,562        464,685   

Adjusted EBITDA(2)

     543,718        490,424        462,760   

Adjusted net income(2)

     208,931        191,005        161,796   

Diluted adjusted net income per share(2)

     1.77        1.62        1.37   

Capital expenditures

     (71,336     (75,679     (80,236

Cash dividends paid to common shareholders

     (567,851     (288,322     (67,493

Net new business(3)

     4,501,200        4,044,100        3,551,500   

 

 

12


Table of Contents
     As of December 31,  
     2012     2011  
     (in thousands)  

Balance Sheet Data:

    

Cash and cash equivalents

   $ 567,728      $ 516,299   

Investments in debt, equity and other securities

     35,951        22,106   

Trade accounts receivable and unbilled services, net

     745,373        691,038   

Property and equipment, net

     193,999        185,772   

Total assets

     2,499,153        2,322,917   

Total debt and capital leases(4)

     2,444,886        1,990,196   

Total shareholders’ deficit

     (1,359,044     (969,596

Other Financial Data:

    

Backlog(3)

   $     8,704,500      $     7,972,900   

 

(1) Pro forma information is unaudited and is prepared in accordance with Article 11 of Regulation S-X.

Pro Forma Earnings Per Share

We declared and paid dividends to our shareholders of $567.9 million during 2012. Under certain interpretations of the SEC, dividends declared in the year preceding an initial public offering are deemed to be in contemplation of the offering with the intention of repayment out of offering proceeds to the extent that the dividends exceeded earnings during such period. As such, unaudited pro forma earnings per share for 2012 gives effect to the number of shares whose proceeds are deemed to be necessary to pay the dividend amount that is in excess of 2012 earnings, up to the amount of shares assumed to be issued in the offering.

The following presents the computation of pro forma basic and diluted earnings per share:

 

Numerator:    Year Ended
December 31,
2012
 
     (in thousands,
except per
share data)
 

Net income attributable to Quintiles Transnational Holdings Inc.

   $ 177,546   
  

 

 

 

Denominator:

  

Common shares used in computing basic income per common share

     115,710   

Adjustment for common shares assumed issued in this offering necessary to pay dividends in excess of earnings(a)

  
  

 

 

 

Basic pro forma weighted average common shares outstanding

  
  

 

 

 

Basic pro forma earnings per share

   $     
  

 

 

 

Basic pro forma weighted average common shares outstanding

  

Diluted effect of securities

     2,086   
  

 

 

 

Diluted pro forma weighted average common shares outstanding

  
  

 

 

 

Diluted pro forma earnings per share

   $     
  

 

 

 

 

 

13


Table of Contents

 

(a)    Dividends declared in the past twelve months

   $ 567,851   

Net income attributable to Quintiles Transnational Holdings Inc. in the past 12 months

     177,546   
  

 

 

 

Dividends paid in excess of earnings

   $ 390,305   
  

 

 

 

Offering price per common share

   $     
  

 

 

 

Common shares assumed issued in this offering necessary to pay dividends in excess of earnings

  
  

 

 

 

As Adjusted Pro Forma Earnings Per Share

In addition to the effect of the pro forma earnings per share for dividends noted above, as adjusted pro forma earnings per share gives effect to the number of common shares whose proceeds will be used to repay $             million of outstanding indebtedness.

The following presents the computation of as adjusted pro forma basic and diluted earnings per share:

 

Numerator:    Year Ended
December 31,
2012
 
     (in thousands,
except per
share data)
 

Net income attributable to Quintiles Transnational Holdings Inc.

   $ 177,546   
  

 

 

 

Interest expense, net of tax(b)

  

Amortization of debt issuance costs and discount, net of tax(b)

  
  

 

 

 

As adjusted pro forma net income

   $     
  

 

 

 

Denominator:

  

Common shares used in computing pro forma basic earnings per share

  

Adjustment for common shares used to repay outstanding indebtedness(c)

  
  

 

 

 

Basic as adjusted pro forma weighted average common shares outstanding

  
  

 

 

 

Basic as adjusted pro forma earnings per share

   $     
  

 

 

 

Basic as adjusted pro forma weighted average common shares outstanding

  

Diluted effect of securities

  
  

 

 

 

Diluted as adjusted pro forma weighted average common shares outstanding

  
  

 

 

 

Diluted as adjusted pro forma earnings per share

   $     
  

 

 

 

 

 

14


Table of Contents

 

  (b) These adjustments reflect the elimination of historical interest expense and amortization of debt issuance costs and discount (net of tax at an effective rate of 38.5%) after reflecting the pro forma reduction of our $300 million term loan facility executed in February 2012, and an additional $             million of term loans under our senior secured credit facilities with the proceeds from this offering as follows:

 

     Dates
Outstanding
     Interest
Expense
     Amortization
of Debt
Issue Costs
and
Discount
     Tax Effect      Total  
     (in thousands)  

February 2012 Term Loan ($300 million, 7.5% rate of interest)

    
 
2/26/12 to
12/31/12
  
  
   $                        $                        $                        $                    

Term Loans ($             million, 4.5%-5.0% rate of interest)

    
 
1/1/12 to
12/31/12
  
  
           
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

      $         $         $         $     
     

 

 

    

 

 

    

 

 

    

 

 

 

 

(c)    Indebtedness to be repaid with proceeds from this offering

   $                                     
  

 

 

 

Offering price per common share

   $     
  

 

 

 

Common shares assumed issued in this offering to repay indebtedness

  
  

 

 

 

(2)    We report our financial results in accordance with GAAP. To supplement this information, we also use the following non-GAAP financial measures in this prospectus: adjusted service revenues, EBITDA, adjusted EBITDA and adjusted net income (including diluted adjusted net income per share). Adjusted service revenues exclude service revenues from our former Capital Solutions segment, which we wound down after the deconsolidation of our former subsidiary PharmaBio Development, Inc., or PharmaBio, in November 2010. EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA and adjusted net income (including diluted adjusted net income per share) represent non-GAAP EBITDA and GAAP net income (and diluted GAAP net income per share), respectively, further adjusted to exclude certain expenses that we do not view as part of our core operating results, including management fees, restructuring costs, transaction expenses, bonuses paid to certain holders of stock options, impairment charges, and gains or losses from sales of businesses, business assets or extinguishing debt. Adjusted EBITDA and adjusted net income (including diluted adjusted net income per share) also exclude the results of our historical Capital Solutions segment, except for certain costs that we retained on a go-forward basis. Management believes that these non-GAAP measures provide useful supplemental information to management and investors regarding the underlying performance of our business operations and facilitate comparisons of our results subsequent to the deconsolidation of PharmaBio in November 2010 with our results prior to the deconsolidation of PharmaBio. Management also believes that these measures are more indicative of our core operating results as they exclude certain items whose fluctuations from period-to-period do not necessarily correspond to changes in the core operations of the business. These non-GAAP measures are performance measures only and are not measures of our cash flows or liquidity. Adjusted service revenues, EBITDA, adjusted EBITDA and adjusted net income (including diluted adjusted net income per share) are non-GAAP financial measures that are not in accordance with, or an alternative for, measures of financial performance prepared in accordance with GAAP and may be different from similarly titled non-GAAP measures used by other companies. Non-GAAP measures have

 

 

15


Table of Contents

limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. Investors and potential investors are encouraged to review the reconciliations of adjusted service revenues, EBITDA, adjusted EBITDA and adjusted net income (including diluted adjusted net income per share) to our closest reported GAAP measures contained within “Selected and Pro Forma Consolidated Financial Data” included elsewhere in this prospectus.

(3)    Net new business is the value of services awarded during the period from projects under signed contracts, letters of intent and, in some cases, pre-contract commitments that are supported by written communications, adjusted for contracts that were modified or canceled during the period. Consistent with our methodology for calculating net new business during a particular period, backlog represents, at a particular point in time, future service revenues from work not yet completed or performed under signed contracts, letters of intent and, in some cases, pre-contract commitments that are supported by written communications.

(4)    Includes $22.9 million, $18.3 million and $8.3 million of unamortized discounts as of December 31, 2012, 2011 and 2010, respectively.

 

 

16


Table of Contents

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below together with the other information included in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before deciding to purchase our common stock. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may materially and adversely affect our business, financial condition, results of operations and future prospects. In this event, the market price of our common stock could decline, and you could lose part or all of your investment.

Risks Relating to Our Business

The potential loss or delay of our large contracts or of multiple contracts could adversely affect our results.

Most of our customers can terminate our contracts upon 30 to 90 days notice. Our customers may delay, terminate or reduce the scope of our contracts for a variety of reasons beyond our control, including but not limited to:

 

   

decisions to forego or terminate a particular trial;

 

   

lack of available financing, budgetary limits or changing priorities;

 

   

actions by regulatory authorities;

 

   

production problems resulting in shortages of the drug being tested;

 

   

failure of products being tested to satisfy safety requirements or efficacy criteria;

 

   

unexpected or undesired clinical results for products;

 

   

insufficient patient enrollment in a trial;

 

   

insufficient investigator recruitment;

 

   

shift of business to a competitor or internal resources;

 

   

product withdrawal following market launch; or

 

   

shut down of manufacturing facilities.

As a result, contract terminations, delays and alterations are a regular part of our business. In the event of termination, our contracts often provide for fees for winding down the project, but these fees may not be sufficient for us to maintain our margins, and termination may result in lower resource utilization rates. In addition, we may not realize the full benefits of our backlog of contractually committed services if our customers cancel, delay or reduce their commitments under our contracts with them, which may occur if, among other things, a customer decides to shift its business to a competitor or revoke our status as a preferred provider. Thus, the loss or delay of a large contract or the loss or delay of multiple contracts could adversely affect our service revenues and profitability. For example, we believe that termination of two commercial services contracts in late 2012 will be a factor that affects our ability to grow revenues in our Integrated Healthcare Services segment in 2013 at the same rate as in 2012. We believe the risk of loss or delay of multiple contracts potentially has greater effect where we are party to broader partnering arrangements with global biopharmaceutical companies.

 

17


Table of Contents

We bear financial risk if we underprice our contracts or overrun cost estimates, and our financial results can also be adversely affected by failure to receive approval for change orders or delays in documenting change orders.

Most of our contracts are either fee for service contracts or fixed-fee contracts. We bear the financial risk if we initially underprice our contracts or otherwise overrun our cost estimates. In addition, contracts with our customers are subject to change orders, which occur when the scope of work we perform needs to be modified from that originally contemplated by our contract with the customer. Modifications can occur, for example, when there is a change in a key trial assumption or parameter or a significant change in timing. Further, where we are not successful in converting out-of-scope work into change orders under our current contracts, we bear the cost of the additional work. Such underpricing, significant cost overruns or delay in documentation of change orders could have a material adverse effect on our business, results of operations, financial condition or cash flows.

Our backlog may not convert to revenues at the historical conversion rate.

Our backlog of approximately $8.7 billion as of December 31, 2012 represents future service revenues from work not yet completed or performed under signed contracts, letters of intent and, in some cases, pre-contract commitments that are supported by written communications. While our backlog at the beginning of 2013 is 9% higher than our backlog at the beginning of 2012, we believe that the conversion of backlog to revenue during 2013 will more likely than not be at a slower rate than we experienced in 2012. Once work begins on a project, revenue is recognized over the duration of the project. Projects may be terminated or delayed by the customer or delayed by regulatory authorities for reasons beyond our control. To the extent projects are delayed, the timing of our revenue could be affected. In the event that a customer cancels a contract, we typically would be entitled to receive payment for all services performed up to the cancellation date and subsequent customer-authorized services related to terminating the canceled project. Typically, however, we have no contractual right to the full amount of the revenue reflected in our backlog in the event of a contract cancellation. The duration of the projects included in our backlog, and the related revenue recognition, range from a few weeks to many years. Our backlog may not be indicative of our future results, and we may not realize all the anticipated future revenue reflected in our backlog. A number of factors may affect backlog, including:

 

   

the size, complexity and duration of the projects;

 

   

the cancellation or delay of projects; and

 

   

change in the scope of work during the course of a project.

Fluctuations in our reported backlog levels also result from the fact that we may receive a small number of relatively large orders in any given reporting period that may be included in our backlog. Because of these large orders, our backlog in that reporting period may reach levels that may not be sustained in subsequent reporting periods. As we increasingly compete for and enter into large contracts that are more global in nature, we expect the rate at which our backlog converts into revenue to decrease, or lengthen. A decrease in this conversion rate means that the rate of revenue recognized on contracts may be slower than what we have experienced in the past, which could impact our service revenues and results of operations on a quarterly and annual basis. The revenue recognition on larger, more global projects could be slower than on smaller, less global projects for a variety of reasons, including but not limited to an extended period of negotiation between the time the project is awarded to us and the actual execution of the contract, as well as an increased timeframe for obtaining the necessary regulatory approvals. Additionally, delayed projects will remain in backlog and will not generate revenue at the rate originally expected. Thus, the relationship of backlog to realized revenues may vary over time.

 

18


Table of Contents

Our operating margins and profitability will be adversely affected if we are unable to achieve efficiencies in our operating expenses or grow revenues at a rate faster than expenses.

We operate in a highly competitive environment and experience competitive pricing pressure. In order to achieve our operating margins over the last three years, we have implemented initiatives to control the rate of growth of our operating expenses, including periodic restructurings. We will continue to utilize these initiatives in the future with a view to offsetting these pricing pressures; however, we cannot be certain that we will be able to achieve the efficiency gains necessary to maintain or grow our operating margins or that the magnitude of our growth in service revenues, will be faster than the growth in our operating costs. If we are unable to grow our service revenues at a faster rate than our operating costs, our operating margins will be adversely affected.

Our business depends on the continued effectiveness and availability of our information systems, including the information systems we use to provide our services to our customers, and failures of these systems may materially limit our operations.

Due to the global nature of our business and our reliance on information systems to provide our services, we intend to increase our use of Web-enabled and other integrated information systems in delivering our services. We also provide access to similar information systems to certain of our customers in connection with the services we provide them. As the breadth and complexity of our information systems continue to grow, we will increasingly be exposed to the risks inherent in the development, integration and ongoing operation of evolving information systems, including:

 

   

disruption, impairment or failure of data centers, telecommunications facilities or other key infrastructure platforms;

 

   

security breaches of, cyberattacks on and other failures or malfunctions in our critical application systems or their associated hardware; and

 

   

excessive costs, excessive delays or other deficiencies in systems development and deployment.

The materialization of any of these risks may impede the processing of data, the delivery of databases and services, and the day-to-day management of our business and could result in the corruption, loss or unauthorized disclosure of proprietary, confidential or other data. While we have disaster recovery plans in place, they might not adequately protect us in the event of a system failure. Despite any precautions we take, damage from fire, floods, hurricanes, power loss, telecommunications failures, computer viruses, break-ins and similar events at our various computer facilities could result in interruptions in the flow of data to our servers and from our servers to our customers. Corruption or loss of data may result in the need to repeat a trial at no cost to the customer, but at significant cost to us, the termination of a contract or damage to our reputation. Additionally, significant delays in system enhancements or inadequate performance of new or upgraded systems once completed could damage our reputation and harm our business. Finally, long-term disruptions in the infrastructure caused by events such as natural disasters, the outbreak of war, the escalation of hostilities and acts of terrorism, particularly involving cities in which we have offices, could adversely affect our businesses. Although we carry property and business interruption insurance, our coverage might not be adequate to compensate us for all losses that may occur.

Unauthorized disclosure of sensitive or confidential data, whether through systems failure or employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose customers. Similarly, unauthorized access to or through our information systems or those we develop for our customers, whether by our employees or third parties, including a cyberattack by computer programmers and hackers who may develop and deploy viruses, worms or other malicious software programs, could result in negative publicity, significant remediation costs, legal liability and damage to our reputation and could have a material adverse effect on our results of operations. In addition, our liability insurance might not be sufficient in type or amount to cover us against claims related to security breaches, cyberattacks and other related breaches.

 

19


Table of Contents

We may be adversely affected by customer or therapeutic concentration.

Although we did not have any customer that represented 10% or more of our service revenues during 2011 or 2012, we derive the majority of our revenues from a limited number of large customers. If any large customer decreases or terminates its relationship with us, our business, results of operations or financial condition could be materially adversely affected.

Additionally, conducting multiple clinical trials for different customers in a single therapeutic class involving drugs with the same or similar chemical action has in the past and may in the future adversely affect our business if some or all of the trials are canceled because of new scientific information or regulatory judgments that affect the drugs as a class or if industry consolidation results in the rationalization of drug development pipelines. Similarly, marketing and selling drugs for different biopharmaceutical companies with similar chemical actions subjects us to risk if new scientific information or regulatory judgment prejudices the drugs as a class, which may lead to compelled or voluntary prescription limitations or withdrawal of some or all of such drugs from the market.

Our business is subject to international economic, political and other risks that could negatively affect our results of operations and financial condition.

We have significant operations in foreign countries that may require complex arrangements to deliver services on global contracts for our customers. Additionally, we have established operations in locations remote from our most developed business centers. As a result, we are subject to heightened risks inherent in conducting business internationally, including the following:

 

   

conducting a single trial across multiple countries is complex, and issues in one country, such as a failure to comply with local regulations or restrictions, may affect the progress of the trial in the other countries, for example, by limiting the amount of data necessary for a trial to proceed, resulting in delays or potential cancellation of contracts, which in turn may result in loss of revenue;

 

   

foreign countries could enact legislation or impose regulations or other restrictions, including unfavorable labor regulations or tax policies, which could have an adverse effect on our ability to conduct business in or expatriate profits from those countries;

 

   

foreign countries, such as India, are expanding or may expand their regulatory framework with respect to patient informed consent, protection and compensation in clinical trials, which could delay or inhibit our ability to conduct trials in such jurisdictions;

 

   

the regulatory or judicial authorities of foreign countries may not enforce legal rights and recognize business procedures in a manner in which we are accustomed or would reasonably expect;

 

   

changes in political and economic conditions may lead to changes in the business environment in which we operate, as well as changes in foreign currency exchange rates;

 

   

potential violations of local laws or anti-bribery laws, such as the United States Foreign Corrupt Practices Act, may cause difficulty in staffing and managing foreign operations;

 

   

customers in foreign jurisdictions may have longer payment cycles, and it may be more difficult to collect receivables in foreign jurisdictions; and

 

   

natural disasters, pandemics or international conflict, including terrorist acts, could interrupt our services, endanger our personnel or cause project delays or loss of trial materials or results.

 

20


Table of Contents

These risks and uncertainties could negatively impact our ability to, among other things, perform large, global projects for our customers. Furthermore, our ability to deal with these issues could be affected by applicable United States laws and the need to protect our assets. Any such risks could have an adverse impact on our financial condition and results of operations.

If we are unable to successfully develop and market new services or enter new markets, our growth, results of operations or financial condition could be adversely affected.

A key element of our growth strategy is the successful development and marketing of new services or entering new markets that complement or expand our existing business. As we develop new services or enter new markets, including services targeted at participants in the broader healthcare industry, we may not have or adequately build the competencies necessary to perform such services satisfactorily, may not receive market acceptance for such services or may face increased competition. If we are unable to succeed in developing new services, entering new markets or attracting a customer base for our new services or in new markets, we will be unable to implement this element of our growth strategy, and our future business, reputation, results of operations and financial condition could be adversely affected.

Upgrading the information systems that support our operating processes and evolving the technology platform for our services pose risks to our business.

Continued efficient operation of our business requires that we implement standardized global business processes and evolve our information systems to enable this implementation. We have continued to undertake significant programs to optimize business processes with respect to our services. Our inability to effectively manage the implementation and adapt to new processes designed into these new or upgraded systems in a timely and cost-effective manner may result in disruption to our business and negatively affect our operations.

We have entered into agreements with certain vendors to provide systems development and integration services that develop or license to us the information technology, or IT, platform for programs to optimize our business processes. If such vendors fail to perform as required or if there are substantial delays in developing, implementing and updating the IT platform, our customer delivery may be impaired, and we may have to make substantial further investments, internally or with third parties, to achieve our objectives. Additionally, our progress may be limited by parties with existing or claimed patents who seek to enjoin us from using preferred technology or seek license payments from us.

Meeting our objectives is dependent on a number of factors which may not take place as we anticipate, including obtaining adequate technology-enabled services, creating IT-enabled services that our customers will find desirable and implementing our business model with respect to these services. Also, increased IT-related expenditures may negatively impact our profitability.

If we fail to perform our services in accordance with contractual requirements, regulatory standards and ethical considerations, we could be subject to significant costs or liability and our reputation could be harmed.

We contract with biopharmaceutical companies to perform a wide range of services to assist them in bringing new drugs to market. Our services include monitoring clinical trials, data and laboratory analysis, electronic data capture, patient recruitment and other related services. Such services are complex and subject to contractual requirements, regulatory standards and ethical considerations. For example, we must adhere to regulatory requirements such as the United States Food and Drug Administration’s, or FDA, current Good Clinical Practices, Good Laboratory Practice and Good Manufacturing Practice requirements. If we fail to perform our services in accordance with these requirements, regulatory agencies may take action against us for failure to comply with applicable regulations governing clinical trials or sales and marketing practices. Such actions may include sanctions, such as injunctions or failure of such regulatory authorities to grant marketing approval of products, delay, suspension or withdrawal of approvals, license revocation, product seizures or recalls,

 

21


Table of Contents

operational restrictions, civil or criminal penalties or prosecutions, damages or fines. Customers may also bring claims against us for breach of our contractual obligations and patients in the clinical trials and patients taking drugs approved on the basis of those trials may bring personal injury claims against us for negligence. Any such action could have a material adverse effect on our results of operations, financial condition and reputation.

Such consequences could arise if, among other things, the following occur:

Improper performance of our services.    The performance of clinical development services is complex and time-consuming. For example, we may make mistakes in conducting a clinical trial that could negatively impact or obviate the usefulness of the trial or cause the results of the trial to be reported improperly. If the trial results are compromised, we could be subject to significant costs or liability, which could have an adverse impact on our ability to perform our services. As examples:

 

   

non-compliance generally could result in the termination of ongoing clinical trials or sales and marketing projects or the disqualification of data for submission to regulatory authorities;

 

   

compromise of data from a particular trial, such as failure to verify that informed consent was obtained from patients, could require us to repeat the trial under the terms of our contract at no further cost to our customer, but at a substantial cost to us; and

 

   

breach of a contractual term could result in liability for damages or termination of the contract.

Large clinical trials can cost hundreds of millions of dollars, and while we endeavor to contractually limit our exposure to such risks, improper performance of our services could have an adverse effect on our financial condition, damage our reputation and result in the cancellation of current contracts by or failure to obtain future contracts from the affected customer or other customers.

Interactive Response Technology malfunction.    Cenduit LLC, our joint venture with Thermo Fisher Scientific Inc., or Cenduit, provides Interactive Response Technology, or IRT, services. IRT enables the randomization of patients in a given clinical trial to different treatment arms and regulates the supply of an investigational drug, all by means of interactive voice response and interactive web response systems. If IRT malfunctions and, as a result, patients are incorrectly randomized or supplied with an incorrect drug during the course of the clinical trials, then any such event would create a risk of liability to Cenduit, which could have an adverse impact on the value of our investment in Cenduit, and could also result in a contractual claim against us for failure to properly perform the clinical trial. Furthermore, negative publicity associated with an IRT malfunction could have an adverse effect on our business and reputation. Additionally, errors in randomization may require us to repeat the trial at no further cost to our customer, but at a substantial cost to us.

Investigation of customers.    From time to time, one or more of our customers are investigated by regulatory authorities or enforcement agencies with respect to regulatory compliance of their clinical trials, programs or the marketing and sale of their drugs. In these situations, we have often provided services to our customers with respect to the clinical trials, programs or activities being investigated, and we are called upon to respond to requests for information by the authorities and agencies. There is a risk that either our customers or regulatory authorities could claim that we performed our services improperly or that we are responsible for clinical trial or program compliance. If our customers or regulatory authorities make such claims against us and prove them, we could be subject to damages, fines or penalties. In addition, negative publicity regarding regulatory compliance of our customers’ clinical trials, programs or drugs could have an adverse effect on our business and reputation.

Insufficient customer funding to complete a clinical trial.    As noted above, clinical trials can cost hundreds of millions of dollars. There is a risk that we may initiate a clinical trial for a customer, and then the customer becomes unwilling or unable to fund the completion of the trial. In such a situation, notwithstanding the customer’s ability or willingness to pay for or otherwise facilitate the completion of the trial, we may be ethically bound to complete or wind down the trial at our own expense.

 

22


Table of Contents

Our research and development services could subject us to potential liability that may adversely affect our results of operations and financial condition.

Our business involves the testing of new drugs on patients in clinical trials and, if marketing approval is granted, the availability of these drugs to be prescribed to patients. Our involvement in the clinical trials and development process creates a risk of liability for personal injury to or death of patients, particularly those with life-threatening illnesses, resulting from adverse reactions to the drugs administered during testing or after product launch, respectively. For example, we have from time to time been sued and may be sued in the future by individuals alleging personal injury due to their participation in clinical trials and seeking damages from us under a variety of legal theories. If we are required to pay damages or incur defense costs in connection with any personal injury claim that is outside the scope of indemnification agreements we have with our customers, if any indemnification agreement is not performed in accordance with its terms or if our liability exceeds the amount of any applicable indemnification limits or available insurance coverage, our financial condition, results of operations and reputation could be materially and adversely affected. We might also not be able to get adequate insurance for these types of risks at reasonable rates in the future.

We also contract with physicians to serve as investigators in conducting clinical trials. If the investigators commit errors or make omissions during a clinical trial that result in harm to trial patients or after a clinical trial to a patient using the drug after it has received regulatory approval, claims for personal injury or products liability damages may result. Additionally, if the investigators engage in fraudulent behavior, trial data may be compromised, which may require us to repeat the clinical trial or subject us to liability. We do not believe we are legally responsible for the medical care rendered by such third-party investigators, and we would vigorously defend any claims brought against us. However, it is possible we could be found liable for claims with respect to the actions of third-party investigators.

Some of our services involve direct interaction with clinical trial patients or volunteers and operation of Phase I clinical facilities, which could create potential liability that may adversely affect our results of operations and financial condition.

We operate three facilities where Phase I clinical trials are conducted, which ordinarily involve testing an investigational drug on a limited number of healthy individuals, typically 20 to 80 persons, to determine such drug’s basic safety. Failure to operate such a facility in accordance with applicable regulations could result in that facility being shut down, which could disrupt our operations. Additionally, we face risks associated with adverse events resulting from the administration of such drugs to healthy volunteers and the professional malpractice of medical care providers. Occasionally, physicians employed at our Phase I clinical facilities act as principal investigators in later-phase trials at those same facilities. We also directly employ nurses and other trained employees who assist in implementing the testing involved in our clinical trials, such as drawing blood from healthy volunteers. Any professional malpractice or negligence by such investigators, nurses or other employees could potentially result in liability to us in the event of personal injury to or death of a healthy volunteer in clinical trials. This liability, particularly if it were to exceed the limits of any indemnification agreements and insurance coverage we may have, may adversely affect our financial condition, results of operations and reputation.

Our commercial services could result in liability to us if a drug causes harm to a patient. While we are generally indemnified and insured against such risks, we may still suffer financial losses.

When we market drugs under contract for a biopharmaceutical company, we could suffer liability for harm allegedly caused by those drugs, either as a result of a lawsuit against the biopharmaceutical company to which we are joined, a lawsuit naming us or any of our subsidiaries or an action launched by a regulatory body. While we are indemnified by the biopharmaceutical company for the action of the drugs we market on its behalf, and we carry insurance to cover harm caused by our negligence in performing services, it is possible that we could nonetheless incur financial losses, regulatory penalties or both. In particular, any claim could result in potential liability for us if the claim is outside the scope of the indemnification agreement we have with the

 

23


Table of Contents

biopharmaceutical company, the biopharmaceutical company does not abide by the indemnification agreement as required or the liability exceeds the amount of any applicable indemnification limits or available insurance coverage. Such a finding could have an adverse impact on our financial condition, results of operations and reputation. Furthermore, negative publicity associated with harm caused by drugs we helped to market could have an adverse effect on our business and reputation.

Our insurance may not cover all of our indemnification obligations and other liabilities associated with our operations.

We maintain insurance designed to provide coverage for ordinary risks associated with our operations and our ordinary indemnification obligations. The coverage provided by such insurance may not be adequate for all claims we may make or may be contested by our insurance carriers. If our insurance is not adequate or available to pay liabilities associated with our operations, or if we are unable to purchase adequate insurance at reasonable rates in the future, our profitability may be adversely impacted.

If we are unable to attract suitable investigators and patients for our clinical trials, our clinical development business might suffer.

The recruitment of investigators and patients for clinical trials is essential to our business. Investigators are typically located at hospitals, clinics or other sites and supervise the administration of the investigational drug to patients during the course of a clinical trial. Patients generally include people from the communities in which the clinical trials are conducted. Our clinical development business could be adversely affected if we are unable to attract suitable and willing investigators or patients for clinical trials on a consistent basis. For example, if we are unable to engage investigators to conduct clinical trials as planned or enroll sufficient patients in clinical trials, we might need to expend additional funds to obtain access to resources or else be compelled to delay or modify the clinical trial plans, which may result in additional costs to us.

If we lose the services of key personnel or are unable to recruit experienced personnel, our business could be adversely affected.

Our success substantially depends on the collective performance, contributions and expertise of our senior management team and other key personnel including qualified management, professional, scientific and technical operating staff and qualified sales representatives for our contract sales services. There is significant competition for qualified personnel, particularly those with higher educational degrees, such as a medical degree, a Ph.D. or an equivalent degree, in the biopharmaceutical and biopharmaceutical services industries. The departure of any key executive, or our inability to continue to identify, attract and retain qualified personnel or replace any departed personnel in a timely fashion, may impact our ability to grow our business and compete effectively in our industry and may negatively affect our ability to meet financial and operational goals.

Exchange rate fluctuations may affect our results of operations and financial condition.

During 2012, approximately 38.9% of our service revenues were denominated in currencies other than the United States dollar. Because a large portion of our service revenues and expenses are denominated in currencies other than the United States dollar and our financial statements are reported in United States dollars, changes in foreign currency exchange rates could significantly affect our results of operations and financial condition. Exchange rate fluctuations between local currencies and the United States dollar create risk in several ways, including:

Foreign Currency Translation Risk.    The revenue and expenses of our foreign operations are generally denominated in local currencies and translated into United States dollars for financial reporting purposes. Accordingly, exchange rate fluctuations will affect the translation of foreign results into United States dollars for purposes of reporting our consolidated results.

 

24


Table of Contents

Foreign Currency Transaction Risk.    We are subject to foreign currency transaction risk for fluctuations in exchange rates during the period of time between the consummation and cash settlement of a transaction. We earn revenue from our service contracts over a period of several months and, in some cases, over several years. Accordingly, exchange rate fluctuations during this period may affect our profitability with respect to such contracts.

We may limit these risks through exchange rate fluctuation provisions stated in our service contracts, or we may hedge our transaction risk with foreign currency exchange contracts or options. We have not, however, hedged 100% of our foreign currency transaction risk, and we may experience fluctuations in financial results from our operations outside the United States and foreign currency transaction risk associated with our service contracts.

Disruptions in the credit and capital markets and unfavorable general economic conditions could negatively affect our business, results of operations and financial condition.

Unfavorable economic conditions, including concerns over the European sovereign debt crisis, uncertainty relating to the Euro, the reduction of the United States’ credit rating, which was downgraded by Standard & Poor’s in August 2011, and continued high unemployment in the United States and Europe, have contributed to increased volatility in the capital markets and diminished expectations for the global economy. Continued or further disruption in the credit and capital markets could have negative effects on our business that may be difficult to predict or anticipate, including the ability of our customers, vendors, contractors and financing sources to meet their contractual obligations. For example, if our customers have difficulty obtaining necessary financing, they may reduce the projects that they outsource to us or be unable to make timely payments to us, which could have a negative impact on our business.

Our effective income tax rate may fluctuate, which may adversely affect our operations, earnings and earnings per share.

Our effective income tax rate is influenced by our projected profitability in the various taxing jurisdictions in which we operate. Changes in the distribution of profits and losses among taxing jurisdictions may have a significant impact on our effective income tax rate, which in turn could have an adverse effect on our net income and earnings per share. Factors that may affect our effective income tax rate include, but are not limited to:

 

   

the requirement to exclude from our quarterly worldwide effective income tax calculations losses in jurisdictions where no income tax benefit can be recognized;

 

   

actual and projected full year pre-tax income;

 

   

changes in tax laws in various taxing jurisdictions;

 

   

audits by taxing authorities; and

 

   

the establishment of valuation allowances against deferred income tax assets if we determined that it is more likely than not that future income tax benefits will not be realized.

These changes may cause fluctuations in our effective income tax rate that could adversely affect our results of operations and cause fluctuations in our earnings and earnings per share.

We have only a limited ability to protect our intellectual property rights, and these rights are important to our success.

Our success depends, in part, upon our ability to develop, use and protect our proprietary methodologies, analytics, systems, technologies and other intellectual property. Existing laws of the various countries in which

 

25


Table of Contents

we provide services or solutions offer only limited protection of our intellectual property rights, and the protection in some countries may be very limited. We rely upon a combination of trade secrets, confidentiality policies, nondisclosure, invention assignment and other contractual arrangements, and patent, copyright and trademark laws, to protect our intellectual property rights. These laws are subject to change at any time and certain agreements may not be fully enforceable, which could further restrict our ability to protect our innovations. Our intellectual property rights may not prevent competitors from independently developing services similar to or duplicative of ours. Further, the steps we take in this regard might not be adequate to prevent or deter infringement or other misappropriation of our intellectual property by competitors, former employees or other third parties, and we might not be able to detect unauthorized use of, or take appropriate and timely steps to enforce, our intellectual property rights. Enforcing our rights might also require considerable time, money and oversight, and we may not be successful in enforcing our rights.

Depending on the circumstances, we might need to grant a specific customer greater rights in intellectual property developed in connection with a contract than we otherwise generally do. In certain situations, we might forego all rights to the use of intellectual property we create, which would limit our ability to reuse that intellectual property for other clients. Any limitation on our ability to provide a service or solution could cause us to lose revenue-generating opportunities and require us to incur additional expenses to develop or license new or modified solutions for future projects.

Our relationships with existing or potential customers who are in competition with each other may adversely impact the degree to which other customers or potential customers use our services, which may adversely affect our results of operations.

The biopharmaceutical industry is highly competitive, with biopharmaceutical companies each seeking to persuade payers, providers and patients that their drug therapies are better and more cost-effective than competing therapies marketed or being developed by competing firms. In addition to the adverse competitive interests that biopharmaceutical companies have with each other, biopharmaceutical companies also have adverse interests with respect to drug selection and reimbursement with other participants in the healthcare industry, including payers and providers. Biopharmaceutical companies also compete to be first to market with new drug therapies. We regularly provide services to biopharmaceutical companies who compete with each other, and we sometimes provide services or funding to such customers regarding competing drugs in development. Our existing or future relationships with our biopharmaceutical customers may therefore deter other biopharmaceutical customers from using our services or may result in our customers seeking to place limits on our ability to serve other biopharmaceutical industry participants. In addition, our further expansion into the broader healthcare market may adversely impact our relationships with biopharmaceutical customers, and such customers may elect not to use our services, reduce the scope of services that we provide to them or seek to place restrictions on our ability to serve customers in the broader healthcare market with interests that are adverse to theirs. Any loss of customers or reductions in the level of revenues from a customer could have a material adverse effect on our results of operations, business and prospects.

If we are unable to successfully identify, acquire and integrate existing businesses, services and technologies, our business, results of operations and financial condition could be adversely impacted.

We anticipate that a portion of our future growth may come from acquiring existing businesses, services or technologies. The success of any acquisition will depend upon, among other things, our ability to effectively integrate acquired personnel, operations, products and technologies into our business and to retain the key personnel and customers of our acquired businesses. In addition, we may be unable to identify suitable acquisition opportunities or obtain any necessary financing on commercially acceptable terms. We may also spend time and money investigating and negotiating with potential acquisition targets but not complete the transaction. Any future acquisition could involve other risks, including, among others, the assumption of additional liabilities and expenses, difficulties and expenses in connection with integrating the acquired companies and achieving the expected benefits, issuances of potentially dilutive securities or interest-bearing

 

26


Table of Contents

debt, loss of key employees of the acquired companies, transaction costs, diversion of management’s attention from other business concerns and, with respect to the acquisition of foreign companies, the inability to overcome differences in foreign business practices, language and customs. Our failure to identify potential acquisitions, complete targeted acquisitions and integrate completed acquisitions could have a material adverse effect on our business, financial condition and results of operations.

Investments in our customers’ businesses or drugs and our related commercial rights strategies could have a negative impact on our financial performance.

We may enter into arrangements with our customers in which we take on some of the risk of the potential success or failure of the customers’ businesses or drugs, including making strategic investments in our customers, providing financing to customers or acquiring an interest in the revenues from customers’ drugs. In addition, we have committed to invest $60.0 million in the NovaQuest Pharma Opportunities Fund III, L.P., or the Fund, a private equity fund that seeks to enter into similar risk-based arrangements. Our financial results would be adversely affected if these investments or the underlying drugs do not achieve the level of success that we anticipate and/or our return or payment from the drug investment or financing is less than our direct and indirect costs with respect to these arrangements.

Our results of operations may be adversely affected if we fail to realize the full value of our goodwill and intangible assets.

As of December 31, 2012, we had goodwill and net intangible assets of $575.2 million, which constituted approximately 23.0% of our total assets at the end of this period. We assess the realizability of our indefinite-lived intangible assets and goodwill annually and conduct an interim evaluation whenever events or changes in circumstances, such as operating losses or a significant decline in earnings associated with the acquired business or asset, indicate that these assets may be impaired. Our ability to realize the value of the goodwill and indefinite-lived intangible assets will depend on the future cash flows of the businesses we have acquired, which in turn depend in part on how well we have integrated these businesses into our own business. If we are not able to realize the value of the goodwill and indefinite-lived intangible assets, we may be required to incur material charges relating to the impairment of those assets. Such impairment charges could materially and adversely affect our operating results and financial condition.

We face risks arising from the restructuring of our operations.

From time to time, we have adopted restructuring plans to improve our operating efficiency through various means such as reduction of overcapacity, elimination of non-billable support roles or other realignment of resources. For example, in May 2012, our Board of Directors, or our Board, approved a restructuring plan of up to $20.0 million that is expected to result in the reduction of approximately 280 positions, primarily in Europe. We recognized approximately $20.0 million of total restructuring costs related to this plan in 2012. In July 2011 and May 2010, we adopted restructuring plans that each resulted in the recognition of $22.0 million in restructuring charges. Restructuring presents significant potential risks of events occurring that could adversely affect us, including a decrease in employee morale, the failure to achieve targeted cost savings and the failure to meet operational targets and customer requirements due to the loss of employees and any work stoppages that might occur.

Risks Relating to Our Industry

The biopharmaceutical services industry is highly competitive.

The biopharmaceutical services industry is highly competitive. We often compete for business with other biopharmaceutical services companies, internal discovery departments, development departments, and sales and marketing departments within our customers, some of which could be considered large biopharmaceutical services companies in their own right with greater resources than ours. We also compete with universities and

 

27


Table of Contents

teaching hospitals. If we do not compete successfully, our business will suffer. The industry is highly fragmented, with numerous smaller specialized companies and a handful of full-service companies with global capabilities similar to ours. Increased competition has led to price and other forms of competition, such as acceptance of less favorable contract terms, that could adversely affect our operating results. As a result of competitive pressures, in recent years our industry has experienced consolidation and “going private” transactions. This trend is likely to produce more competition from the resulting larger companies, and ones without the cost pressures of being public, for both customers and acquisition candidates. In addition, there are few barriers to entry for smaller specialized companies considering entering the industry. Because of their size and focus, these companies might compete effectively against larger companies such as us, which could have a material adverse impact on our business.

Outsourcing trends in the biopharmaceutical industry and changes in aggregate spending and R&D budgets could adversely affect our operating results and growth rate.

Economic factors and industry trends that affect biopharmaceutical companies affect our business. Biopharmaceutical companies continue to seek long-term strategic collaborations with global CROs with favorable pricing terms. Competition for these collaborations is intense and we may decide to forego an opportunity or we may not be selected, in which case a competitor may enter into the collaboration and our business with the customer, if any, may be limited. In addition, if the biopharmaceutical industry reduces its outsourcing of clinical trials and sales and marketing projects or such outsourcing fails to grow at projected rates, our operations and financial condition could be materially and adversely affected. We may also be negatively impacted by consolidation and other factors in the biopharmaceutical industry, which may slow decision making by our customers or result in the delay or cancellation of clinical trials. Our commercial services may be affected by reductions in new drug launches and increases in the number of drugs losing patent protection. All of these events could adversely affect our business, results of operations or financial condition.

We may be affected by healthcare reform and potential additional reforms.

In March 2010, the United States Congress enacted healthcare reform legislation intended to expand, over time, health insurance coverage and impose health industry cost containment measures. This legislation may significantly impact the biopharmaceutical industry. In addition, numerous government bodies are considering or have adopted various healthcare reforms and may undertake, or are in the process of undertaking, efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and biopharmaceutical companies. We are uncertain as to the effects of these recent reforms on our business and are unable to predict what legislative proposals, if any, will be adopted in the future. If regulatory cost containment efforts limit the profitability of new drugs, our customers may reduce their R&D spending or promotional, marketing and sales expenditures, which could reduce the business they outsource to us. Similarly, if regulatory requirements are relaxed or simplified drug approval procedures are adopted, the demand for our services could decrease.

Government bodies may also adopt healthcare legislation or regulations that are more burdensome than existing regulations. For example, product safety concerns and recommendations by the Drug Safety Oversight Board could change the regulatory environment for drug products, and new or heightened regulatory requirements may increase our expenses or limit our ability to offer some of our services. Additionally, new or heightened regulatory requirements may have a negative impact on the ability of our customers to conduct industry-sponsored clinical trials, which could reduce the need for our services.

Actions by government regulators or customers to limit a prescription’s scope or withdraw an approved drug from the market could result in a loss of revenue.

Government regulators have the authority, after approving a drug, to limit its scope of prescription or withdraw it from the market completely based on safety concerns. Similarly, customers may act to voluntarily limit the scope of prescription of drugs or withdraw them from the market. If we are providing services to

 

28


Table of Contents

customers for drugs that are limited or withdrawn, we could suffer a loss of revenue with negative impacts to our financial results. Additionally, to the extent we may enter into any investment arrangements with respect to particular drugs, if the drugs underlying these arrangements are limited or withdrawn, our revenues from these arrangements would be limited, which could have a negative impact on our financial results.

Current and proposed laws and regulations regarding the protection of personal data could result in increased risks of liability or increased cost to us or could limit our service offerings.

The confidentiality, collection, use and disclosure of personal data, including clinical trial patient-specific information, are subject to governmental regulation generally in the country that the personal data were collected or used. For example, United States federal regulations under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, require individuals’ written authorization, in addition to any required informed consent, before Protected Health Information, or PHI, may be used for research and such regulations specify standards for deidentifications and for limited data sets. We are both directly and indirectly affected by the privacy provisions surrounding individual authorizations because many investigators with whom we are involved in clinical trials are directly subject to them as a HIPAA “covered entity” and because we obtain identifiable health information from third parties that are subject to such regulations. Because of recent amendments to the HIPAA data security and privacy rules that were promulgated on January 25, 2013 and effective March 26, 2013, there are some instances where we are a HIPAA “business associate” of a “covered entity”, so that we will be directly liable for mishandling protected health information. These amendments will subject us to HIPAA’s enforcement scheme, which, as amended, can yield up to $1.5 million in annual civil penalties for each HIPAA violation.

In the European Union, or EU, personal data includes any information that relates to an identified or identifiable natural person with health information carrying additional obligations, including obtaining the explicit consent from the individual for collection, use or disclosure of the information. In addition, we are subject to EU rules with respect to cross-border transfers of such data out of the EU. The United States, the EU and its member states, and other countries where we have operations, such as Japan, continue to issue new privacy and data protection rules and regulations that relate to personal data and health information. Failure to comply with certain certification/registration and annual re-certification/registration provisions associated with these data protection and privacy regulations and rules in various jurisdictions, or to resolve any serious privacy complaints, could subject us to regulatory sanctions, criminal prosecution or civil liability. Federal, state and foreign governments are contemplating or have proposed or adopted additional legislation governing the collection, possession, use or dissemination of personal data, such as personal health information, and personal financial data as well as security breach notification rules for loss or theft of such data. Additional legislation or regulation of this type might, among other things, require us to implement new security measures and processes or bring within the legislation or regulation de-identified health or other personal data, each of which may require substantial expenditures or limit our ability to offer some of our services. Additionally, if we violate applicable laws, regulations or duties relating to the use, privacy or security of personal data, we could be subject to civil liability or criminal prosecution, be forced to alter our business practices and suffer reputational harm. In the next few years, the European data protection framework may be revised as a generally applicable data regulation. The text has not yet been finalized, but it contains new provisions specifically directed at the processing of health information, sanctions of up to 2% of worldwide gross revenue and extra-territoriality measures intended to bring non-EU companies under the proposed regulation.

If we do not keep pace with rapid technological changes, our services may become less competitive or obsolete.

The biopharmaceutical industry generally, and drug development and clinical research more specifically, are subject to rapid technological changes. Our current competitors or other businesses might develop technologies or services that are more effective or commercially attractive than, or render obsolete, our current or future technologies and services. If our competitors introduce superior technologies or services and if we cannot make enhancements to remain competitive, our competitive position would be harmed. If we are unable to compete successfully, we may lose customers or be unable to attract new customers, which could lead to a decrease in our revenue and financial condition.

 

29


Table of Contents

The biopharmaceutical industry has a history of patent and other intellectual property litigation, and we might be involved in costly intellectual property lawsuits.

The biopharmaceutical industry has a history of intellectual property litigation, and these lawsuits will likely continue in the future. Accordingly, we may face patent infringement suits by companies that have patents for similar business processes or other suits alleging infringement of their intellectual property rights. Legal proceedings relating to intellectual property could be expensive, take significant time and divert management’s attention from other business concerns, regardless of the outcome of the litigation. If we do not prevail in an infringement lawsuit brought against us, we might have to pay substantial damages, and we could be required to stop the infringing activity or obtain a license to use technology on unfavorable terms.

Risks Relating to Our Indebtedness

Our substantial debt could adversely affect our financial condition.

As of December 31, 2012, we had $2.44 billion of total indebtedness, including $22.9 million of unamortized discount and excluding $300.0 million of additional available borrowings under our revolving credit facility. Our substantial indebtedness could adversely affect our financial condition and thus make it more difficult for us to satisfy our obligations with respect to our credit facilities. If our cash flow is not sufficient to service our debt and adequately fund our business, we may be required to seek further additional financing or refinancing or dispose of assets. We may not be able to effect any of these alternatives on satisfactory terms or at all. Our substantial indebtedness could also:

 

   

increase our vulnerability to adverse general economic and industry conditions;

 

   

require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital, investments, acquisitions, capital expenditures, R&D efforts and other general corporate purposes;

 

   

limit our ability to make required payments under our existing contractual commitments, including our existing long-term indebtedness;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

place us at a competitive disadvantage compared to our competitors that have less debt;

 

   

cause us to incur substantial fees from time to time in connection with debt amendments or refinancings;

 

   

increase our exposure to rising interest rates because a portion of our borrowings is at variable interest rates; and

 

   

limit our ability to borrow additional funds or to borrow on terms that are satisfactory to us.

Despite our level of indebtedness, we are able to incur more debt and undertake additional obligations. Incurring such debt or undertaking such additional obligations could further exacerbate the risks to our financial condition.

Although the credit agreements governing our credit facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and the indebtedness incurred in compliance with these restrictions could increase. For example, in October 2012, we amended our credit agreement governing the Quintiles Transnational senior secured credit facilities to provide a new Term Loan B-1 (as defined under “Use of Proceeds”) for a principal amount of $175.0 million and to

 

30


Table of Contents

provide an increase of our existing senior secured revolving credit facility by $75.0 million to $300.0 million. As a result, we have approximately $300 million available for borrowing under our senior secured revolving credit facility. To the extent new debt is added to our current debt levels, the risks to our financial condition would increase.

While the credit agreements governing our credit facilities also contain restrictions on our and our restricted subsidiaries’ ability to make loans and investments, these restrictions are subject to a number of qualifications and exceptions, and the investments incurred in compliance with these restrictions could be substantial.

If we do not comply with the covenants governing our credit facilities, we may not have the funds necessary to pay all of our indebtedness that could become due.

The credit agreements governing our credit facilities require us to comply with certain covenants. In particular, our credit agreements prohibit us from incurring any additional indebtedness, except in specified circumstances, or amending the terms of agreements relating to certain existing junior indebtedness, if any, in a manner materially adverse to the lenders under our credit agreements, without lender approval. Further, our credit agreements contain customary covenants, including covenants that restrict our ability to acquire and dispose of assets, engage in mergers or reorganizations, pay dividends or make investments. In addition, the credit agreement governing our Term Loan B-1 and our Term Loan B-2 (as defined under “Use of Proceeds”) requires us to make mandatory principal prepayments in certain circumstances, including with a portion of our excess cash flow if Quintiles Transnational’s total leverage ratio (as defined in the credit agreement) exceeds certain levels. A violation of any of these covenants could cause an event of default under our credit agreements.

If we default on our credit agreements as a result of our failure to pay principal or interest when due, our material breach of any representation, warranty or covenant, or any other reason, all outstanding amounts could become immediately due and payable. In such case, we may not have sufficient funds to repay all the outstanding amounts. In addition, or in the alternative, the lenders under our credit agreements could exercise their rights under the security documents entered into in connection with the credit agreements. Any acceleration of amounts due under the credit agreements governing our outstanding indebtedness or the substantial exercise by the lenders of their rights under the security documents would likely have a material adverse effect on us.

Interest rate fluctuations may affect our results of operations and financial condition.

Because we have variable-rate debt instruments, fluctuations in interest rates also affect our business. We attempt to minimize interest rate risk and lower our overall borrowing costs through the utilization of derivative financial instruments, primarily interest rate swaps. We have entered into interest rate swaps with financial institutions that have reset dates and critical terms that match those of our credit facilities. Accordingly, any change in market value associated with the interest rate swaps is offset by the opposite market impact on the related debt. As of December 31, 2012, we had hedged $975.0 million, or 45.5%, of our variable-rate debt. Because we do not attempt to hedge all of our variable-rate debt, we may incur higher interest costs for portions of our variable-rate debt which are not hedged. Each quarter point increase or decrease in the applicable interest rate would result in our interest expense changing by approximately $5.4 million per year under our credit facilities with variable interest rates.

Risks Relating to Our Common Stock and This Offering

The parties to the Shareholders Agreement will continue to have significant influence over us after this offering, including control over decisions that require the approval of shareholders, which could limit your ability to influence the outcome of matters submitted to shareholders for a vote.

Upon the completion of this offering, shareholders who will own approximately         % of the outstanding shares of our common stock (or         % if the underwriters exercise their option to purchase additional shares in

 

31


Table of Contents

full), including the Sponsors and Dr. Gillings (and his affiliates), are parties to a Shareholders Agreement entered into in connection with the Major Shareholder Reorganization, or the Shareholders Agreement. The Shareholders Agreement, among other things, imposes certain transfer restrictions on the shares held by such shareholders and requires such shareholders to vote in favor of certain nominees to our Board. For a discussion of the Shareholders Agreement, see “Certain Relationships and Related Person Transactions.” As long as this group owns or controls at least a majority of our outstanding voting power, it has the ability to exercise substantial control over all corporate actions requiring shareholder approval, irrespective of how our other shareholders may vote, including:

 

   

the election and removal of directors and the size of our Board;

 

   

any amendment of our articles of incorporation or bylaws; or

 

   

the approval of mergers and other significant corporate transactions, including a sale of substantially all of our assets.

Upon the listing of our shares on             , we will be a “controlled company” within the meaning of the rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to shareholders of companies that are subject to such requirements.

After completion of this offering, the parties to the Shareholders Agreement will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the             . Under these rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements that, within one year of the date of the listing of our common stock:

 

   

we have a board that is composed of a majority of “independent directors,” as defined under the rules of such exchange;

 

   

we have a compensation committee that is composed entirely of independent directors; and

 

   

we have a nominating and corporate governance committee that is composed entirely of independent directors.

Following this offering, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors on our Board. In addition, our Compensation and Talent Development Committee and our Governance, Quality and Nominating Committee will not consist entirely of independent directors or be subject to annual performance evaluations. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the                         .

Provisions of our corporate governance documents could make an acquisition of our company more difficult and may prevent attempts by our shareholders to replace or remove our current management, even if beneficial to our shareholders.

Provisions of our articles of incorporation and our bylaws following this offering may discourage, delay or prevent a merger, acquisition or other change in control of our company that shareholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our Board. Because our Board is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace current members

 

32


Table of Contents

of our management team. Among others, these provisions include, (1) our ability to issue preferred stock without shareholder approval, (2) the requirement that our shareholders may not act without a meeting, (3) requirements for advance notification of shareholder nominations and proposals contained in our bylaws, (4) the absence of cumulative voting for our directors, (5) requirements for shareholder approval of certain business combinations and (6) the limitations on director nominations contained in our Shareholders Agreement. See “Description of Capital Stock” for more detail.

If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of your investment.

The initial public offering price of our common stock is substantially higher than the net tangible book deficit per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book deficit per share after this offering. Based on the initial public offering price of $         per share, you will experience immediate dilution of $         per share, representing the difference between our pro forma net tangible book deficit per share after giving effect to this offering and the initial public offering price. In addition, purchasers of common stock in this offering will have contributed         % of the aggregate price paid by all purchasers of our stock but will own only approximately         % of our common stock outstanding after this offering. We also have a large number of outstanding stock options to purchase common stock with exercise prices that are below the estimated initial public offering price of our common stock. To the extent that these options are exercised, you will experience further dilution. See “Dilution” for more detail.

An active, liquid trading market for our common stock may not develop, which may limit your ability to sell your shares.

Prior to this offering, there was no public market for our common stock. Although we intend to apply to list our common stock on the             under the symbol             , an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price will be determined by negotiations between us and the underwriters and may not be indicative of market prices of our common stock that will prevail in the open market after the offering. A public trading market having the desirable characteristics of depth, liquidity and orderliness depends upon the existence of willing buyers and sellers at any given time, such existence being dependent upon the individual decisions of buyers and sellers over which neither we nor any market maker has control. The failure of an active and liquid trading market to develop and continue would likely have a material adverse effect on the value of our common stock. The market price of our common stock may decline below the initial public offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

As a public company, we will become subject to additional laws, regulations and stock exchange listing standards, which will impose additional costs on us and may strain our resources and divert our management’s attention.

We have historically operated our business as a private company. After this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the                 , and other applicable securities laws and regulations. Compliance with these laws and regulations will increase our legal and financial compliance costs and make some activities more difficult, time-consuming or costly. For example, the Exchange Act will require us, among other things, to file annual, quarterly and current reports with respect to our business and operating results. We also expect that being a public company and being subject to new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain

 

33


Table of Contents

coverage. These factors may therefore strain our resources, divert management’s attention and affect our ability to attract and retain qualified Board members.

Our operating results and share price may be volatile, and the market price of our common stock after this offering may drop below the price you pay.

Our quarterly operating results are likely to fluctuate in the future as a publicly traded company. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could subject the market price of our shares to wide price fluctuations regardless of our operating performance. We and the underwriters will negotiate to determine the initial public offering price. You may not be able to resell your shares at or above the initial public offering price or at all. Our operating results and the trading price of our shares may fluctuate in response to various factors, including:

 

   

market conditions in the broader stock market;

 

   

actual or anticipated fluctuations in our quarterly financial and operating results;

 

   

introduction of new products or services by us or our competitors;

 

   

issuance of new or changed securities analysts’ reports or recommendations;

 

   

sales, or anticipated sales, of large blocks of our stock;

 

   

additions or departures of key personnel;

 

   

regulatory or political developments;

 

   

litigation and governmental investigations;

 

   

changing economic conditions; and

 

   

exchange rate fluctuations.

These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our shares to fluctuate substantially. While we believe that operating results for any particular quarter are not necessarily a meaningful indication of future results, fluctuations in our quarterly operating results could limit or prevent investors from readily selling their shares and may otherwise negatively affect the market price and liquidity of our shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our shareholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding                 shares of common stock based on the number of shares outstanding as of December 31, 2012. This includes                 shares that we are selling in this offering, as well as the                 shares that the selling shareholders are selling, which may be resold in the public market immediately, and assumes no exercises of

 

34


Table of Contents

outstanding options. Substantially all of the shares that are not being sold in this offering will be subject to a 180-day lock-up period provided under agreements executed in connection with this offering. These shares will, however, be able to be resold after the expiration of the lock-up agreement as described in the “Shares Eligible for Future Sale” section of this prospectus. We also intend to register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described in the “Underwriting” section of this prospectus. As restrictions on resale end, the market price of our stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them.

Since we have no current plans to pay regular cash dividends on our common stock following this offering, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

Although we have previously declared dividends to our shareholders, we do not anticipate paying any regular cash dividends on our common stock following this offering. Any decision to declare and pay dividends in the future will be made at the discretion of our Board and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur, including under our existing credit facilities. Therefore, any return on investment in our common stock is solely dependent upon the appreciation of the price of our common stock on the open market, which may not occur. See “Dividend Policy” for more detail.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not meet their expectations, our share price and trading volume could decline.

The trading market for our shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our share price could decline.

 

35


Table of Contents

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. Such forward-looking statements reflect, among other things, our current expectations and anticipated results of operations, all of which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, market trends, or industry results to differ materially from those expressed or implied by such forward-looking statements. Therefore, any statements contained herein that are not statements of historical fact may be forward-looking statements and should be evaluated as such. Without limiting the foregoing, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “should,” “targets,” “will” and the negative thereof and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” Unless legally required, we assume no obligation to update any such forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information.

 

36


Table of Contents

MARKET AND OTHER INDUSTRY DATA

This prospectus includes market share and industry data and forecasts that we have obtained from market research, consultant surveys, publicly available information and industry publications and surveys, as well as our internal data. Market research, consultant surveys, and industry publications and surveys generally indicate that the information contained therein was obtained from sources believed to be reliable, but they do not guarantee the accuracy or completeness of such information. Although we believe that the publications and reports are reliable as of the date of this prospectus, neither we nor the underwriters have independently verified the data. Our internal data, estimates and forecasts are based upon information obtained from our investors, partners, trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions. Although we believe that such information included in this prospectus is reliable, it is inherently imprecise. In addition, our estimates, in particular as they relate to market size, market growth, penetration, market share and our general expectations, involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

37


Table of Contents

USE OF PROCEEDS

We estimate that the net proceeds to us from our issuance and sale of                  shares of common stock in this offering will be approximately $                 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us (or approximately $                 million if the underwriters exercise their option to purchase additional shares of common stock in full). This estimate assumes an initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus.

A $1.00 increase (decrease) in the assumed public offering price of $                , based upon the midpoint of the estimated price range set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us from this offering by $                 million (or approximately $                 million if the underwriters exercise their option to purchase additional shares of common stock in full), assuming the number of shares we offer, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We will not receive any proceeds from the sale of shares by the selling shareholders, including if the underwriters exercise their option to purchase additional shares.

We intend to use the net proceeds of this offering to pay all amounts outstanding under the $300.0 million term loan, or the Holdings Term Loan, obtained by Quintiles Holdings in February 2012, including any related fees and expenses, to pay an additional $                 million of term loans under our senior secured credit facilities (                    ) and for general corporate purposes, including supporting our strategic growth opportunities in the future.

The Holdings Term Loan accrues cash interest at the rate of 7.50% per year and we are required to pay interest entirely in cash unless certain conditions are satisfied, in which case we are entitled to pay all or a portion of the interest for such interest period by increasing the principal amount of the Holdings Term Loan, such increase being referred to as paid-in-kind interest, or PIK Interest. PIK Interest on the Holdings Term Loan accrues at the rate of 8.25% per year. No principal payments are due until maturity on February 26, 2017.

The senior secured credit facilities, which include the $175.0 million Term Loan B-1, or the Term Loan B-1, obtained by Quintiles Transnational on October 22, 2012, and the $1.975 billion Term Loan B-2, or the Term Loan B-2, obtained by Quintiles Transnational on December 20, 2012, bear a variable rate of interest of the greater of LIBOR or 1.25% plus 3.25%, and the interest rate was 4.5% at December 31, 2012. After March 31, 2013, the Term Loan B-2 will bear a variable rate of interest of the greater of LIBOR or 1.25% plus an applicable margin of 3.00% - 3.25% based on Quintiles Transnational’s total company leverage ratio, as defined in the credit agreement governing the senior secured credit facilities. The Term Loan B-1 and the Term Loan B-2 require Quintiles Transnational to make annual amortization payments equal to 1% per annum (payable in aggregate quarterly installments of $5.4375 million) with the balance due at maturity on June 8, 2018. We used the proceeds from the Term Loan B-1, together with cash on hand, to (1) pay a dividend to our shareholders totaling approximately $241.7 million, (2) pay a bonus to certain option holders totaling approximately $2.4 million and (3) pay related fees and expenses. We used the proceeds from the Term Loan B-2, together with cash on hand, to repay the remaining outstanding balance on the then-existing $2.0 billion Term Loan B, or the Term Loan B, obtained by Quintiles Transnational on June 8, 2011.

For additional information regarding our liquidity and outstanding indebtedness, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

38


Table of Contents

DIVIDEND POLICY

Following completion of the offering, our Board does not currently intend to pay dividends on our common stock. However, we expect to reevaluate our dividend policy on a regular basis following the offering and may, subject to compliance with the covenants contained in our credit facilities and other considerations, determine to pay dividends in the future. The declaration, amount and payment of any future dividends on shares of our common stock will be at the sole discretion of our Board, which may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, the implications of the payment of dividends by us to our shareholders or by our subsidiaries to us, and any other factors that our Board may deem relevant. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” “Description of Certain Indebtedness” and Note 11 to our audited consolidated financial statements included elsewhere in this prospectus for restrictions on our ability to pay dividends.

In October 2012, our Board declared a cash dividend of $2.09 per share (or $241.7 million in the aggregate) to shareholders of record as of October 24, 2012. In February 2012, our Board declared a cash dividend of $2.82 per share (or $326.1 million in the aggregate) to shareholders of record as of February 29, 2012. In June 2011, our Board declared a cash dividend of $2.48 per share (or $288.3 million in the aggregate) to shareholders of record on June 7, 2011. In November 2010, our Board declared a cash dividend of $0.58 per share (or $67.5 million in the aggregate) to shareholders of record as of November 16, 2010.

 

39


Table of Contents

CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization at December 31, 2012:

 

   

On an actual basis; and

   

On an as adjusted basis to give effect to (1) the issuance of shares of common stock by us in this offering, after deducting underwriting discounts and commissions and estimated offering expenses; (2) the application of the estimated net proceeds from the offering as described in “Use of Proceeds” and (3) the payment of a one-time termination fee of $         million under an agreement with Dr. Gillings and our Sponsors.

You should read this table in conjunction with the information contained in “Use of Proceeds,” “Selected and Pro Forma Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     At December 31, 2012  
      Actual     As Adjusted  
     (dollars in thousands)  

Cash and Cash Equivalents

   $         567,728      $                        
  

 

 

   

 

 

 

Short-term debt:

    

Current portion of long-term debt, including capital leases

     55,710     

Long-term debt:

    

Long-term debt, less current portion, including capital leases*

     2,366,268     
  

 

 

   

 

 

 

Total debt and capital lease obligations

   $ 2,421,978      $     
  

 

 

   

 

 

 

Shareholders’ equity:

    
Common stock, par value $0.01 per share; 150,000,000 shares authorized and 115,763,510 shares issued and outstanding on an actual basis, 300,000,000 shares authorized and             shares issued and outstanding on an as adjusted basis      4,554     

Accumulated deficit

     (1,371,772  

Accumulated other comprehensive income

     7,695     
  

 

 

   
Deficit attributable to Quintiles Transnational Holdings Inc.’s shareholders      (1,359,523  

Deficit attributable to noncontrolling interests

     479     
  

 

 

   

Total shareholders’ deficit

     (1,359,044  
  

 

 

   

Total capitalization

   $ 1,062,934      $     
  

 

 

   

 

 

 

 

*  As presented on the face of our consolidated balance sheet, which is net of unamortized discounts of $22,908.

 

40


Table of Contents

DILUTION

If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book deficit per share of our common stock immediately after this offering. Dilution results from the fact that the initial public offering price per share of common stock is substantially in excess of the net tangible book deficit per share of our common stock attributable to the existing shareholders for our presently outstanding shares of common stock. Our net tangible book deficit per share represents the amount of our total tangible assets (total assets less intangible assets) less total liabilities, divided by the number of shares of common stock issued and outstanding.

Our net tangible book deficit as of December 31, 2012 was approximately $1,980.7 million, or $17.10 per share, based on 115,763,510 shares of our common stock outstanding as of December 31, 2012. Dilution is calculated by subtracting net tangible book deficit per share of our common stock from the assumed initial public offering price per share of our common stock.

Without taking into account any other changes in such net tangible book deficit after December 31, 2012, after giving effect to the sale of                 shares of our common stock in this offering assuming an initial public offering price of $        per share (the midpoint of the offering range shown on the cover of this prospectus), less the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book deficit as of December 31, 2012 would have been approximately $                million, or $        per share of common stock. This amount represents an immediate decrease in net tangible book deficit of $         per share of our common stock to the existing shareholders and immediate dilution in net tangible book deficit of $        per share of our common stock to investors purchasing shares of our common stock in this offering. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

      $                        

Net tangible book deficit per share as of December 31, 2012, before giving effect to this offering

   $ 17.10      

Decrease in net tangible book deficit per share attributable to investors purchasing shares in this offering

     
  

 

 

    

Pro forma net tangible book deficit per share, after giving effect to this offering

     
     

 

 

 

Dilution in as adjusted net tangible book deficit per share to investors in this offering

      $     
     

 

 

 

If the underwriters exercise their option in full to purchase additional shares, the pro forma as adjusted net tangible book deficit per share of our common stock after giving effect to this offering would be $        per share of our common stock. This represents an increase in pro forma as adjusted net tangible book deficit of $        per share of our common stock to existing shareholders and dilution in pro forma as adjusted net tangible book deficit of $        per share of our common stock to new investors.

A $1.00 increase (decrease) in the assumed initial public offering price of $        per share of our common stock would decrease (increase) the pro forma as adjusted net tangible book deficit per share of our common stock after giving effect to this offering by $            , or by $        per share of our common stock, assuming no change to the number of shares of our common stock offered by us as set forth on the front cover page of this prospectus and after deducting the estimated underwriting discounts and expenses payable by us.

 

41


Table of Contents

The following table summarizes, as of December 31, 2012, on the pro forma basis described above, the total number of shares of our common stock purchased from us, the total consideration paid to us, and the average price per share of our common stock paid by purchasers of such shares and by new investors purchasing shares of our common stock in this offering.

 

      Shares Purchased     Total Consideration (000s)     Average
Price  Per
Share
 
     Number    Percent     Amount      Percent    

Existing shareholders

                     %   $                                       %   $                    

New investors

                     %   $                        %   $     
  

 

  

 

 

   

 

 

    

 

 

   

Total

                     %   $                        %   $     
  

 

  

 

 

   

 

 

    

 

 

   

The total number of shares of our common stock reflected in the table and discussion above is based on shares of common stock outstanding on a pro forma basis, as of December 31, 2012, and excludes, as of December 31, 2012:

 

   

11,054,690 shares of common stock issuable upon exercise of options outstanding as of December 31, 2012 at a weighted-average exercise price of $17.17 per share; and

 

   

an aggregate of 1,021,690 shares of common stock reserved for future issuance under our stock incentive plans.

To the extent that we grant options to our employees or directors in the future, and those options or existing options are exercised or other issuances of shares of our common stock are made, there will be further dilution to new investors.

 

42


Table of Contents

SELECTED AND PRO FORMA CONSOLIDATED FINANCIAL DATA

We have derived the following consolidated statement of income data for 2012, 2011 and 2010 and consolidated balance sheet data as of December 31, 2012 and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the following consolidated statement of income data for 2009 and 2008 and consolidated balance sheet data as of December 31, 2010, 2009 and 2008 from our audited consolidated financial statements not included in this prospectus. You should read the consolidated financial data set forth below in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of the results we may achieve in any future period.

 

     Year Ended December 31,  
     2012     2011      2010     2009     2008  
     (in thousands, except per share data)  

Statement of Income Data:

           

Service revenues

   $ 3,692,298      $ 3,294,966       $ 3,060,950      $ 3,010,793      $ 2,875,595   

Reimbursed expenses

     1,173,215        1,032,782         863,070        888,795        886,864   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     4,865,513        4,327,748         3,924,020        3,899,588        3,762,459   

Costs, expenses and other:

           

Costs of revenues

     3,632,582        3,185,787         2,804,837        2,783,591        2,755,252   

Selling, general and administrative

     817,755        762,299         698,406        684,466        689,032   

Restructuring costs

     18,741        22,116         22,928        (141     2,369   

Transaction expenses(1)

                                  37,500   

Impairment charges(2)

            12,295         2,844        15,453        26,876   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from operations

     396,435        345,251         395,005        416,219        251,430   

Interest expense, net

     131,304        105,126         137,631        106,037        135,432   

Loss on extinguishment of debt

     1,275        46,377                         

Other (income) expense, net

     (3,572     9,073         15,647        9,622        (14,792

Gain on sale of business assets(3)

                                  (17,472
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in earnings (losses) of unconsolidated affiliates

     267,428        184,675         241,727        300,560        148,262   

Income tax expense

     93,364        15,105         77,582        88,253        123,306   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income before equity in earnings (losses) of unconsolidated affiliates

     174,064        169,570         164,145        212,307        24,956   

Equity in earnings (losses) from unconsolidated affiliates(4)

     2,567        70,757         1,110        (2,729     8,054   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income-continuing operations

     176,631        240,327         165,255        209,578        33,010   

Gain from sale of discontinued operation, net of taxes(5)

                                  2,285   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     176,631        240,327         165,255        209,578        35,295   

Net loss (income) attributable to noncontrolling interests

     915        1,445         (4,659     485        (154
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income attributable to Quintiles Transnational Holdings Inc.

   $ 177,546      $ 241,772       $ 160,596      $ 210,063      $ 35,141   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

43


Table of Contents
     Year Ended December 31,  
     2012     2011     2010     2009     2008  
     (in thousands, except per share data)  

Earnings per common share from continuing operations attributable to common shareholders:

          

Basic earnings per share

   $ 1.53      $ 2.08      $ 1.38      $ 1.80      $ 0.28   

Diluted earnings per share

   $ 1.51      $ 2.05      $ 1.36      $ 1.79      $ 0.28   

Cash dividends declared per common share

   $ 4.91      $ 2.48      $ 0.58      $ 4.57      $   

Weighted average common shares outstanding:

          

Basic

     115,710        116,232        116,418        116,499        115,566   

Diluted

     117,796        117,936        118,000        117,509        116,274   

Unaudited Pro Forma Data:(6)

          

Basic earnings per common share

   $             

Diluted earnings per common share

   $             

Weighted average common shares outstanding:

          

Basic

          

Diluted

          

Unaudited As Adjusted Pro Forma Data:(6)

          

Net income

   $             

Basic earnings per common share

   $             

Diluted earnings per common share

   $             

Weighted average common shares outstanding:

          

Basic

          

Diluted

          

Statement of Cash Flow Data:

          

Net cash provided by (used in):

          

Operating activities

   $ 335,701      $ 160,953      $ 378,160      $ 484,474      $ 206,201   

Investing activities

     (132,233     (224,838     (141,434     (90,465     (99,198

Financing activities

     (146,873     (59,309     (153,081     (270,189     (99,079

Other Financial Data:

          

Adjusted service revenues(7)

   $ 3,692,298      $ 3,294,966      $ 2,996,752      $ 2,923,791      $ 2,781,944   

EBITDA(7)

     499,587        452,562        464,685        482,247        372,903   

Adjusted EBITDA(7)

     543,718        490,424        462,760        463,885        323,123   

Adjusted net income(7)

     208,931        191,005        161,796        214,004        70,238   

Diluted adjusted net income per share(7)

     1.77        1.62        1.37        1.82        0.60   

Capital expenditures

     (71,336     (75,679     (80,236     (85,932     (98,692

Cash dividends paid to common shareholders

     (567,851     (288,322     (67,493     (532,327       

Net new business(8)

     4,501,200        4,044,100        3,551,500        3,641,400        3,519,200   

 

44


Table of Contents
     As of December 31,  
     2012     2011     2010     2009     2008  
     (in thousands)  

Balance Sheet Data:

          

Cash and cash equivalents

   $ 567,728      $ 516,299      $ 646,615      $ 565,774      $ 424,875   

Investments in debt, equity and other securities

     35,951        22,106        1,557        61,713        77,595   

Trade accounts receivable and unbilled services, net

     745,373        691,038        570,160        584,200        639,831   

Property and equipment, net

     193,999        185,772        184,494        199,415        188,059   

Total assets

     2,499,153        2,322,917        2,064,887        2,112,734        2,079,226   

Total long-term liabilities

     2,540,233        2,100,380        1,827,160        1,904,595        1,434,369   

Total debt and capital leases(9)

     2,444,886        1,990,196        1,704,896        1,876,607        1,516,451   

Total shareholders’ deficit

     (1,359,044     (969,596     (900,359     (907,515     (615,604

Other Financial Data:

          

Backlog(8)

   $ 8,704,500      $ 7,972,900      $ 7,115,300      $ 6,494,400      $ 6,165,400   

 

(1)    On December 14, 2007, we initiated the Major Shareholder Reorganization, which was a share purchase transaction that involved the sale of shares of our common stock by certain of our shareholders to other existing shareholders or their affiliates, as well as third parties, and the issuance of common stock to new investors. Related to these transactions, in 2008 we paid a transaction fee of $37.5 million to affiliates of the new investors.

(2)    We incurred other than temporary losses on marketable and non-marketable equity securities of $11.3 million and $15.6 million, respectively, during the year ended December 31, 2008. We incurred other than temporary losses on marketable and non-marketable equity securities of $4.4 million and $9.4 million, respectively, and an impairment of a long-lived asset of $1.7 million during the year ended December 31, 2009. Refer to our audited financial statements included elsewhere in this prospectus for information on other than temporary losses and long-lived asset impairments during the years ended December 31, 2012, 2011 and 2010.

(3)    In October 2008, we sold our clinical supplies and depot operations for approximately $18.5 million in cash, net of expenses, which resulted in a gain of $17.5 million.

(4)    In November 2011, we sold our investment in Invida Pharmaceutical Holdings Pte. Ltd., or Invida, for approximately $103.6 million of net proceeds resulting in gain of approximately $74.9 million.

(5)    In June 2007, we sold a healthcare policy research and consulting business for $64 million in cash. The sale resulted in a gain of $34.6 million, of which $1.9 million (net of taxes of $1.3 million) was recorded in 2008 after certain purchase contingencies were satisfied. In 2008, after certain purchase contingencies were satisfied related to the sale of another business in 2004, we recognized a $370,000 gain (net of taxes of $248,000).

(6)    Pro forma information is unaudited and is prepared in accordance with Article 11 of Regulation S-X.

Pro Forma Earnings Per Share

We declared and paid dividends to shareholders of $567.9 million during 2012. Under certain interpretations of the SEC, dividends declared in the year preceding an initial public offering are deemed to be in contemplation of the offering with the intention of repayment out of offering proceeds to the extent that the dividends exceeded earnings during such period. As such, unaudited pro forma earnings per share for 2012 gives effect to the number of shares whose proceeds are deemed to be necessary to pay the dividend amount that is in excess of 2012 earnings, up to the amount of shares assumed to be issued in the offering.

 

45


Table of Contents

The following presents the computation of pro forma basic and diluted earnings per share:

 

Numerator:    Year Ended
December 31,
2012
 
     (in thousands,
except per share
data)
 

Net income attributable to Quintiles Transnational Holdings Inc.

   $ 177,546   
  

 

 

 

Denominator:

  

Common shares used in computing basic income per common share

     115,710   

Adjustment for common shares assumed issued in this offering necessary to pay dividends in excess of earnings(a)

  
  

 

 

 

Basic pro forma weighted average common shares outstanding

  
  

 

 

 

Basic pro forma earnings per share

   $     
  

 

 

 

Basic pro forma weighted average common shares outstanding

  

Diluted effect of securities

     2,086   
  

 

 

 

Diluted pro forma weighted average common shares outstanding

  
  

 

 

 

Diluted pro forma earnings per share

   $     
  

 

 

 

 

(a)    Dividends declared in the past 12 months

   $ 567,851   

Net income attributable to Quintiles Transnational Holdings Inc. in the past twelve months

     177,546   
  

 

 

 

Dividends paid in excess of earnings

   $ 390,305   
  

 

 

 

         Offering price per common share

   $     
  

 

 

 

Common shares assumed issued in this offering necessary to pay dividends in excess of earnings

  
  

 

 

 

As Adjusted Pro Forma Earnings Per Share

In addition to the effect of the pro forma earnings per share for dividends noted above, as adjusted pro forma earnings per share gives effect to the number of common shares whose proceeds will be used to repay $         million of outstanding indebtedness.

The following presents the computation of as adjusted pro forma basic and diluted earnings per share:

 

Numerator:    Year Ended
December 31,
2012
 
     (in thousands,
except per share
data)
 

Net income attributable to Quintiles Transnational Holdings Inc.

   $ 177,546   

Interest expense, net of tax(b)

  

Amortization of debt issuance costs and discount, net of tax(b)

  
  

 

 

 

As adjusted pro forma net income

   $     
  

 

 

 

 

46


Table of Contents

Denominator:

  

Common shares used in computing pro forma basic earnings per share

  

Adjustment for common shares used to repay outstanding indebtedness(c)

  
  

 

 

 

Basic as adjusted pro forma weighted average common shares outstanding

  
  

 

 

 

Basic as adjusted pro forma earnings per share

   $     
  

 

 

 

Basic as adjusted pro forma weighted average common shares outstanding

  

Diluted effect of securities

  
  

 

 

 

Diluted as adjusted pro forma weighted average common shares outstanding

  
  

 

 

 

Diluted as adjusted pro forma earnings per share

   $     
  

 

 

 

 

  (b) These adjustments reflect the elimination of historical interest expense and amortization of debt issuance costs and discount (net of tax at an effective rate of 38.5%) after reflecting the pro forma reduction of our $300 million term loan facility executed in February 2012, and an additional $             million of term loans under our senior secured credit facilities with the proceeds from this offering as follows:

 

     Dates
Outstanding
     Interest
Expense
     Amortization
of Debt Issue
Costs and
Discount
     Tax Effect      Total  
     (in thousands)  

February 2012 Term Loan ($300 million, 7.5% rate of interest)

    
 
2/26/12 to
12/31/12
  
  
   $                        $                        $                        $                    

Term Loans ($             million, 4.5%-5% rate of interest)

    
 
1/1/12 to
12/31/12
  
  
           
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

      $         $         $         $     
     

 

 

    

 

 

    

 

 

    

 

 

 

 

(c)    Indebtedness to be repaid with proceeds from this offering

   $                    
  

 

 

 

Offering price per common share

   $     
  

 

 

 

Common shares assumed issued in this offering to repay indebtedness

  
  

 

 

 

(7)    We report our financial results in accordance with GAAP. To supplement this information, we also use the following non-GAAP financial measures in this prospectus: adjusted service revenues, EBITDA, adjusted EBITDA and adjusted net income (including diluted adjusted net income per share). Adjusted service revenues exclude service revenues from our former Capital Solutions segment, which we wound down after the deconsolidation of PharmaBio in November 2010. EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA and adjusted net income (including diluted adjusted net income per share) represent non-GAAP EBITDA and GAAP net income (and diluted GAAP net income per share), respectively, further adjusted to exclude certain expenses that we do not view as part of our core operating results, including management fees, restructuring costs, transaction expenses, bonuses paid to certain holders of stock options, impairment charges, and gains or losses from sales of businesses, business assets or extinguishing debt. Adjusted EBITDA and adjusted net income (including diluted adjusted net income per share) also exclude

 

47


Table of Contents

the results of our historical Capital Solutions segment, except for certain costs that we retained on a go-forward basis. Management believes that these non-GAAP measures provide useful supplemental information to management and investors regarding the underlying performance of our business operations and facilitate comparisons of our results subsequent to the deconsolidation of PharmaBio in November 2010 with our results prior to the deconsolidation of PharmaBio. Management also believes that these measures are more indicative of our core operating results as they exclude certain items whose fluctuations from period-to-period do not necessarily correspond to changes in the core operations of the business. These non-GAAP measures are performance measures only and are not measures of our cash flows or liquidity. Adjusted service revenues, EBITDA, adjusted EBITDA and adjusted net income (including diluted adjusted net income per share) are non-GAAP financial measures that are not in accordance with, or an alternative for, measures of financial performance prepared in accordance with GAAP and may be different from similarly titled non-GAAP measures used by other companies. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. Investors and potential investors are encouraged to review the following reconciliations of adjusted service revenues, EBITDA, adjusted EBITDA and adjusted net income (including diluted adjusted net income per share) to our closest reported GAAP measures:

 

48


Table of Contents
    Year Ended December 31,  
    2012     2011     2010     2009     2008  
    (in thousands, except per share data)  

Adjusted Service Revenues, EBITDA and Non-GAAP Adjusted EBITDA:

         

Non-GAAP Adjusted Service Revenues:

         

GAAP service revenues as reported

  $ 3,692,298      $ 3,294,966      $ 3,060,950      $ 3,010,793      $ 2,875,595   

Deconsolidation of PharmaBio (c)

                  (64,198     (87,002     (93,651
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted service revenues

  $ 3,692,298      $ 3,294,966      $ 2,996,752      $ 2,923,791      $ 2,781,944   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Adjusted EBITDA:

GAAP net income as reported

  $ 176,631      $ 240,327      $ 165,255      $ 209,578      $ 35,295   

Interest expense, net

    131,304        105,126        137,631        106,037        135,432   

Income tax expense

    93,364        15,105        77,582        88,253        124,854   

Depreciation and amortization

    98,288        92,004        84,217        78,379        77,322   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP EBITDA

    499,587        452,562        464,685        482,247        372,903   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restructuring costs

    18,741        22,116        22,928        (141     2,369   

Transaction expenses

                                37,500   

Impairment charges

           12,295        2,844        15,453        26,876   

Incremental share-based compensation expense (a)

    13,637        2,553               7,086          

Bonus paid to certain holders of stock options

    11,308        10,992               9,962          

Management fees (b)

    5,309        5,213        5,159        5,068        4,913   

Loss on extinguishment of debt

    1,275        46,377                        

Other (income) expense, net

    (3,572     9,073        15,647        9,622        (14,792

Gain on sale of business assets

                                (17,472

Equity in losses (earnings) from unconsolidated affiliates

    (2,567     (70,757     (1,110     2,729        (8,054

Gain from sale of discontinued operation

                                (3,833

Deconsolidation of PharmaBio (c)

                  (47,393     (68,141     (77,287
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP adjusted EBITDA

  $ 543,718      $ 490,424      $ 462,760      $ 463,885      $ 323,123   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Adjusted Net Income:

         

GAAP net income as reported

  $ 176,631      $ 240,327      $ 165,255      $ 209,578      $ 35,295   

Net (income) loss attributable to Noncontrolling interests

    915        1,445        (4,659     485        (154

Restructuring costs

    18,741        22,116        22,928        (141     2,369   

Transaction expenses

                                37,500   

Impairment charges

           12,295        2,844        15,453        26,876   

Incremental share-based compensation expense (a)

    13,637        2,553               7,086          

Bonus paid to certain holders of stock options

    11,308        10,992               9,962          

Management fees (b)

    5,309        5,213        5,159        5,068        4,913   

Loss on extinguishment of debt

    1,275        46,377                        

Interest rate swap termination fee

           11,630                        

Gain on sale of business assets

           (74,880                   (17,472

Gain from sale of discontinued operation (net of tax)

                                (2,285

Deconsolidation of PharmaBio (c)

                  (28,979     (31,020     (21,918

Tax effect of non-GAAP adjustments (d)

    (18,885     (21,063     (752     (2,467     9,714   

Other income tax adjustments (d)

           (66,000                   (4,600
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP adjusted net income

  $ 208,931      $ 191,005      $ 161,796      $ 214,004      $ 70,238   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average common shares outstanding

    117,796        117,936        118,000        117,509        116,274   

Diluted non-GAAP adjusted net income per share

  $ 1.77      $ 1.62      $ 1.37      $ 1.82      $ 0.60   

 

49


Table of Contents

 

(a)    Incremental expense incurred for repricings of share-based awards. The amount represents only the incremental amount of share-based compensation expense incurred in the quarter that the repricing occurred.

(b)    Management fees are paid to affiliates of certain of our major investors, including the Sponsors and an entity affiliated with Dr. Gillings, and will terminate upon completion of this offering. These fees are discussed more fully in Note 14 to our audited consolidated financial statements included elsewhere in this prospectus.

(c)    Prior to January 1, 2011, our operations included a third segment, Capital Solutions. This segment consisted primarily of the activities of our former subsidiary PharmaBio. PharmaBio was responsible for facilitating non-traditional customer alliances, including our 2002 agreement with Lilly to support Lilly in its commercialization efforts for Cymbalta® in the United States. In December 2009, we spun off PharmaBio to our shareholders.

In November 2010, we deconsolidated PharmaBio. Effective January 1, 2011, we changed the composition of our reportable segments. Integrated Healthcare Services now includes, beginning on January 1, 2011, our commercial rights and royalties revenues. For periods prior to January 1, 2011, however, all commercial rights and royalties revenues, including the activities of PharmaBio that we were required to consolidate in our operations until November 2010, remain presented in Capital Solutions for historical presentation purposes. Because of our change in segments, effective as of January 1, 2011, certain expenses, primarily compensation-related expenses, that previously were included in Capital Solutions are presented in Product Development and Integrated Healthcare Services, as these expenses are now borne by these respective groups. For periods prior to January 1, 2011, however, these expenses continue to be presented in Capital Solutions as they represent expenses of this segment during these periods.

In order to facilitate comparisons of our results following the changes in our reportable segments that were effective on January 1, 2011, our adjusted service revenues, adjusted EBITDA and adjusted net income (including diluted adjusted net income per share) for periods prior to January 1, 2011 exclude the results of our historical Capital Solutions segment, net of the expenses discussed above that were previously included in Capital Solutions prior to that date but, beginning on January 1, 2011, are presented in Product Development and Integrated Healthcare Services. Retained service revenues were intersegment revenues reported within our Product Development and Integrated Healthcare Services segments related to services provided to our Capital Solutions segment and were eliminated in consolidation. If PharmaBio had been spun off as of the beginning of the earliest period presented, it would have been an unconsolidated third-party during these periods; therefore these service revenues would have been retained and reflected within our consolidated service revenues. The following table presents a reconciliation of the PharmaBio deconsolidation adjustments included in the table above to service revenues and income from operations, our segment performance measures, for Capital Solutions for each period presented.

 

50


Table of Contents
     Year Ended December 31,  
     2010     2009     2008  
     (in thousands)  

Capital Solutions service revenues, as reported

   $ 116,406      $ 169,898      $ 191,395   

Retained service revenues

     (52,208     (82,896     (97,744
  

 

 

   

 

 

   

 

 

 

Deconsolidation of PharmaBio — non-GAAP adjusted service revenues

   $ 64,198      $ 87,002      $ 93,651   
  

 

 

   

 

 

   

 

 

 

Capital Solutions income from operations, as reported

   $ 30,522      $ 55,259      $ 60,236   

Retained costs

     16,782        12,642        16,266   

Interest expense, net

     (20,596     (38,308     (53,810

Other income (loss)

     2,271        1,427        (774
  

 

 

   

 

 

   

 

 

 

Deconsolidation of PharmaBio — non-GAAP adjusted net income

     28,979        31,020        21,918   
  

 

 

   

 

 

   

 

 

 

Depreciation and amortization

     89        240        785   

Interest expense, net

     20,596        38,308        53,810   

Other (income) loss

     (2,271     (1,427     774   
  

 

 

   

 

 

   

 

 

 

Deconsolidation of PharmaBio — non-GAAP adjusted EBITDA

   $     47,393      $     68,141      $     77,287   
  

 

 

   

 

 

   

 

 

 

For more information regarding the presentation of our segments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segments” and Note 23 to our audited consolidated financial statements included elsewhere in this prospectus.

(d)    Deductible non-GAAP adjustments were tax effected at their effective rate of 38.5%, with the exception of gains on sale of businesses, which were tax effected at the effective rates for those transactions of 29.0% and 82.6% in 2011 and 2008, respectively. Other income tax adjustments are set forth in the table below, in thousands:

 

     Year Ended December 31,  
     2011     2008  

Release of significant FIN 48 reserves

   $ (17,300   $ (4,600

Impact of amending prior year United States income tax returns to claim foreign tax credits rather than foreign tax deductions on foreign source income

     (48,700       
  

 

 

   

 

 

 

Total

   $ (66,000   $ (4,600
  

 

 

   

 

 

 

(8)    Net new business is the value of services awarded during the period from projects under signed contracts, letters of intent and, in some cases, pre-contract commitments that are supported by written communications, adjusted for contracts that were modified or canceled during the period. Consistent with our methodology for calculating net new business during a particular period, backlog represents, at a particular point in time, future service revenues from work not yet completed or performed under signed contracts, letters of intent and, in some cases, pre-contract commitments that are supported by written communications.

(9)    Includes $22.9 million, $18.3 million, $8.3 million and $10.4 million of unamortized discounts as of December 31, 2012, 2011, 2010 and 2009, respectively.

 

51


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are the world’s largest provider of biopharmaceutical development services and commercial outsourcing services. We are positioned at the intersection of business services and healthcare and generated $3.7 billion of service revenues in 2012, conduct business in approximately 100 countries and have more than 27,000 employees. We use the breadth and depth of our service offerings, our global footprint and our therapeutic, scientific and analytics expertise to help our biopharmaceutical customers, as well as other healthcare customers, navigate the increasingly complex healthcare environment to improve efficiency and to deliver better healthcare outcomes.

Our business is currently organized in two reportable segments, Product Development and Integrated Healthcare Services.

Product Development

Product Development provides services and expertise that allow biopharmaceutical companies to outsource the clinical development process from first in man trials to post-launch monitoring. Our comprehensive service offering provides the support and functional expertise necessary at each stage of development, as well as the systems and analytical capabilities to help our customers improve product development efficiency and effectiveness.

Product Development is comprised of clinical solutions and services and consulting. Clinical solutions and services provides services necessary to develop biopharmaceutical products, including project management and clinical monitoring functions for conducting multi-site trials (generally Phase II-IV) (collectively “core clinical”) and clinical trial support services that improve clinical trial decision making and include global laboratories, data management, biostatistical, safety and pharmacovigilance, and early clinical development trials, and strategic planning and design services that improve decisions and performance. Consulting provides strategy and management consulting services based on life science expertise and advanced analytics, as well as regulatory and compliance consulting services.

Integrated Healthcare Services

Integrated Healthcare Services provides the healthcare industry with both broad geographic presence and commercial capabilities. Our customized commercialization services are designed to accelerate the commercial success of biopharmaceutical and other health-related products. Integrated Healthcare Services provides a broad array of services including commercial services, such as providing contract pharmaceutical sales forces in key geographic markets, as well as a growing number of healthcare business services for the broader healthcare sector. Service offerings include commercial services (sales representatives, strategy, marketing communications and other areas related to commercialization), outcome research (drug therapy analysis, real-world research and evidence-based medicine, including research studies to prove a drug’s value) and payer and provider services (comparative and cost-effectiveness research capabilities, clinical management analytics, decision support services, medication adherence and health outcome optimization services, and web-based systems for measuring quality improvement).

 

52


Table of Contents

Capital Solutions (Historical)

Prior to January 1, 2011, our operations included a third segment, Capital Solutions. This segment consisted primarily of the activities of our former subsidiary PharmaBio. PharmaBio was responsible for facilitating non-traditional customer alliances, including our 2002 agreement with Lilly to support Lilly in its commercialization efforts for Cymbalta® in the United States. Under this agreement, we made marketing and milestone payments to Lilly and agreed to provide sales representatives to promote Cymbalta® during the first five years following its launch in August 2004. In exchange for these payments and services, Lilly agreed to pay us royalties on sales of Cymbalta® for certain indications in the United States for eight years following launch. PharmaBio monetized certain of its Cymbalta® rights to a third party in exchange for upfront cash payments.

In December 2009, we spun off PharmaBio to our shareholders. Because we determined that PharmaBio was a variable interest entity for which we were the primary beneficiary, we continued to consolidate PharmaBio in our results of operations, financial position and cash flows following the spin-off. In November 2010, we completed certain actions related to our relationships and arrangements with PharmaBio, including terminating our agreement to provide management and other administrative services to PharmaBio and terminating certain guarantees and indemnities with respect to certain obligations spun off with PharmaBio. As a result, we determined that we no longer controlled PharmaBio. As such, effective in November 2010, we no longer consolidate PharmaBio in our results of operations, financial position and cash flows.

As a result of these changes in our business, effective January 1, 2011, we changed the composition of our reportable segments. Certain expenses, primarily compensation-related, that previously were included in Capital Solutions have been presented in Product Development and Integrated Healthcare Services, as these expenses are now borne by these respective segments because we retained these expenses following the spin-off and subsequent deconsolidation of PharmaBio. For periods prior to January 1, 2011, however, these expenses continue to be presented in Capital Solutions as they represent expenses related to the operation of this segment during these periods.

Industry Outlook

The potential of the CRO market served by Product Development is primarily a function of two variables: biopharmaceutical R&D spend and the proportion of this spend that is outsourced (outsourcing penetration). Despite continued softness in the economy and concern about global credit markets, we expect outsourced clinical development to CROs to grow 5%-8% annually from 2012 to 2015. Of this annual growth, we believe that up to 2% will be derived from increased R&D expenditures, with the remainder coming from increased outsourcing penetration. We estimate that overall outsourcing penetration in 2011 was 33%. We believe that our customers will continue to outsource a greater part of their activities to transform their value chain away from a vertically integrated model and focus on their core competencies to lower risk and improve return, with a focus on selecting outsourcing partners that are able to demonstrate the ability to provide flexible and efficient delivery models that leverage patient data to help biopharmaceutical companies deliver more effective patient outcomes. We believe that increased demand will create new opportunities for biopharmaceutical services companies, particularly those with a global reach.

Integrated Healthcare Services historically has focused on biopharmaceutical companies seeking to commercialize their products. The total market served by Integrated Healthcare Services is diverse, which makes it difficult to estimate the current amount of outsourced integrated healthcare services and the expected growth in such services. However, based on our knowledge of these markets we believe that, while the rate of outsourcing penetration varies by market within Integrated Healthcare Services, the overall outsourcing penetration of the estimated $88 billion addressable market is not more than 15%. We believe that the market for payer and provider and outcome services will evolve and expand, and as a result, there will be opportunities to grow our

 

53


Table of Contents

revenues and expand our service offerings, including to payers who are looking to improve the cost-effectiveness of drug therapies and providers who are looking to make evidence-based decisions regarding treatment decisions. As business models continue to evolve in the healthcare sector, we believe that the growth rate for outsourcing across the Integrated Healthcare Services markets will be similar to the growth in clinical development.

Acquisitions

We completed a number of acquisitions in 2011 and 2012 to enhance our capabilities and offerings in certain areas. These include our acquisitions of Outcome Sciences, Inc., or Outcome, which we acquired to strengthen our late phase research offerings; VCG&A, Inc. and its wholly owned subsidiary, VCG BIO, Inc., or collectively VCG, which we acquired to strengthen our commercial services; Advion BioServices, Inc., or Advion, which we acquired to enhance our biomarker and other advanced testing capabilities; and Expression Analysis, Inc., or Expression Analysis, which we acquired to enhance our genetic sequencing and advanced bioinformatics expertise. See Note 15 to our audited consolidated financial statements found elsewhere in this prospectus for additional information with respect to these acquisitions. The results of operations of acquired businesses have been included since the date of acquisition and were not significant to our consolidated results of operations.

Sources of Revenue

Total revenues are comprised of service revenues and revenues from reimbursed expenses. Service revenues include the revenue we earn from providing product development and commercialization services to our customers, sales of products and from commercial rights and royalties. Product sales, which are less than 1% of consolidated service revenues for all periods presented, represent sales of pharmaceutical products pursuant to distribution agreements. Commercial rights and royalties revenues primarily include royalties and commissions that we receive on our customers’ product sales in exchange for providing product development or commercial services and primarily related to PharmaBio, which was deconsolidated in November 2010. Reimbursed expenses are comprised principally of payments to physicians (investigators) who oversee clinical trials and travel expenses for our clinical monitors and sales representatives. Reimbursed expenses may fluctuate from period-to-period due, in part, to where we are in the lifecycle of the many contracts that are in progress at a particular point in time. For instance, these pass-through costs tend to be higher during the early phases of clinical trials as a result of patient recruitment efforts. As reimbursed expenses are pass-through costs to our customers with little to no profit and we believe that the fluctuations from period to period are not meaningful to our underlying performance, we do not provide analysis of the fluctuations in these items or their impact on our financial results.

Costs and Expenses

Our costs and expenses are comprised primarily of our costs of revenues and selling, general and administrative expenses.

Our costs of revenues consist of service costs and reimbursed expenses. Service costs include compensation and benefits for billable employees, depreciation of assets used in generating revenue and other expenses directly related to service contracts such as courier fees, laboratory supplies, professional services, travel expenses and the cost of products sold under distribution agreements. As noted above, reimbursed expenses are comprised principally of payments to physicians (investigators) who oversee clinical trials and travel expenses for our clinical monitors and sales representatives.

Selling, general and administrative expenses include costs related to administrative functions including compensation and benefits, travel, professional services, training and expenses for advertising, IT, facilities and depreciation and amortization.

 

54


Table of Contents

Foreign Currency Fluctuations

The impact from foreign currency fluctuations and constant currency information assumes constant foreign currency exchange rates based on the rates in effect for the comparable prior-year period were used in translation. We believe that providing the impact of fluctuations in foreign currency rates on certain financial results can facilitate analysis of period-to-period comparisons of business performance.

Results of Operations

Year ended December 31, 2012 compared to the year ended December 31, 2011 and the year ended December 31, 2011 compared to the year ended December 31, 2010

Backlog

We began the year in a strong position as backlog in place at the beginning of 2012 of $8.0 billion was 12% higher as compared to the beginning of 2011. Product Development’s net new business increased 14% to $3.5 billion in 2012 as compared to $3.0 billion in 2011, led by increases in core clinical in Europe and North America and increases in our late phase, consulting and global laboratory service offerings. These increases were partially offset by lower net new business in the Asia-Pacific and Latin America and from our early clinical development service offerings. Integrated Healthcare Services’ net new business was $1.0 billion in 2012 and 2011.

While we entered 2013 with a total backlog of $8.7 billion, which is nearly 9% higher than when we entered 2012, we believe the conversion of this backlog into revenue during 2013 will more likely than not be at a lower rate than we experienced during 2012. Therefore our ability to continue to grow revenues in the near term at rates comparable to our recent historical results will depend on many factors including but not limited to successful and timely delivery on contracts in backlog, contract cancellation rates and continued growth in net new business that will generate revenue in 2013. These factors can be influenced to some degree by aspects not within our control such as economic conditions and trends in the industry in which we do business.

Revenues

 

           Change  
    Year Ended December 31,      2012 vs. 2011     2011 vs. 2010  
    2012      2011      2010      $      %     $      %  
    (dollars in thousands)  

Service revenues

  $ 3,692,298       $ 3,294,966       $ 3,060,950       $ 397,332         12.1   $ 234,016         7.6

Reimbursed expenses

    1,173,215         1,032,782         863,070         140,433         13.6        169,712         19.7   
 

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

Total revenues

  $ 4,865,513       $ 4,327,748       $ 3,924,020       $ 537,765         12.4   $ 403,728         10.3
 

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

Overall, our service revenues increased $397.3 million, or 12.1%, in 2012 as compared to 2011. This increase is comprised of constant currency revenue growth of approximately $374.4 million, or 11.4%, and $84.6 million, or 2.6%, from businesses acquired in the fourth quarter of 2011 and the third quarter of 2012, partially offset by a negative impact of approximately $61.7 million from the effects of foreign currency fluctuations. The constant currency revenue growth was related to both of our segments, with Product Development contributing $293.8 million and Integrated Healthcare Services contributing $80.6 million. The increase in revenue was primarily related to delivery on greater backlog coverage in place as we entered the year and the growth in net new business in Product Development during 2012. The positive impact our expanding backlog had on the revenue increase was tempered by a competitive pricing environment. Product Development revenue has continued to be impacted by lower revenue from early clinical development services as a result of overcapacity in the marketplace.

 

55


Table of Contents

Overall, our service revenues increased $234.0 million, or 7.6%, in 2011 as compared to 2010. This increase is comprised of constant currency revenue growth of approximately $258.2 million, or 8.4%, a positive impact of approximately $80.8 million from the effects of foreign currency fluctuations, $11.5 million from businesses acquired in the fourth quarter of 2011 and a negative impact of $116.4 million from the deconsolidation of PharmaBio during the fourth quarter of 2010. The constant currency revenue growth was related to growth in both of our current segments, with Product Development contributing $189.9 million (excluding both the impact of foreign currency fluctuations and loss of intersegment revenues upon the deconsolidation of PharmaBio) and Integrated Healthcare Services contributing $68.3 million (excluding both the impact of foreign currency fluctuations and the loss of intersegment revenues upon the deconsolidation of PharmaBio). This increase in revenue in both segments was primarily related to delivery on greater backlog coverage in place as we entered 2011, as well as the growth in net new business in 2011. The positive impact on revenue from our expanding backlog was tempered by a competitive pricing environment. We also experienced lower revenue from early clinical development services as a result of overcapacity in the marketplace.

Costs of Revenues

 

          Change  
    Year Ended December 31,     2012 vs. 2011     2011 vs. 2010  
    2012     2011     2010     $      %     $     %  
    (dollars in thousands)  

Service costs

  $ 2,459,367      $ 2,153,005      $ 1,941,767      $ 306,362         14.2   $ 211,238        10.9

Reimbursed expenses

    1,173,215        1,032,782        863,070        140,433         13.6        169,712        19.7   
 

 

 

   

 

 

   

 

 

   

 

 

      

 

 

   

Total costs of revenues

  $ 3,632,582      $ 3,185,787      $ 2,804,837      $ 446,795         14.0   $ 380,950        13.6
 

 

 

   

 

 

   

 

 

   

 

 

      

 

 

   

Service costs as a % of service revenues

    66.6     65.3     63.4         

When compared to 2011, service costs in 2012 increased $306.4 million. The increase included a constant currency increase in expenses of approximately $316.0 million and approximately $59.2 million from businesses acquired in the fourth quarter of 2011 and the third quarter of 2012, which was partially offset by a positive impact of approximately $68.8 million from the effects of foreign currency fluctuations. The constant currency service costs growth was due to an increase in compensation and related expenses and other expenses directly related to our service contracts. The increase in compensation and related expenses was primarily as a result of a growth-related increase in billable headcount, normal annual merit increases and an increase in incentive compensation. Also contributing to the increase in costs of service revenues was a $16.7 million reduction in the benefit from R&D grants received from France and Austria, an increase in third party costs, primarily related to a new agreement to distribute pharmaceutical products in Italy, and various other individually insignificant factors.

When compared to 2010, service costs in 2011 increased $211.2 million. This increase included a constant currency increase in expenses of approximately $139.9 million and approximately $71.3 million from the effect of foreign currency fluctuations. The constant currency increase was due to an increase in compensation and related expenses, primarily as a result of increased headcount related to higher resource requirements in 2011 to meet demand and to deliver on several large, complex projects, as well as normal annual merit increases in compensation, and various other individually insignificant factors. These increases were partially offset by R&D grants received from France and Austria, which were higher by approximately $22.3 million and reduced compensation expense, and by lower commercial rights and royalties related costs of approximately $30.4 million due to the deconsolidation of PharmaBio in November 2010.

 

56


Table of Contents

Selling, General and Administrative Expenses

 

     Year Ended December 31,  
     2012     2011     2010  
     (dollars in thousands)   

Selling, general and administrative expenses

   $ 817,755      $ 762,299      $ 698,406   

% of service revenues

     22.1     23.1     22.8

The $55.5 million increase in selling, general and administrative expenses in 2012 was caused by (1) incremental costs of approximately $30.4 million resulting from the business combinations completed during the fourth quarter of 2011 and the third quarter of 2012, of which approximately $8.7 million related to amortization of intangible assets acquired, (2) higher spend on business development and IT costs (including higher depreciation and amortization expense related to an increase in assets in service) and (3) an increase in share-based compensation expense, which includes the impact from the repricing of certain stock options in connection with dividends paid to our shareholders. The remaining increase was primarily the result of increases in compensation and related expenses including the impact of merit increases, an increase in headcount and higher incentive compensation. These increases were partially offset by a positive foreign currency impact of approximately $17.9 million and a reduction in facility costs due to a consolidation of offices in Europe (including lower depreciation and amortization expense due to fewer assets in service).

The increase in selling, general and administrative expenses in 2011 was caused by a foreign currency impact of $17.9 million, higher spending in business development related to higher headcount and investments in emerging markets, as well as higher facility costs primarily related to the opening of a new regional headquarters in the United Kingdom, higher depreciation and amortization related to an increase in depreciable assets in service, and expenses related to our refinancing in 2011, which consisted primarily of a bonus paid to certain holders of stock options. These increases were partially offset by a decline in marketing costs primarily due to a rebranding effort that caused higher expense in 2010, savings in 2011 from restructuring activity and lower share-based compensation expense.

Restructuring Costs

 

     Year Ended December 31,  
     2012      2011      2010  
     (in thousands)   

Restructuring costs

   $     18,741       $     22,116       $     22,928   

We recognized $18.7 million of restructuring charges, net of reversals for changes in estimates, during 2012, which was primarily related to our May 2012 restructuring plan to reduce staffing overcapacity and to rationalize non-billable support roles. This restructuring action will result in the elimination of approximately 280 positions, primarily in Europe. We believe that this plan will result in annual cost savings of approximately $15 to $25 million.

We recognized $22.1 million of restructuring charges, net of immaterial reversals for changes in estimates, during 2011, primarily related to our July 2011 restructuring plan to reduce staffing overcapacity and to rationalize non-billable support roles. As part of our July 2011 plan, approximately 290 positions were eliminated, primarily in North America and Europe.

In 2010, we implemented restructuring activities under a May 2010 plan to better align resources with our backlog and strategic direction. A follow on to this plan was approved in December 2010. We recognized

 

57


Table of Contents

approximately $22.9 million of restructuring charges in 2010, net of reversals and changes in estimate, related to these activities.

Impairment Charges

 

     Year Ended December 31,  
     2012      2011      2010  
     (in thousands)   

Impairment charges

   $              —       $       12,295       $         2,844   

During 2011, we recognized a $12.2 million impairment on long-lived assets used in our early clinical development services due to a decline in revenue as well as overcapacity in the market for early clinical development services. Refer to the related disclosure in our audited consolidated financial statements for the year ended December 31, 2012, included elsewhere in this prospectus, for more information on this impairment. We recognized impairment charges during 2010 primarily related to equity investments owned by our previously consolidated entity, PharmaBio.

Interest Income and Interest Expense

 

     Year Ended December 31,  
     2012     2011     2010  
     (in thousands)   

Interest income

   $ (3,067   $ (3,939   $ (3,799

Interest expense

         134,371            109,065            141,430   

Interest income includes interest received from bank balances and investments in debt securities.

Interest expense, which primarily represents interest expense incurred on credit arrangements including term loans and other notes and capital leases, increased in 2012 as compared to 2011 primarily as a result of the $300.0 million Holdings Term Loan, which Quintiles Holdings obtained in February 2012, and the $175.0 million Term Loan B-1, which Quintiles Transnational obtained under its credit agreement in October 2012. Interest expense decreased in 2011 as compared to 2010 primarily as a result of lower average interest rates incurred, which were partially offset by an increase in the average outstanding debt balance. See “—Liquidity and Capital Resources” for more information on our debt transactions.

Loss on Extinguishment of Debt

 

     Year Ended December 31,  
     2012      2011      2010  
     (in thousands)   

Loss on extinguishment of debt

   $         1,275       $       46,377       $              —   

During 2012, we recognized a $1.3 million loss on extinguishment of debt on a portion of the debt retired related to our 2012 refinancing. The loss on extinguishment of debt included approximately $634,000 of unamortized debt issuance costs, $631,000 of unamortized discount and $10,000 of fees and expenses.

During 2011, we recognized a $46.4 million loss on extinguishment of debt on a portion of the debt retired related to our 2011 refinancing and related transactions. The loss on extinguishment of debt included approximately $14.1 million of prepayment premiums, $15.2 million of unamortized debt issuance costs, $7.5 million of unamortized discount and $9.6 million of fees and expenses.

See “—Liquidity and Capital Resources” for more information on these transactions.

 

58


Table of Contents

Other (Income) Expense, Net

 

     Year Ended December 31,  
         2012             2011              2010      
     (in thousands)   

Other (income) expense, net

   $ (3,572   $ 9,073       $ 15,647   

Included in other (income) expense, net were approximately $1.1 million of foreign currency net losses in 2012. In addition, 2012 included income of approximately $4.6 million due to changes in estimates related to the estimated earn-out payments, net of accretion expense, for two of our 2011 acquisitions.

Included in other expense for 2011 were approximately $1.9 million of foreign currency net gains compared to $17.9 million of foreign currency net losses in 2010. Also included in 2011 was $11.6 million of expense associated with the termination of interest rate swaps in connection with the refinancing that occurred in June 2011 as we deemed it to be unlikely that the previously forecasted transactions would occur.

In addition, other (income) expense, net includes investment gains and losses. Investment (losses) gains of $(61,000), $(16,000) and $2.3 million are included in 2012, 2011 and 2010, respectively. The gain in 2010 was positively impacted by a $2.0 million reversal of the reserve on the note with Discovery Laboratories, Inc., as the note was fully repaid during 2010.

Income Tax Expense

 

     Year Ended December 31,  
         2012             2011             2010      
     (dollars in thousands)   

Income tax expense

   $ 93,364      $ 15,105      $ 77,582   

Effective income tax rate

     34.9     8.2     32.1

Our effective income tax rate was 8.2% for 2011 compared to 34.9% in 2012 and 32.1% for 2010. The favorable rate in 2011 was primarily due to an approximately $48.7 million benefit from the recognition of foreign tax credits related to prior years due to an increase in projected foreign source income as a result of improved operational results and the favorable impact of the 2011 refinancing transaction on future results. The rate was also favorably impacted due to a $16.4 million benefit for the release of foreign uncertain tax positions due to the expiration of the statute of limitations. The rate in 2011 was unfavorably impacted by $21.7 million of income tax expense related to the gain on the sale of our investment in Invida Pharmaceutical Holdings Pte. Ltd., or Invida. For financial reporting purposes, the gain on the sale is included in equity in earnings from unconsolidated affiliates; however, our income tax on the gain is included in income tax expense. Our effective income tax rate for all periods was negatively impacted by income taxes provided on most of the earnings of our foreign subsidiaries. The earnings of our foreign subsidiaries will be subject to taxation in the United States for income tax purposes when repatriated. However, for financial reporting purposes, income taxes were provided on the earnings of the majority of our foreign subsidiaries as though they have currently been repatriated, as those earnings were deemed to be not indefinitely reinvested outside the United States. Accordingly, we have recorded a deferred income tax liability associated with these foreign earnings.

Equity in Earnings of Unconsolidated Affiliates

 

    Year Ended December 31,  
        2012             2011             2010      
    (in thousands)   

Equity in earnings of unconsolidated affiliates

  $ 2,567      $ 70,757      $ 1,110   

 

59


Table of Contents

During 2011, we sold our investment in Invida for approximately $103.6 million of net proceeds resulting in a gain of approximately $74.9 million.

Net Loss (Income) Attributable to Noncontrolling Interests

 

     Year Ended December 31,  
     2012      2011      2010  
     (in thousands)   

Net loss (income) attributable to noncontrolling interests

   $ 915       $ 1,445       $ (4,659

Included in 2010 net loss (income) attributable to noncontrolling interests is $5.3 million of net income attributable to our previously consolidated entity, PharmaBio, which was deconsolidated in November 2010.

Segments

Service revenues and income from operations by segment are as follows (dollars in millions):

 

     Service Revenues     Income from Operations     Operating Profit Margin  
     2012      2011      2010     2012     2011     2010     2012     2011     2010  

Product Development

   $ 2,728.7       $ 2,437.8       $ 2,221.9      $ 477.9      $ 424.7      $ 434.8        17.5     17.4     19.6

Integrated Healthcare Services

     963.6         857.2         774.8        60.5        58.2        41.6        6.3        6.8        5.4   

Capital Solutions

                     116.4                      30.5                      26.2   

Eliminations

                     (52.2                          n.m.        n.m.        n.m.   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

       

Total segment

     3,692.3         3,295.0         3,060.9        538.4        482.9        506.9        14.6     14.7     16.6

General corporate and unallocated expenses

             (123.3     (103.2     (86.2      

Restructuring costs

             (18.7     (22.1     (22.9      

Impairment charges

                    (12.3     (2.8      
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

       

Consolidated

   $   3,692.3       $   3,295.0       $   3,060.9      $ 396.4      $ 345.3      $   395.0         
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

       

Certain costs are not allocated to our segments and are reported as general corporate and unallocated expenses. These costs primarily consist of share-based compensation and expenses for corporate office functions such as senior leadership, finance, human resources, IT, facilities and legal.

Product Development

 

    

 

   

 

   

 

    Change  
     2012     2011     2010     2012 vs. 2011     2011 vs. 2010  
     (dollars in millions)  

Service revenues

   $     2,728.7      $     2,437.8      $     2,221.9      $     290.9        11.9   $     215.9        9.7

Costs of service revenues

     1,683.3        1,463.9        1,275.0        219.4        15.0     188.9        14.8

as a percent of

service revenues

     61.7     60.1     57.4      

Selling, general and administrative expenses

     567.5        549.2        512.1        18.3        3.3     37.1        7.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment income from operations

   $ 477.9      $ 424.7      $ 434.8      $ 53.2        12.5   $ (10.1     (2.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

60


Table of Contents

Service Revenues

2012 compared to 2011

Product Development’s service revenues were $2.7 billion in 2012, an increase of $290.9 million, or 11.9%, over 2011. This increase is comprised of constant currency revenue growth of $293.8 million, or 12.1%, and $34.8 million from businesses acquired in the fourth quarter of 2011 and the third quarter of 2012, which were partially offset by a negative impact of approximately $37.7 million due to the effect of foreign currency fluctuations. The constant currency service revenues growth was primarily a result of a volume-related increase of $238.5 million in clinical solutions and services and $55.3 million from consulting services.

Our clinical solutions and services experienced growth in all regions including the Americas, Europe and the Asia-Pacific. This growth was due largely to growth in the overall market as well as a consistent history of year-over-year growth in net new business that resulted in delivery during 2012 on the higher backlog as we entered the year. Also impacting the growth was an increase in global laboratories test volumes and an increase in the delivery of clinical solutions and services provided on a functional basis, principally due to the expansion of services and geographic deployment of resources on existing projects, and from the ramp up of new projects. This growth was partially offset by lower revenues from early clinical development services and was also tempered by a competitive pricing environment. Service revenues from consulting services increased primarily as a result of approximately $47.3 million of new business related to assisting a customer on a regulatory compliance project that is expected to wind down during 2013. As a result, we anticipate consulting service revenues in 2013 will be lower than in 2012 as we do not currently expect growth from new business will fully offset the impact from the completion of this project.

2011 compared to 2010

Product Development’s service revenues were $2.4 billion in 2011, an increase of $215.9 million, or 9.7%, over 2010. This increase is comprised of constant currency revenue growth of $189.9 million, or 8.5%, a positive impact of approximately $38.9 million due to the effect of foreign currency fluctuations, and a negative impact of $12.9 million from the loss of intersegment revenues upon the deconsolidation of PharmaBio. The constant currency service revenues growth was primarily as a result of volume-related increase of $186.2 million from clinical solutions and services.

Our clinical solutions and services experienced growth in all regions including the Americas, Europe and the Asia-Pacific. This growth was due largely to growth in the overall market as well as a consistent history of year-over-year growth in net new business that resulted in delivery during 2011 on the higher backlog as we entered the year. Also impacting the growth was an increase in the delivery of these services provided on a functional basis, principally due to the expansion of services and geographic deployment of resources on existing projects and an increase in global laboratories test volumes, in part related to marketing of these services with our other clinical offerings. This growth was partially offset by lower revenues from early clinical development services and was also tempered by a competitive pricing environment.

Costs of Service Revenues

2012 compared to 2011

Product Development’s costs of service revenues were higher by approximately $219.4 million in 2012, which was comprised of $243.0 million of constant currency growth and $25.5 million from businesses acquired in the fourth quarter of 2011 and the third quarter of 2012, partially offset by a reduction of $49.1 million from the effect of foreign currency fluctuations. On a constant currency basis, the increase in costs of service revenues was primarily due to an increase in compensation and related expenses resulting from an increase in billable headcount needed to support our higher volume of revenue, normal annual merit increases, an increase in incentive

 

61


Table of Contents

compensation, a $16.7 million reduction in the benefit from R&D grants received from France and Austria and various other individually insignificant factors. As a percent of service revenues, Product Development’s costs of service revenues were 61.7% and 60.1% in 2012 and 2011, respectively, with the increase primarily related to (1) a competitive pricing environment, (2) the increase in headcount noted above to meet demand as well as to deliver on several large and complex projects, (3) the impact from the decrease in the benefit from R&D grants noted above, (4) investments in equipment and resources during 2012 that have enabled us to expand our global laboratories testing capabilities as well as our global reach for these services, and (5) overcapacity in the early clinical development services marketplace.

2011 compared to 2010

Product Development’s service costs were higher by approximately $188.9 million in 2011, which was comprised of constant currency growth of $149.9 million and $39.0 million from the effect of foreign currency fluctuations. On a constant currency basis, the increase in costs of service revenues was primarily due to compensation and related expenses that increased as a result of a volume-related increase in billable headcount, normal annual merit increases in compensation and various other individually insignificant factors, partially offset by R&D grants received from France and Austria, which were higher by approximately $22.3 million, which reduced compensation expense. As a percent of service revenues, Product Development’s costs of service revenues were 60.1% and 57.4% in 2011 and 2010, respectively, with the increase primarily related to (1) a competitive pricing environment, (2) the increase in headcount noted above to meet demand as well as to deliver on several large and complex projects and (3) overcapacity in the marketplace for early clinical development services. We have taken steps to reduce capacity and costs in this area, including the consolidation of our related facilities, to help mitigate the future impact of further contraction in this area.

Selling, General and Administrative Expenses

2012 compared to 2011

As a percent of service revenues, Product Development’s selling, general and administrative expenses were 20.8% and 22.5% in 2012 and 2011, respectively. Product Development’s selling, general and administrative expenses increased approximately $18.3 million in 2012 as compared to 2011. This increase was primarily caused by (1) incremental costs of approximately $10.5 million resulting from the business combinations completed during the fourth quarter of 2011 and the third quarter of 2012, of which approximately $2.0 million related to amortization of intangible assets acquired and (2) higher spend on business development and IT costs (including higher depreciation and amortization expense related to an increase in assets in service). The remaining increase was primarily the result of increases in compensation and related expenses including the impact of merit increases, an increase in headcount and higher incentive compensation. These increases were partially offset by (1) a positive foreign currency impact of approximately $13.9 million and (2) a reduction in facility costs due to a consolidation of offices in Europe (including lower depreciation and amortization expense due to fewer assets in service).

2011 compared to 2010

As a percent of service revenues, Product Development’s selling, general and administrative expenses were 22.5% and 23.0% in 2011 and 2010, respectively. Product Development’s selling, general and administrative expenses increased $37.1 million in 2011 as compared to 2010. This increase was primarily caused by a foreign currency impact of $13.5 million, higher spending on strategic initiatives in business development, growth-related increases in facilities costs, and an increase in depreciation and amortization related to an increase in depreciable assets in service. The remaining increase was primarily the result of increases in compensation and related expenses, including the impact of headcount and merit increases. These increases include approximately $14.8 million of costs that prior to 2011 were part of Capital Solutions. We retained these resources and associated costs and redirected their activities to support Product Development following the deconsolidation of PharmaBio and the wind down of the Capital Solutions segment in the fourth quarter of 2010. These increases

 

62


Table of Contents

were partially offset by a decline in marketing costs, primarily due to a rebranding effort that caused higher expense in 2010.

Integrated Healthcare Services

 

                       Change  
     2012     2011     2010     2012 vs. 2011     2011 vs. 2010  
     (dollars in millions)  

Service revenues

   $ 963.6      $ 857.2      $ 774.8      $ 106.4        12.4   $ 82.4        10.6

Costs of service revenues

     776.0        688.7        636.1        87.3        12.7     52.6        8.3

as a percent of

service revenues

     80.5     80.3     82.1        

Selling, general and
administrative expenses

     127.1        110.3        97.1        16.8        15.2     13.2        13.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment income from operations

   $ 60.5      $ 58.2      $ 41.6      $ 2.3        4.0   $ 16.6        39.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service Revenues

2012 compared to 2011

Integrated Healthcare Services’ service revenues were $963.6 million in 2012, an increase of $106.4 million, or 12.4%, over 2011. This is comprised of constant currency revenue growth of $80.6 million, or 9.4%, and $49.8 million from businesses acquired in the fourth quarter of 2011, which were partially offset by a negative impact of approximately $24.0 million due to the effect of foreign currency fluctuations. The constant currency service revenues growth was primarily in the Americas, Europe and Asia-Pacific regions. The increase in the Americas was primarily due to delivery on higher backlog in place as we entered the year. The increase in Europe was primarily due to revenue from a new agreement to distribute pharmaceutical products in Italy, partially offset by lower non-product related revenues. The modest revenue increase in the Asia-Pacific reflects the competitive market for these services in that region. Looking to 2013, our ability to grow Integrated Healthcare Services’ service revenues at the same rate as 2012 may be impacted by the termination of two commercial services projects and increased competitive pressures in certain markets, both of which we experienced in late 2012.

2011 compared to 2010

Integrated Healthcare Services’ service revenues were $857.2 million in 2011, an increase of $82.4 million, or 10.6%, over 2010. This increase is comprised of constant currency revenue growth of $68.3 million, or 8.8%, $11.5 million from businesses acquired in the fourth quarter of 2011, a positive impact of approximately $41.9 million due to the effect of foreign currency fluctuations, partially offset by $39.3 million from the loss of intersegment revenues upon the deconsolidation of PharmaBio. The constant currency revenue growth was primarily related to growth in the Americas, Europe and Asia-Pacific regions. These increases were primarily due to delivery on higher backlog in place as we entered the year as well as growth in net new business in 2011.

Costs of Service Revenues

2012 compared to 2011

Costs of service revenues in 2012 were higher by approximately $87.3 million as compared to 2011. This increase was comprised of $73.4 million of constant currency growth and $33.6 million from businesses acquired in the fourth quarter of 2011, which were partially offset by a reduction of $19.7 million from the effect of foreign currency fluctuations. The constant currency growth was primarily related to an increase in compensation and related expenses driven mainly by an increase in billable headcount, normal annual merit increases and an increase in incentive compensation. Also contributing to the constant currency growth were costs related to a new

 

63


Table of Contents

agreement to distribute pharmaceutical products in Italy. These impacts were partially offset by a decline in recruiting costs, as we were able to redeploy available resources on new business. As a percent of service revenues, Integrated Healthcare Services’ costs of service revenues were 80.5% and 80.3% in 2012 and 2011, respectively. The slight increase in costs of service revenues as a percent of service revenues was primarily as a result of a shift in revenue mix to lower margin product sales resulting from the new product distribution agreement in Italy.

2011 compared to 2010

Costs of service revenues in 2011 were higher by approximately $52.6 million as compared to 2010. This increase was comprised of constant currency growth of $12.5 million, $32.3 million from the effect of foreign currency fluctuations and $7.8 million from businesses acquired in the fourth quarter of 2011. On a constant currency basis, compensation and related expenses increased primarily as a result of an increase in billable headcount and normal annual merit increases in compensation. As a percent of service revenues, Integrated Healthcare Services’ costs of service revenues were 80.3% and 82.1% in 2011 and 2010, respectively. The decline in costs of service revenues as a percent of service revenues was primarily due to revenue in 2011 related to an early termination fee on three projects and an award fee earned on another project, as well as successful cost containment activities, particularly in the Americas and the Asia-Pacific.

Selling, General and Administrative Expenses

2012 compared to 2011

As a percent of service revenues, Integrated Healthcare Services’ selling, general and administrative costs were 13.2% and 12.9% in 2012 and 2011, respectively. The $16.8 million increase in Integrated Healthcare Services’ selling, general and administrative expenses in 2012 as compared to 2011 was primarily due to $20.0 million from businesses acquired in the fourth quarter of 2011, which were partially offset by a reduction of $2.6 million from the effect of foreign currency fluctuations.

2011 compared to 2010

As a percent of service revenues, Integrated Healthcare Services’ selling, general and administrative costs were 12.9% and 12.5% in 2011 and 2010, respectively. The $13.2 million increase in Integrated Healthcare Services’ selling, general and administrative expenses in 2011 as compared to 2010 was primarily due to a foreign currency impact of $3.9 million, $5.3 million from businesses acquired in the fourth quarter of 2011, higher spending on strategic initiatives in business development and approximately $2.0 million of costs that prior to 2011 were part of Capital Solutions. These resources and associated costs were retained by us and their activities were redirected to support Integrated Healthcare Services following the deconsolidation of PharmaBio and the wind down of the Capital Solutions segment.

Capital Solutions

Prior to January 1, 2011, our operations included a third segment, Capital Solutions. Operations for this segment wound down in 2010 as a result of the deconsolidation of PharmaBio in November 2010.

Liquidity and Capital Resources

Overview

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal source of liquidity is operating cash flows. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include: capital expenditures, acquisitions, debt service requirements, dividends, common stock repurchases, adequacy of our revolving credit facility and access to other capital markets.

 

64


Table of Contents

We manage our worldwide cash requirements by monitoring the funds available among our subsidiaries and determining the extent to which those funds can be accessed on a cost effective basis. The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences; however, those balances are generally available without legal restrictions to fund ordinary business operations. We have and expect to transfer cash from those subsidiaries to the United States and to other international subsidiaries when it is cost effective to do so.

Uneven improvement in the global economy and the debt crisis in Europe continue to weigh on investor and consumer confidence globally, putting the pace of recovery at risk, particularly in European countries. However, our customers are primarily large private-sector biopharmaceutical companies. While we have a minimal direct holding of sovereign debt (less than $0.5 million), we continually monitor the risk that may result from our customers’ exposure to disruptions in the European banking system and the reduced liquidity in the publicly funded healthcare systems in Europe.

We remained in a strong cash position with a cash balance of $567.7 million at December 31, 2012 ($103.1 million of which was in the United States), an increase from $516.3 million at December 31, 2011.

Based on our current operating plan, we believe that our available cash and cash equivalents, together with future cash flows from operations and our ability to access funds under our revolving credit facility, will enable us to fund our operating requirements and capital expenditures and meet debt obligations for at least the next 12 months. We regularly evaluate our debt arrangements, as well as market conditions, and from time to time we may explore opportunities to modify our existing debt arrangements or pursue additional debt financing arrangements that could result in the issuance of new debt securities by us or our affiliates. We may use our existing cash, cash generated from operations or dispositions of assets or businesses and/or proceeds from any new financing arrangements to pay off or reduce some of our outstanding obligations, to pay dividends or to repurchase shares from our shareholders or other purposes. As part of our ongoing business strategy, we also are continually evaluating new acquisition, expansion and investment possibilities, as well as potential dispositions of assets or businesses, as appropriate, including dispositions that may cause us to recognize a loss on certain assets. Should we elect to pursue acquisition, expansion or investment possibilities, we may seek to obtain debt or equity financing to facilitate those activities. Our ability to enter into any such potential transactions and our use of cash or proceeds is limited to varying degrees by the terms and restrictions contained in our senior secured credit facilities. We cannot provide assurances that we will be able to complete any such alternative financing arrangements or other transactions on favorable terms or at all.

Senior Secured Credit Agreement

On June 8, 2011, we entered into the initial credit agreement governing the Quintiles Transnational senior secured credit facilities under which we were permitted to borrow up to $2.225 billion. The credit facility arrangements were amended in October 2012 and December 2012, as described below, and initially consisted of two components: a $225.0 million first lien revolving credit facility due in 2016 and the $2.0 billion first lien Term Loan B due in 2018. The Term Loan B bore a variable rate of interest of the greater of LIBOR or 1.25% plus 3.75%. We used the proceeds from the Term Loan B, together with cash on hand to (1) repay the outstanding balance on our then-existing senior secured credit facilities which included a $1.0 billion first lien term loan due in 2013 and a $220.0 million second lien term loan due in 2014, (2) pay the purchase price for our then-existing senior notes accepted in the tender offer, (3) redeem our senior notes which remained outstanding following completion of the tender offer, (4) pay a dividend to our shareholders totaling approximately $288.3 million, (5) pay a bonus to certain option holders totaling approximately $11.0 million and (6) pay related fees and expenses. On December 20, 2012, the Term Loan B was repaid with the proceeds of a new Term Loan B-2 (as defined below), effectively lowering the interest rate by 50 basis points (see below).

On October 22, 2012, we entered into an amendment to the credit agreement governing the Quintiles Transnational senior secured credit facilities to provide (1) the new Term Loan B-1 with a syndicate of banks for an aggregate principal amount of $175.0 million due 2018, (2) an extension of the maturity date by one year, to

 

65


Table of Contents

2017, of its existing $225.0 million senior secured revolving credit facility and (3) a $75.0 million increase in its existing $225.0 million senior secured revolving credit facility, or the Increased Revolving Facility. The Term Loan B-1 bears a variable rate of interest of the greater of LIBOR or 1.25% plus 3.25% and the Increased Revolving Facility bears a variable rate of interest of LIBOR plus 2.50% to 2.75%, depending upon our leverage ratio. Annual maturities on the Term Loan B-1 are 1% of the original principal amount until December 31, 2017, with the balance of the Term Loan B-1 to be repaid at final maturity on June 8, 2018. In addition, in connection with certain repricing transactions, if any occur prior to October 22, 2013, we will be required to pay a premium equal to 1% of the aggregate amount of any Term Loan B-1 prepayment or 1% of the aggregate outstanding amount of the Term Loan B-1 immediately prior to such repricing transaction. During the fourth quarter of 2012, the proceeds from the Term Loan B-1, together with approximately $73 million of cash on hand, were used to (1) pay a dividend to our shareholders totaling approximately $241.7 million, (2) pay a bonus to certain option holders totaling approximately $2.4 million and (3) pay approximately $4 million of fees and related expenses. Other terms and covenants of the Term Loan B-1 and the Increased Revolving Facility are the same as the terms and covenants of our Term Loan B and the senior secured revolving credit facility prior to the amendment.

On December 20, 2012, we entered into an amendment to the credit agreement governing the Quintiles Transnational senior secured credit facilities to provide the new Term Loan B-2 with a syndicate of banks for an aggregate principal amount of $1.975 billion due in 2018. The Term Loan B-2 bears a variable rate of interest of the greater of LIBOR or 1.25% plus 3.25%. Annual maturities on the Term Loan B-2 are $20.0 million until December 31, 2017 with the balance of the Term Loan B-2 to be repaid at final maturity on June 8, 2018. In addition, in connection with certain repricing transactions, if any occur prior to December 20, 2013, we will be required to pay a premium equal to 1% of the aggregate amount of any Term Loan B-2 prepayment or 1% of the aggregate outstanding amount of the Term Loan B-2 immediately prior to such repricing transaction. We will be required to apply 50% of excess cash flow (as defined in the credit agreement), subject to a reduction to 25% or 0% depending upon our leverage ratio for repayment of the Term Loan B-1 and Term Loan B-2. We used the proceeds from the Term Loan B-2, together with cash on hand, to repay the outstanding balance on our then-existing Term Loan B and related fees and expenses.

The credit facility arrangements are secured by a first-priority perfected security interest in substantially all of Quintiles Transnational’s assets and assets of Quintiles Transnational’s direct and indirect United States restricted subsidiaries (other than any excluded subsidiaries), in each case, now owned or later acquired, including a pledge of all equity interests and notes owned by Quintiles Transnational and Quintiles Transnational’s United States restricted subsidiaries (other than any excluded subsidiaries); provided that only 65% of the voting equity interests of Quintiles Transnational and Quintiles Transnational’s United States restricted subsidiaries’ (other than any excluded subsidiaries’) “first-tier” non-United States subsidiaries is required to be pledged in respect of the obligations under the credit facility arrangements.

Other Long-Term Debt

In February 2012, we executed a term loan facility with a syndicate of banks to provide the Holdings Term Loan, pursuant to which we borrowed an aggregate principal amount of $300.0 million due February 26, 2017. Interest on the Holdings Term Loan is payable quarterly and we are required to pay interest on the Holdings Term Loan entirely in cash unless certain conditions are satisfied, in which case we are entitled to pay all or a portion of the interest for such interest period by increasing the principal amount of the Holdings Term Loan, such increase being referred to as PIK Interest. Cash interest on the Holdings Term Loan accrues at the rate of 7.50% per year, and PIK Interest on the Holdings Term Loan accrues at the rate of 8.25% per year. No principal payments are due until maturity on February 26, 2017. Voluntary prepayments are permitted, in whole or in part, subject to minimum prepayment requirements and a prepayment premium equal to (1) 2% of the prepaid amount, if the prepayment is made on or prior to the third anniversary of the closing date, and (2) 1% of the prepaid amount, if the prepayment is made after the third anniversary of the closing date but on or prior to the fourth anniversary of the closing date. The Holdings Term Loan is secured by a lien on 100% of the equity interests of

 

66


Table of Contents

Quintiles Transnational. We used the proceeds from the Holdings Term Loan, together with cash on hand to (1) pay a dividend to our shareholders totaling approximately $326.1 million, (2) pay a bonus to certain option holders totaling approximately $8.9 million and (3) pay related expenses.

Restrictive Covenants

Our long-term debt agreements contain usual and customary restrictive covenants that, among other things, place limitations on our ability to declare dividends and make other restricted payments; prepay, redeem or purchase debt; incur liens; make loans and investments; incur additional indebtedness; amend or otherwise alter debt and other material documents; engage in mergers, acquisitions and asset sales; transact with affiliates; and engage in businesses that are not related to our existing business. As of December 31, 2012, 2011 and 2010, we were in compliance with these debt covenants.

See Note 11 to our audited consolidated financial statements included elsewhere in this prospectus for additional details regarding our credit arrangements.

Years ended December 31, 2012, 2011 and 2010

Cash Flow from Operating Activities

 

     Year Ended December 31,  
     2012      2011      2010  
     (in thousands)   

Net cash provided by operating activities

   $ 335,701       $ 160,953       $ 378,160   

2012 compared to 2011

Cash provided by operating activities increased by $174.7 million during 2012 as compared to 2011. The increase in operating cash flow was primarily as a result of the increase in income from operations, an improvement from the impact of the number of days of net service revenues outstanding ($162.4 million) and $23.7 million less cash used to pay expenses related to extinguishing debt in the 2012 period compared to the 2011 period. The improvement in cash flows from net service receivables outstanding is as a result of a three-day decrease in net service revenues outstanding in 2012 compared to an 11-day increase in net service revenues outstanding in the same period in 2011. The net impact on cash from net service receivables outstanding is a result of normal fluctuations in the timing of payments from customers. Days of revenues outstanding can shift significantly at each reporting period depending on the timing of cash receipts under contractual payment terms relative to the recognition of revenue over a project lifecycle. Although we have continued to experience a trend toward longer payment terms on our contracts, a strong collection effort and significant cash payments late in 2012 on the close out of several large contracts resulted in the timing related decrease in net service revenues outstanding. These increases were partially offset by higher cash payments in the 2012 period for income taxes and interest of approximately $40.6 million and $26.2 million, respectively.

2011 compared to 2010

The decrease in cash flows provided by operating activities in 2011 as compared to 2010 was due largely to lower income from operations and a migration to longer payment terms for many of our contracts, without a corresponding increase in payment terms for our higher operating costs in 2011, since these higher costs are principally compensation related. Longer payment terms resulted in an 11-day increase in the number of days of revenue outstanding in 2011, as compared to a seven-day decrease in 2010, which negatively impacted operating cash flows by approximately $253.3 million in 2011. The factors above more than offset the favorable impact on operating cash flows from lower payments for interest and income taxes of approximately $37.7 million and $14.2 million, respectively, compared to 2010.

 

67


Table of Contents

Cash Flow from Investing Activities

 

     Year Ended December 31,  
     2012     2011     2010  
     (in thousands)   

Net cash used in investing activities

   $ (132,233   $ (224,838   $ (141,434

2012 compared to 2011

Cash used in investing activities decreased by $92.6 million to $132.2 million during 2012, as compared to $224.8 million in the same period in 2011. The uses of cash in 2012 consisted primarily of acquisitions of businesses, acquisitions of property, equipment and software and cash used to fund investments in unconsolidated affiliates and the purchase of equity securities. The cash used for the purchase of equity securities was due to the payment of the remaining commitment to fund our Samsung Group joint venture (approximately $13.2 million). Cash used for acquisitions of businesses includes approximately $39.3 million for the acquisition of Expression Analysis in the third quarter of 2012 as well as a $3.9 million scheduled payment pursuant to the terms in the purchase agreement of Outcome, which we acquired in 2011.

2011 compared to 2010

Cash used in investing activities increased by $83.4 million to $224.8 million during 2011, as compared to cash used of $141.4 million in 2010. The primary reason for the increase in the use of cash was related to our business combinations in 2011. Acquisitions consisting primarily of Outcome, Advion and VCG used cash of $227.1 million, net of cash acquired. Also included in the cash used in 2011 was a $16.5 million increase related to investments in, and advances to, unconsolidated affiliates primarily related to Invida and the NovaQuest Pharma Opportunities Fund III, L.P., or the Fund. During 2011, we funded approximately $10.7 million of our $60.0 million commitment to the Fund. Cash used in investing activities related to the purchase of equity securities increased due to our Samsung Group joint venture. In 2011, we funded approximately $14.0 million of our commitment to invest up to approximately $30.0 million in the Samsung Group joint venture prior to December 31, 2012. In connection with the refinancing transaction in 2011, we paid approximately $11.6 million to terminate certain interest rate swaps. These uses of cash were partially offset by the net proceeds from the sale of our investment in HUYA Bioscience International, LLC, or HUYA, to PharmaBio ($5.0 million) and the sale of our investment in Invida ($103.6 million).

Cash Flow from Financing Activities

 

     Year Ended December 31,  
     2012     2011     2010  
     (in thousands)   

Net cash used in financing activities

   $ (146,873   $ (59,309   $ (153,081

2012 compared to 2011

Net cash used in financing activities increased by $87.6 million to $146.9 million during 2012, as compared to cash used of $59.3 million in 2011. The primary reason for the increase in cash used in financing activities in 2012 was related to an increase in dividends paid partially offset by the issuance of additional debt. Dividends paid on common stock increased by $279.6 million to $567.9 million ($4.91 per share) in 2012 as compared to $288.3 million ($2.48 per share) in 2011. This increase in the use of cash was partially offset by $186.9 million higher net proceeds from debt issuance (proceeds from the issuance of debt, net of costs less principal payments on credit arrangements) which were $435.8 million in 2012, as compared to $248.9 million in 2011.

 

68


Table of Contents

2011 compared to 2010

Net cash used in financing activities decreased by $93.8 million to $59.3 million during 2011, as compared to cash used of $153.1 million in 2010. The primary reason for the decline in cash used in financing activities was related to our debt refinancing transactions in 2011. The net proceeds of the refinancing transactions (proceeds from the issuance of debt less debt-issue costs and repayments on the retired debt) were $248.9 million, as compared to a use of cash of $71.2 million in 2010 (repayments of debt less proceeds from issuance of debt), an increase in cash provided by financing activities of $320.2 million. The cash provided by the net proceeds from the refinancing transactions was partially offset by $288.3 million ($2.48 per share) of dividends paid on common stock in June 2011, which was an increase in the use of cash of $220.8 million when compared to the $67.5 million ($0.58 per share) of dividends paid on common stock in 2010.

Contractual Obligations and Commitments

Below is a summary of our future payment commitments by year under contractual obligations as of December 31, 2012 (in thousands):

 

    2013     2014-2015     2016-2017     Thereafter     Total  

Long-term debt, including interest(1)

  $ 176,057      $ 281,012      $ 557,329      $ 2,041,749      $ 3,056,147   

Obligations under capital leases

    129        172                      301   

Operating leases

    102,331        141,385        88,156        102,997        434,869   

Purchase obligations(2)

    2,063        5,555        1,447               9,065   

Management agreement(3)

    5,338                             5,338   

Commitments to unconsolidated affiliates(4)

    49,273                             49,273   

Defined benefit plans(5)

    13,459                             13,459   

Uncertain income tax positions(6)

    490                             490   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 349,140      $ 428,124      $ 646,932      $ 2,144,746      $ 3,568,942   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)    Interest payments on floating rate debt are based on the interest rate in effect on December 31, 2012.

(2)    Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable pricing provisions and the approximate timing of the transactions.

(3)    We agreed to pay an annual management service fee of $5.0 million to affiliates of certain of our investors. The annual management service fee is paid each year, in advance and in equal quarterly installments. The annual management service fee is subject to upward adjustment each year effective as of March 31 based on any increase in the Consumer Price Index for the preceding calendar year. The initial term of the management agreement extended through December 31, 2010, after which it is automatically extended each December 31 thereafter for an additional year unless written notice is provided or other conditions are met. It is anticipated that we will enter into an agreement with Dr. Gillings and our Sponsors that will result in the termination of the management agreement upon the completion of this offering. In connection with that agreement, we will pay Dr. Gillings and our sponsors a one-time termination fee of $        . Amounts for years subsequent to 2013 have not been included in the above table.

(4)    In 2010, we committed to invest $60.0 million in the Fund. As of December 31, 2012, we have funded approximately $10.7 million of this commitment. We have approximately $49.3 million remaining to be funded under this commitment.

 

69


Table of Contents

(5)    We made cash contributions totaling approximately $12.9 million to our defined benefit plans during 2012, and we estimate that we will make contributions totaling approximately $13.5 million during 2013. Due to the potential impact of future plan investment performance, changes in interest rates, changes in other economic and demographic assumptions and changes in legislation in foreign jurisdictions, we are not able to reasonably estimate the timing and amount of contributions that may be required to fund our defined benefit plans for periods beyond 2013.

(6)    As of December 31, 2012, our liability related to uncertain income tax positions was approximately $35.6 million, $35.1 million of which has not been included in the above table as we are unable to predict when these liabilities will be paid due to the uncertainties in the timing of the settlement of the income tax positions.

Application of Critical Accounting Policies

Note 1 to the consolidated financial statements provided elsewhere in this prospectus describes the significant accounting policies used in the preparation of the consolidated financial statements. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the period. Our estimates are based on historical experience and various other assumptions we believe are reasonable under the circumstances. We evaluate our estimates on an ongoing basis and make changes to the estimates and related disclosures as experience develops or new information becomes known. Actual results may differ from those estimates.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement, (2) the service offering has been delivered to the customer, (3) the collection of fees is probable and (4) the arrangement consideration is fixed or determinable. We do not recognize revenue with respect to start-up activities including contract and scope negotiation, feasibility analysis and conflict of interest review associated with contracts. The costs for these activities are expensed as incurred. For contracts in which portions of revenue are contingent upon the occurrence of uncertain future events we recognize the revenue only after it has been earned and the contingency has been resolved.

The majority of our revenue is recognized based on objective contractual criteria and does not require significant estimates or judgments. However, at any point in time we are working on thousands of active customer projects, which are governed by individual contracts. Most projects are customized based on the needs of the customer, the type of services being provided, therapeutic indication of the drug, geographic locations and other variables. Project specific terms related to pricing, billing terms and the scope and type of services to be provided are generally negotiated and contracted on a project-by-project basis. Changes in the scope of work are common, especially under long-term contracts, and generally result in a change in contract value. In such situations, we enter into negotiations for a contract amendment to reflect the change in scope and the related price. Depending on the complexity of the amendment, the negotiation process can take from a few weeks for a simple adjustment to several months for a complex amendment. In limited situations, management may authorize the project team to commence work on activities outside the contract scope while we negotiate and finalize the contract amendment. In these limited cases, if we are not able to obtain a contract amendment from the customer, our profit margin on the arrangement may be impacted. This result occurs because our costs of delivery are expensed as they are incurred, while revenue is not recognized unless the customer has agreed to the changes in scope and renegotiated pricing terms, the contract value is amended and all other revenue recognition criteria are met.

 

70


Table of Contents

For arrangements that include multiple elements, arrangement consideration is allocated to units of accounting based on the relative selling price. The best evidence of selling price of a unit of accounting is vendor-specific objective evidence, or VSOE, which is the price we charge when the deliverable is sold separately. When VSOE is not available to determine selling price, we use relevant third-party evidence, or TPE, of selling price, if available. When neither VSOE nor TPE of selling price exists, we use our best estimate of selling price considering all relevant information that is available without undue cost and effort.

Most contracts are terminable upon 30 to 90 days notice by the customer. Our risk of material loss in these situations is mitigated as these contracts generally require payment to us for expenses to wind down the trial or project, fees earned to date and, in some cases, a termination fee or a payment of some portion of the fees or profits that could have been earned under the contract if it had not been terminated early. In addition, our contract terms provide for payment terms that generally correspond with performance of the services. Termination fees are included in service revenues when realization is assured.

Accounts Receivable and Unbilled Services

Accounts receivable represents amounts billed to customers. Revenues recognized in excess of billings are classified as unbilled services. The realization of these amounts is based on the customer’s willingness and ability to pay us. We have an allowance for doubtful accounts based on management’s estimate of probable losses we expect to incur resulting from a customer failing to pay us. Our allowance for doubtful accounts, and losses from customers failing to pay us, have not been material to our results of operations. If any of these estimates change or actual results differs from expected results, then an adjustment is recorded in the period in which the amounts become reasonably estimable. These adjustments could have a material effect on our results of operations.

Investments in Unconsolidated Affiliates — Equity Method Investments

We have investments in unconsolidated affiliates that are accounted for under the equity method of accounting. Periodically, we review our investments for a decline in value which we believe may be other than temporary. Should we identify such a decline, we will record a loss through earnings to establish a new cost basis for the investment. These losses could have a material adverse effect on our results of operations.

Income Taxes

Certain items of income and expense are not recognized on our income tax returns and financial statements in the same year, which creates timing differences. The income tax effect of these timing differences results in (1) deferred income tax assets that create a reduction in future income taxes and (2) deferred income tax liabilities that create an increase in future income taxes. Recognition of deferred income tax assets is based on management’s belief that it is more likely than not that the income tax benefit associated with certain temporary differences, income tax operating loss and capital loss carry forwards and income tax credits, would be realized. We recorded a valuation allowance to reduce our deferred income tax assets for those deferred income tax items for which it was more likely than not that realization would not occur. We determined the amount of the valuation allowance based, in part, on our assessment of future taxable income and in light of our ongoing prudent and feasible income tax strategies. If our estimate of future taxable income or tax strategies changes at any time in the future, we would record an adjustment to our valuation allowance. Recording such an adjustment could have a material effect on our financial position.

We do not consider the undistributed earnings of most of our foreign subsidiaries to be indefinitely reinvested. Accordingly, we have provided a deferred income tax liability related to those undistributed earnings. The associated foreign income taxes on our foreign earnings could be available as a credit in the United States on our income taxes. We recognize foreign tax credits to the extent that the recognition is supported by projected foreign source income.

 

71


Table of Contents

Goodwill, Tangible and Identifiable Intangible Assets

We have recorded and allocated to our reporting units the excess of the cost over the fair value of the net assets acquired, known as goodwill. The recoverability of the goodwill and indefinite-lived intangible assets are evaluated annually for impairment, or if and when events or circumstances indicate a possible impairment. Goodwill and indefinite-lived intangible assets are not amortized. We review the carrying values of other identifiable intangible assets if the facts and circumstances indicate a possible impairment. Based upon our 2012 annual testing, we believe that the risk of a significant impairment to goodwill or indefinite-lived intangible assets is currently very low. Other identifiable intangible assets are amortized over their estimated useful lives. During 2012, we adopted new accounting guidance and elected to perform a qualitative analysis for our annual indefinite-lived intangible asset impairment review. For goodwill, we perform a qualitative analysis to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its book value. This includes a qualitative analysis of macroeconomic conditions, industry and market considerations, internal cost factors, financial performance, fair value history and other company specific events. If this qualitative analysis indicates that it is more likely than not that estimated fair value is less than the book value for the respective reporting unit, we apply a two-step impairment test in which we determine whether the estimated fair value of the reporting unit is in excess of its carrying value. If the carrying value of the net assets assigned to the reporting unit exceeds the estimated fair value of the reporting unit, we perform the second step of the impairment test to determine the implied estimated fair value of the reporting unit’s goodwill. We determine the implied estimated fair value of goodwill by determining the present value of the estimated future cash flows for each reporting unit and comparing the reporting unit’s risk profile and growth prospects to selected, reasonably similar publicly traded companies. The inherent subjectivity of applying a discounted cash flow and market comparables approach to valuing our assets and liabilities could have a significant impact on our analysis. Any future impairment could have a material adverse effect on our financial condition or results of operations.

Periodically, we review the carrying values of property and equipment if the facts and circumstances suggest that a potential impairment may have occurred. If this review indicates that carrying values will not be recoverable, as determined based on undiscounted cash flows over the remaining depreciation or amortization period, we will reduce carrying values to estimated fair value. The inherent subjectivity of our estimates of future cash flows could have a significant impact on our analysis. Any future write-offs of long-lived assets could have a material adverse effect on our financial condition or results of operations.

Share-based Compensation Expense

In accordance with the Financial Accounting Standards Board’s Accounting Standards Codification Topic 718, Stock Compensation, as modified or supplemented, we measure compensation cost for share-based payment awards granted to employees and non-employee directors at fair value using the Black-Scholes-Merton option-pricing model. Share-based compensation expense includes share-based awards granted to employees and non-employee directors and has been reported in selling, general and administrative expenses in our consolidated statements of income based upon the classification of the individuals who were granted share-based awards. Share-based compensation expense was $25.9 million, $14.1 million, and $17.3 million for the years ended December 31, 2012, 2011 and 2010, respectively.

We calculate the fair value of share-based compensation awards using the Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton option-pricing model requires the use of subjective assumptions, including share price volatility, the expected life of the award, risk-free interest rate and the fair value of the underlying common shares on the date of grant. In developing our assumptions, we take into account the following:

 

   

As a result of our status as a private company for the last several years, we do not have sufficient history to estimate the volatility of our common share price. We calculate expected volatility based on reported data for selected reasonably similar publicly traded companies for which the historical information is

 

72


Table of Contents
 

available. For the purpose of identifying peer companies, we consider characteristics such as industry, length of trading history, similar vesting terms and in-the-money option status. We plan to continue to use the guideline peer group volatility information until the historical volatility of our common shares is relevant to measure expected volatility for future award grants;

 

   

We determine the risk-free interest rate by reference to implied yields available from United States Treasury securities with a remaining term equal to the expected life assumed at the date of grant;

 

   

The assumed dividend yield is based on our historical dividends paid, excluding dividends that resulted from activities we deemed to be one-time in nature;

 

   

We estimate the average expected life of the award based on our historical experience; and

 

   

We estimate forfeitures based on our historical analysis of actual forfeitures.

The assumptions used in the Black-Scholes-Merton option-pricing model are set forth below:

 

       Year Ended December 31,  
       2012     2011     2010  

Expected volatility

       33-53     40-53     40-58

Expected dividends

       4.82     4.10     4.57

Expected term (in years)

       2.0-7.0        2.7-6.7        2.0-6.5   

Risk-free interest rate

       0.29-1.31     0.30-2.995     0.542-2.73

The following table presents the grant dates, number of underlying shares and related exercise prices of awards granted to employees and non-employees, including non-employee directors, from January 1, 2011 through February 15, 2013, as well as the estimated fair value of the underlying common shares on the grant date.

 

            Date of Grant            

   Number
of Shares
Subject
to Awards
Granted
     Original
Exercise
Price
Per Share
     Estimated
Fair
Value Per
Common
Share at
Grant
Date
 

February 10, 2011

     15,000       $     28.09       $     28.09   

May 12, 2011

     20,000       $ 29.40       $ 29.40   

May 16, 2011

     20,000       $ 29.40       $ 29.40   

August 11, 2011

     800,000       $ 26.11       $ 26.11   

September 12, 2011

     30,000       $ 26.11       $ 26.11   

November 10, 2011

     208,000       $ 25.28       $ 25.28   

May 10, 2012

     1,010,000       $ 25.92       $ 25.92   

May 31, 2012

     38,580       $ 25.92       $ 25.92   

August 8, 2012

     1,815,050       $ 26.68       $ 26.68   

August 13, 2012

     10,000       $ 26.68       $ 26.68   

August 20, 2012

     50,000       $ 26.68       $ 26.68   

August 31, 2012

     120,000       $ 26.68       $ 26.68   

November 8, 2012

     63,500       $ 25.64       $ 25.64   

February 7, 2013

     75,000       $ 30.07       $ 30.07   

The estimated fair value per common share in the table above represents the determination by our Board of the fair value of our common shares as of the date of grant, taking into consideration various objective and subjective factors, including valuations of our common shares, as discussed below.

 

73


Table of Contents

The $4.12 decline in market value from May 16, 2011 (based on the March 31, 2011 valuation) to November 10, 2011 (based on the September 30, 2011 valuation) was primarily as a result of the payment of a cash dividend of $2.48 per share in June of 2011. Also contributing to the decline to a lesser extent was a decrease in the guideline company method, or GCM, valuation as a result of an overall decline in the stock market during that timeframe, which impacted the valuation multiples of the selected guideline companies.

Due to the absence of an active market for our common shares, the fair value of our common shares for purposes of determining the exercise price for award grants was determined in good faith by our Board, with the assistance and upon the recommendation of management, based on a number of objective and subjective factors consistent with the methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, referred to as the AICPA Practice Aid, including:

 

   

contemporaneous third party valuations of our common shares;

 

   

the common shares underlying the award involved illiquid securities in a private company;

 

   

our results of operations and financial position;

 

   

the composition of, and changes to, our management team and Board;

 

   

the material risks related to our business;

 

   

our business strategy;

 

   

the market performance of publicly traded companies in the life sciences and biotechnology sectors, and recently completed mergers and acquisitions of companies comparable to us;

 

   

the likelihood of achieving a liquidity event for the holders of our common shares and options such as an initial public offering given prevailing market conditions; and

 

   

external market conditions affecting the life sciences and biotechnology industry sectors.

Valuation Methodology

In establishing the exercise price, in addition to the objective and subjective factors discussed above, our Board also considered the most recent available common share valuation. For each award grant, a contemporaneous valuation (within the meaning of such term under the AICPA Practice Aid) was performed. The timing of the valuations performed relative to the date of grant was as follows:

 

        Date of Grant                

  

        Date of Valuation        

February 10, 2011

   December 31, 2010

May 12, 2011

   March 31, 2011

May 16, 2011

   March 31, 2011

August 11, 2011

   August 11, 2011

September 12, 2011

   August 11, 2011

November 10, 2011

   September 30, 2011

May 10, 2012

   March 31, 2012

May 31, 2012

   March 31, 2012

August 8, 2012

   July 31, 2012

August 13, 2012

   July 31, 2012

August 20, 2012

   July 31, 2012

August 31, 2012

   July 31, 2012

November 8, 2012

   September 30, 2012

February 7, 2013

   December 31, 2012

 

74