10-K 1 form10k.htm 2007 10K form10k.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2007

OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from _____________to _____________

Commission file number: 0-30318

INVENTIV HEALTH, INC.
(Exact Name of Registrant as Specified in its Charter)

Delaware
(State or Other Jurisdiction No. of Incorporation or Organization)
52-2181734
(I.R.S. Employer Identification No.)

200 Cottontail Lane Vantage Court North; Somerset, New Jersey 08873
(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code:  (800) 416-0555

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:  Common Stock
                                                                                                                                                       (Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [_]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes [  ] No [X]

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer [X]                                                                           Accelerated filer [  ]                                                                Non-accelerated filer [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes [_] No [X]


Based on the closing sale price on the Nasdaq Global Select Market as of the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $1,099,623,506.  For the purposes of this calculation, shares owned by officers, directors and 10% shareholders known to the registrant have been deemed to be owned by affiliates. This determination of affiliate status is not a determination for other purposes.

As of February 25, 2008, there were 32,421,673 outstanding shares of the registrant's common stock.

DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's annual report to security holders for the fiscal year ended December 31, 2007 are incorporated by reference into Part II of this report.  Certain portions of the Registrant's Definitive Proxy Statement to be filed with the Commission for use in connection with the 2007 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
 

 
TABLE OF CONTENTS

Item
Description
Page
PART I
1
3
1A
10
1B
14
2
14
3
14
4
14
 
PART II
5
15
6
16
7
17
7A
31
8
32
9
63
9A
63
9B
63
 
PART III
10
65
11
65
12
65
13
65
14
65
 
PART IV
15
66
 

 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE

STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  These statements concern expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.  Specifically, this report contains forward-looking statements regarding, among other things:
 
 
·
our estimates regarding our liquidity, capital expenditures and sources of both, and our ability to fund our operations and planned capital expenditures for the foreseeable future;

 
·
our strategy to address the need to offer additional services through acquisitions of other companies, including the personnel of such companies;

 
·
our expectations regarding our pursuit of additional debt or equity sources to finance our internal growth initiatives or acquisitions;

 
·
our belief that our growth and success will depend on our ability to continue to enhance the quality of our existing services, introduce new services on a timely and cost-effective basis, integrate new services with existing services, increase penetration with existing customers, recruit, motivate and retain qualified personnel and economically train existing sales representatives and recruit new sales representatives;
 
 
·
our belief that there are ample opportunities for cross-selling to our existing clients;
           
 
·
our anticipation that it will be necessary to continue to select, invest in and develop new and enhanced technology and end-user databases on a timely basis in the future in order to maintain our competitiveness;

 
·
our expectations regarding the impact of our acquisitions, joint ventures and partnerships;
 
 
·
our expectations regarding the impact of the adoption of certain accounting standards; and
 
 
·
our expectations regarding the liquidation of the Columbia Strategic Cash Portfolio.
 
These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements include, but are not limited to, the following:

 
·
our ability to sufficiently increase our revenues and maintain or decrease expenses and cash capital expenditures to permit us to fund our operations;

 
·
our ability to continue to comply with the covenants and terms of our credit facility and to access sufficient capital to fund our operations;
 
 
·
our ability to grow our existing client relationships, obtain new clients and cross-sell our services;
         
 
·
our ability to successfully operate new lines of business;

 
·
our ability to manage our infrastructure and resources to support our growth;

 
·
our ability to successfully identify new businesses to acquire, conclude acquisition negotiations and integrate the acquired businesses into our operations;
 
 
·
any disruptions, impairments, or malfunctions affecting software as well as excessive costs or delays that may adversely impact our continued investment in and development of software;
 
    
·  
the potential impact of government regulation on us and on our clients base;
 
     
·  
our ability to comply with all applicable laws as well as our ability to successfully implement from a timing and cost perspective any changes in applicable laws;
 
     
·  
our ability to recruit, motivate and retain qualified personnel, including sales representatives;
 
   
·  
the actual impact of the adoption of certain accounting standards;
 
       
·  
our ability to maintain technological advantages in a variety of functional areas, including sales force automation, electronic claims surveillance and patient compliance;
 
   
·  
changes in trends in the healthcare and pharmaceutical industries or in pharmaceutical outsourcing; and
 
   
·  
our inability to determine the actual time at which the liquidation of the Columbia Strategic Cash Portfolio will be completed or the total losses that we will actually realize from that investment vehicle.
 
Investors should carefully consider these risk factors and the additional risk factors outlined in more detail in Item 1A, Risk Factors, in this report.



Overview
 
    inVentiv Health Inc. (together with its subsidiaries, “inVentiv”, or the “Company”) is a leading provider of value-added services to the pharmaceutical, life sciences and healthcare industries. We support a broad range of clinical development, communications and commercialization activities that are critical to our customers' ability to complete the development of new drug products and medical devices and successfully commercialize them.  In addition, we provide medical cost containment services to payors in our patient outcomes business.  Our goal is to assist our customers in meeting their objectives by providing our services in each of our operational areas on a flexible and cost-effective basis. We provide services to over 325 client organizations, including all top 20 global pharmaceutical companies, numerous emerging and specialty biotechnology companies and payors.
 
    Our service offerings reflect the changing needs of our clients as their products move through the late-stage development and regulatory approval processes and into product launch and then throughout the product lifecycle. We have established expertise and leadership in providing the services our clients require at each of these stages of product development and commercialization and seek to address their outsourced service needs on a comprehensive basis throughout the product life cycle.  
 
    The success of our business as a whole, and of our inVentiv Clinical, inVentiv Commercial and inVentiv Patient Outcomes segments in particular, is related significantly to the degree to which pharmaceutical companies outsource services that have traditionally been performed internally by fully integrated manufacturers.  We believe that our business has been positively affected by a trend of large pharmaceutical manufacturers toward utilizing outsourcing arrangements as a means of controlling variable unit cost and increasing flexibility.  We also believe that the significant percentage of New Drug Application (“NDA”) and New Molecular Entity (“NME”) approvals attributable to small and mid-tier pharmaceutical and biotechnology companies presents an opportunity for companies providing outsourced services because these companies often prefer to employ high-quality, third party service providers (either directly or in co-promotion situations with pharmaceutical partners) to effect critical late-stage developmental and commercialization functions.  We therefore target a broad spectrum of companies within the pharmaceutical industry in seeking to develop business opportunities.
 
    Our strategy relies on both internal growth and acquisitions to meet our growth objectives.  Our businesses have generated strong revenue growth for the past several years.  Our internal revenue growth reflects our strong track record in winning new business, which in turn is enhanced by our pursuit of cross-servicing opportunities within and across our business segments.  Furthermore, although our revenues are generally received under contracts with limited terms and that can be terminated at the client’s option on short notice, we have been successful historically in obtaining increasing amounts of repeat business from many of our clients and in expanding the scope of the services we provide to them and thereby sustaining multi-year relationships with many of our clients.
 
    We seek out acquisitions in order to fill strategic gaps, selectively strengthen existing franchises, further strengthen and broaden our clinical, communications, commercial and/or patient outcomes capabilities, add complementary client relationships and bring on board additional management talent.  We believe that our track record to-date in identifying, negotiating, closing and integrating strategic, accretive acquisitions has been successful.  Acquisitions contributed significantly to our year-over-year growth for 2007. 


Business Segments
 
    We have organized our businesses into four operating segments:  inVentiv Clinical, inVentiv Communications, inVentiv Commercial and inVentiv Patient Outcomes. Each of our operating segments is composed of multiple businesses that are referred to as "business units" throughout this report.  We apply aggregation criteria consistent with definitions under the related guidance in Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information as well as SFAS 142, Goodwill and Other Intangible Assets, for purposes of aggregating business units.  The following is a detailed description of our four operating segments:
 
    inVentiv Clinical
 
    inVentiv Clinical provides professional resourcing and services primarily to the pharmaceutical, biotech and device companies.   Professional resourcing services include providing clinical research professionals in support of clients’ research efforts, including permanent placement, clinical staffing, and strategic resource teams.  In addition, inVentiv Clinical provides its clinical research clients with outsourced functional services in various areas, including clinical operations, medical affairs and biometrics/data management.    inVentiv Clinical consists of the Smith Hanley group of companies (which includes Smith Hanley Associates (“SHA”), Smith Hanley Consulting Group (“SHCG”) and MedFocus), HHI Clinical & Statistical Research Services (“HHI”), and Synergos, LLP ("Synergos").  inVentiv Clinical's service offerings include:
 
·  
Clinical Staffing and Recruiting. Through SHCG and MedFocus, we meet the staffing and recruiting needs of more than 140 pharmaceutical and biotechnology clients, including 14 of the top 20 global pharmaceutical companies, for SAS™ programmers, data managers, statisticians, monitors and clinical research associates, study and project managers, clinical trials coordinators, safety/regulatory staff, medical writers, scientific and laboratory staff and other clinical personnel.  Our clinical staffing services provide our clients with flexibility in managing and executing clinical trials internally and allow them to avoid the expense of hiring and training a full staff internally.   We draw from a database of over 30,000 candidates that is continually expanded through new recruiting techniques that include search engines, job fairs, conferences and referral bonuses.
 
·  
Functional Outsourcing.  We provide a variety of functional outsourcing services, including data management and statistical analysis services through HHI, through our dedicated facilities in Indiana and Pennsylvania, and monitoring and project management services through Synergos.  We have performed these services for over 150 clinical trials.  Our functional outsourcing services complement SHCG and MedFocus’s contract staffing pool with statistically-knowledgeable physicians and medically-knowledgeable statisticians to deliver well-organized research used in clinical trial and clinical program design, data management, data analysis, double data entry and validation, reporting and standard operating procedures writing. This bi-disciplinary expertise enables us to set up, manage and present data to help pharmaceutical clients move from the preclinical stage through the drug approval process and into post-commercialization oversight.
 
·  
Executive Placement. We provide executive placement services through SHA, which is one of the most experienced and respected executive placement organizations focused primarily on statisticians and data-related functions.
 
    inVentiv Communications
 
    inVentiv Communications provides services related to pharmaceutical advertising, branding, public relations, interactive communications and physician education.  This segment includes  inVentiv Communications, Inc. (formerly known as inChord Communications, Inc.), Jeffrey Simbrow Associates ("JSAI"), ignite Health and Incendia Health Studios (collectively, “Ignite”) (acquired in March 2007), Chamberlain Communications Group, Inc. (“Chamberlain”) (acquired in March 2007), Addison Whitney (acquired in June 2007) and Chandler Chicco Agency (“CCA”) (acquired in July 2007):

·  
Advertising and Communications Support.  Advertising and communications support services are delivered to pharmaceutical industry clients through five separate agencies:

·  
GSW Worldwide and Palio are full-service agencies that create marketing solutions through advertising, public relations, market access strategies, media and market research.  GSW Worldwide has established international reach through a network of twelve international affiliate relationships.
·  
Navicor specializes in oncology and immunology expertise.
·  
Stonefly conducts advertising, marketing, and public relations services focused primarily on biotechnology and emerging pharmaceutical companies.
·  
JSAI is a leading healthcare marketing and communications agency in Canada.
·  
Angela Liedler GmbH (“Liedler”), is a leading healthcare marketing and communications agency in Germany.
 
·  
Public Relations. Public relations services are delivered to pharmaceutical industry clients through two separate PR agencies:
 
·  
CCA is a full service public relations firm that serves the healthcare sector by building and promoting brand value, providing leadership, protecting brand value and furthering public affairs agendas.  CCA operates through three US-based and two Europe-based offices, and has established broad international reach through a network of fifteen international affiliate relationships.
·  
Chamberlain is also a full-service public relations firm dedicated to creating enduring agendas that drive understanding and meaning for clients’ healthcare brands.
 
·  
Branding.  Addison Whitney focuses on creating unique corporate and product brands, and specializes in building powerful branding solutions for clients through unique and disciplined processes. Addison Whitney offers a range of capabilities to create, renew and strengthen brands, including an expertise in generating names that reflect the brand's identity and meet regulatory requirements.  Revenues from our Y-Brand division are recognized and recorded on a fee-for-service basis, in accordance with the terms of the contracts.

·  
Interactive Communications. Ignite specializes in medical advertising and interactive communications targeting patients, caregivers and healthcare professionals.

·  
Patient and Physician education.  Cadent Medical Communications, Selva Communications and Center for Biomedical Continuing Education ("CBCE") provide education and communications services to build advocacy for pharmaceutical and biotech brands.  CBCE is an accredited provider of continuing patient and physician education for physicians.

    inVentiv Commercial
 
    inVentiv Commercial provides a wide range of commercialization support services, organized principally into two subdivisions:

·  
inVentiv Selling Solutions.  inVentiv Selling Solutions encompasses the following group of companies that mainly relate to sales teams and sales support services:

o  
inVentiv Pharma Teams: inVentiv Pharma Teams provide outsourced product commercialization programs for prescription pharmaceutical and other life sciences products.  inVentiv Pharma Teams maintain and operate one of the largest pharmaceutical outsourced sales organizations in the United States, including systems, facilities, and support services necessary to recruit, train and deploy customized, full-service targeted sales forces.

Life sciences companies, particularly pharmaceutical manufacturers, have traditionally relied upon product detailing as the primary means of influencing prescription writing patterns and promoting their products. Product detailing consists of a one-on-one meeting in a physician's office where a sales representative reviews the medical profile of a product's Food and Drug Administration approved indications.  In order to engage in an effective dialogue, the salesperson must be well educated and highly trained.  Recruiting qualified personnel and providing client and product specific training are both core competencies of inVentiv Selling Solutions.

o  
Recruiting: To accomplish a coordinated recruiting effort, our regionally based recruiters coordinate through a national recruitment office that locates and hires potential sales representatives. Our in-house human resources team adheres to selective hiring criteria and conducts detailed evaluations to ensure high quality of representation for our clients. inVentiv Selling Solutions’ recruiters maintain a fully automated database of qualified candidates for immediate hiring opportunities, and our website offers an online application for employment. We offer these recruitment services to clients as part of an integrated sales force recruitment, training and management program, as well as on a standalone basis.  inVentiv Selling Solutions hires a mix of full-time and flex-time representatives in order to accommodate the detailing level required by clients and enhance cost efficiency.

o  
Professional Development and Training: We have one of the largest dedicated training facilities of its type in the U.S.  Topics such as sample accountability, negotiation tactics, personal writing skills, integrity selling, time and territory management, team productivity and pharma-manager leadership are covered extensively in order to prepare the representatives for their interactions with medical professionals.  Our trainers have access to proprietary information about the prescription writing behavior of physicians.  We provide this training both for our own and for our clients' sales forces, and training and development services are essential to maintaining and building our relationships with pharmaceutical companies.  Our training efforts are further enhanced through a proprietary voice-recognition software platform enabling remote training practices. These strengths are widely recognized as distinguishing inVentiv Selling Solutions from its competitors.

o  
Regulatory Compliance Services: Through our PRS business unit, we provide independent oversight of the Prescription Drug Marketing Act (“PDMA”) and Office of Inspector General compliance to clients and to internal inVentiv Pharma Teams.  Our expertise in PDMA compliance issues is nationally recognized.  We provide a number of processes, systems and services to help clients comply with federal and state regulations specific to sample accountability, including auditing of sample accountability compliance by field force professionals and "whole systems" sample accountability assessments.  We also license software solutions for the implementation of sophisticated PDMA compliance strategies.

o  
Non-Personal Promotion: We provide warehousing, assembly, mailing, fulfillment, teleservices and eServices through our Promotech business unit.  Promotech maintains a newly expanded facility with over 62,000 square feet that includes an environmentally controlled, FDA and Drug Enforcement Agency (“DEA”) certified and PDMA compliant warehouse, office space and a 64-station call center.

o  
Virtual Event Services: MedConference is a leading provider of live and on-demand virtual event services to the pharmaceutical industry.  MedConference’s flagship service, MedConferenceLive™, creates and manages live and on-demand web events for the healthcare industry. MedConference’s turnkey package of reliable technology and full-support services provides a flexible, easy-to-use online communication platform for pharmaceutical companies, medical education providers, professional medical associations and others who need to deliver timely information to physicians and healthcare practitioners.

o  
Sales Force Automation/Data Analysis: Our Total Data Solutions (“TDS”) business unit collects and analyzes sales force level data necessary to make marketing resource allocation decisions. Sales representatives are equipped with an industry-leading palm-top and laptop sales force automation system developed for inVentiv Selling Solutions.  This system enables our sales representatives to rapidly collect sales call and physician profiling information while in the field, which is compiled daily in a central data storage server. Our information processing system allows sales management teams to analyze data regularly, compare the results with targeted initiatives and historical data and make necessary adjustments to the sales strategy.  TDS supports inVentiv Pharma Teams’ needs and also offers this sales force automation system on a standalone basis to clients.


·  
inVentiv Strategy and Analytics. inVentiv Strategy and Analytics encompasses our consulting offerings focused on strategy, analytics, market research, managed care and commercialization planning:

o  
Planning and Analytics: Health Products Research (“HPR”) is a leader in the development and implementation of advanced data analysis and market research technologies to support client decision making within pharmaceutical and biotechnology companies.  HPR combines leading edge technology with advanced statistical techniques and empirical research to deliver strategic and tactical solutions that help pharmaceutical executives maximize their return on investment for promotional resources.  HPR’s range of services includes a variety of quantitative and other tools that supports HPR’s clients in optimizing and continually improving the effectiveness of deployed promotional and sales force resources.

o  
Strategic Consulting:  Strategyx, acquired in June 2007, is a strategy consulting firm, focused on delivering effective and innovative approaches to participating in the emerging, managed healthcare marketplace. Strategyx specializes in three practice areas: managed markets strategy, product strategy and organization design.

o  
Product Access and Managed Market Support:  Ventiv Access Group provides the strategy and tactics to increase access to clients' products in managed markets, trade distribution channels, Medicaid, Medicare, and other State and Federal outlets.

o  
Consulting and Contract Marketing:  Creative Healthcare Solutions, LLC (“CHS”) is a leading provider of contract marketing services for pharmaceutical and biotech companies.  CHS supports product teams by adding expertise in brand management, new product planning, market research and business development.

 
    inVentiv Patient Outcomes
 
    inVentiv Patient Outcomes provides services related to patient adherence, patient assistance and reimbursement, clinical educator teams and medical cost containment and disease management.  This segment includes Adheris, Inc. (“Adheris”), The Franklin Group (“Franklin”), The Therapeutics Institute and AWAC (acquired in July 2007).

·  
Patient Pharmaceutical Compliance Programs. Through Adheris, we provide a variety of patient support services with a proven history of improving medication adherence across nearly every chronic therapeutic category.  By partnering with pharmacies around the country, Adheris’ programs build on the pharmacist-patient relationship and trust with personalized letters from pharmacists themselves.  Adheris programs comply with the patient privacy provisions of the Health Insurance Portability and Accountability Act of 1996, ("HIPAA"), and its OnSyte(TM) technology allows retail pharmacies to help patients stay on therapy while protecting their confidentiality and private medical information.

·  
Patient Support Programs. We offer patient assistance programs and reimbursement counseling through our Franklin business unit.  Franklin has established a leadership position in providing reliable and innovative patient assistance programs, reimbursement counseling, web-based programs, missions programs and proactive fulfillment.  Franklin also provides a variety of additional patient support services to clients, including support in Medicare Part D education.

·  
Clinical Nurse Educators, On-Call Specialists, and Medical Science Liaison Programs: The Therapeutics Institute offers highly qualified clinical and scientific professionals to build advocacy, educate healthcare professionals, and sensitize markets to novel and exciting therapies

·  
Medical Cost Containment and Consulting Solutions.  AWAC is a leading provider of proprietary IT-driven cost containment and medical consulting solutions to third party administrators, ERISA self-funded plans, fully insured plans, employer groups, managing general underwriters and insurance carriers.  AWAC provides unique data integration and access and analysis capabilities including real-time claims evaluation and intervention, disease management, demand management, risk assessment, wellness programs and pre-certification.

Acquisitions and Divestitures
 
    Strategic acquisitions are one core element of our business strategy.  We believe that our expertise in identifying potential acquisition targets, assessing their importance to our operational and growth objectives, performing due diligence and completing the acquisition of appropriate businesses and effectively integrating them with our existing operations is a significant competitive advantage.   The following is a summary of our acquisitions to date:
 
 
Acquisition
 
Type of Business
 
Segment (“inVentiv”)
 
Headquarters Location
 
Month Acquired
Chandler Chicco Agency
Public relations
Communications
New York
July 2007
AWAC
Medical cost containment and consulting solutions
Patient Outcomes
Georgia
July 2007
Addison Whitney
Branding
Communications
North Carolina
June 2007
Strategyx
Strategic consulting
Commercial
New Jersey
June 2007
Ignite Health
Interactive communications
Communications
California
March 2007
Chamberlain
Public relations
Communications
New York
March 2007
MedConference
Virtual event services
Commercial
Pennsylvania
November 2006
DialogCoach
Professional development and training
Commercial
Pennsylvania
November 2006
JSAI
Advertising and communications support
 
Communications
Ontario,
Canada
 
April 2006
Synergos
Functional outsourcing
 
Clinical
 
Texas
 
April 2006
Adheris
Patient pharmaceutical compliance programs
 
Patient Outcomes
 
Massachusetts
 
February 2006
inVentiv Communications, Inc.
Advertising and communications support
 
Communications
 
Ohio
 
October 2005
PRS
Regulatory compliance services
Commercial
Pennsylvania
August 2005
HHI
Functional outsourcing
Clinical
Maryland
November 2004
Smith Hanley
Clinical staffing and recruiting
Clinical
Connecticut
October 2004
Franklin
Patient support programs
Patient Outcomes
New Jersey
June 2004
 
    Our acquisition activity adds complexity to the analysis of period-to-period financial results and makes direct comparison of those financial results difficult.  Our acquisitions are accounted for using purchase accounting and the financial results of the acquired businesses are included in our consolidated financial statements from their acquisitions dates.  A prior year period that ended before an acquisition was completed, however, will not include the corresponding financial results of the acquired business.
 
    During 2002 and 2003, we divested our European Contract Sales businesses. We have been receiving payments subsequent to some of these divestitures based on the subsequent earnings of the divested unit. For the years ended December 31, 2007, 2006 and 2005, we received approximately $0.5 million, $1.4 million and  $1.7 million, respectively, mostly relating to the Germany based contract sales organizations.

International Operations
 
    As part of the acquisition of inVentiv Communications, Inc. in October 2005, we added that company's United Kingdom-based operations.  As part of the acquisition of CCA in July 2007, we added CCA’s operations in the United Kingdom and France.  These units collectively provide advertising, marketing and public relations services to clients throughout Europe.    In April 2006, we acquired JSAI, a leading healthcare marketing and communications agency in Canada.
 
    In December 2007, we increased our investment interest from 44% to 85% in Liedler, a provider of communication and marketing services for medical and pharmaceutical products, located in Germany.  We accounted for Liedler as an equity investment until the acquisition date, and then included its results in our consolidated results thereafter.  We also have a 15% ownership interest in Heart Reklambyra AB (“Heart”), an advertising agency located in Sweden, which we account for by using the equity method of accounting.  Neither investment is material to the overall consolidated financial statements.
 
    In addition to our fully-owned international operations and our minority ownership interests, we have within GSW Worldwide and within CCA an established network of over a dozen international affiliate relationships, which do not have any equity interest in the affiliate, that help support our client needs in additional international markets.
 
Clients
 
    We provide our services to leading pharmaceutical life sciences and healthcare companies.  For the years ended December 31, 2007 and 2006, no clients individually exceeded 10% of our total revenues, and we served over 325 unique clients in 2007 and support over 850 client brands.  Approximately 51% and 48% of our revenues in 2007 and 2006, respectively, were derived from our ten largest clients, which for 2007, listed alphabetically, were as follows: Allergan, Boehringer Ingelheim, Inc., Cephalon, Inc., Eli Lilly and Company, Johnson and Johnson, Merck KGaA, Novartis Pharmaceuticals, Inc., Pfizer, sanofi-aventis Group, and Wyeth.
 
    We consider the breadth of our client portfolio and our close relationships with leading pharmaceutical manufacturers to be an important competitive advantage, providing us with a source for recurring revenues as well as sales growth opportunities as our clients launch new products and as we develop new offerings. Our services are typically sold to several target groups within the client organization, typically their clinical, marketing and sales departments and brand teams. This provides the basis for continuous interaction and feedback, allowing us to continuously improve our services and identify new business opportunities, a process augmented by the longevity of many of our client relationships. We have developed sustained relationships with large, mid-tier and emerging pharmaceutical and biotechnology clients that provide us with recurring revenue streams and cross-selling opportunities. Our ability to perform services and add value at every part of the product life cycle enhances our ability to develop new business opportunities and form long-lasting relationships with clients.
 
    Our relationships with a client's clinical or marketing and sales organizations also benefit from high switching costs, as retaining another sales force or advertising agency and redesigning a marketing program creates substantial additional expense and causes losses in time and productivity for our clients. In addition, successful marketing and sales outsourcers have established their reputations due to sophisticated performance evaluation capabilities, and clients are unlikely to use vendors without widely recognized expertise and a strong track record and recognized brand names.

Competition
 
    We operate in highly competitive industries.  Our competitors include a variety of vendors providing services to the pharmaceutical, life sciences and healthcare industries, including outsourced sales organizations, medical communications agencies, contract research organizations and medical cost containment consultants.  Each of our business segments faces distinct competitors in the individual markets in which each operates:

·  
inVentiv Clinical: The specialty staffing services industry is very competitive and fragmented with relatively few barriers to entry.  We compete with several large nationwide temporary staffing companies.  The primary clinical staffing competitors to our SHCG and MedFocus business units include ClinForce (a division of Cross Country Healthcare, Inc.), Managed Clinical Solutions (a division of ICON), ASG, Advanced Clinical Services, RPS and Kforce Inc.  Primary competitors in the permanent placement area include numerous smaller specialty permanent placement groups which compete with us, as well as to some degree larger national firms such as Korn/Ferry International, Russell Reynolds Associates, and Heidrick & Struggles International, Inc.; however we are one of the only national firms that specializes exclusively in professional clinical trials research personnel.  In functional outsourcing (or Contract Research Organizations), the competition ranges from numerous small specialty organizations to global CROs such as Innovex (Quintiles Transnational Corp.) or Covance Inc.

·  
inVentiv Communications:  Marketing and communications services is a relatively fragmented and competitive market.  Our Communications Services group competes with the healthcare offerings of the five large global advertising holding companies, which include WPP Group PLC, Omnicom Group Inc., Publicis Groupe S.A., IPG and Havas.  In addition, we compete with a large number of smaller specialized agencies that have focused either on a therapeutic area or a particular service offering.

·  
inVentiv Commercial:  The majority of sales teams are currently managed internally by our clients, and we to some degree “compete” with our clients' alternative choices of managing their needs internally or co-promoting with another pharmaceutical company.  In addition, a small number of providers comprise the market for outsourced sales teams, and we believe that inVentiv, Innovex (Quintiles Transnational Corp.), Professional Detailing, Inc. and Publicis Groupe S.A. combined account for the majority of the U.S. outsourced sales team market share. The rest of the industry is fragmented, with a number of small providers focused on niche services.  One or more of our large competitors in the outsourced sales team market could become significant competitors with regard to the other services we offer by either developing additional capabilities or acquiring these capabilities.

·  
inVentiv Patient Outcomes:  Adheris’ offerings compete with several third party companies that implement adherence programs through major chains, including Catalina Marketing Corporation and Mirixa Corporation, as well as less directly with a number of specialty agencies and specialist service providers that focus on various aspects of patient adherence and compliance.  The Franklin Group competes with several other service companies and reimbursement specialists, including Express Scripts and the Lash Group.  The Therapeutics Institute competes with Innovex (Quintiles Transnational Corp.) and several other specialty nurse educator companies.  While payor cost containment services is a relatively fragmented and competitive market, we believe there is no single company providing AWAC’s range of services.  AWAC competitors in the technology arena include Active Health (a subsidiary of Aetna Health), D2 Hawkeye, MedStat and MEDai.  In the demand management area many companies provide pre-certification, utilization review and case management, and in the wellness area many companies provide wellness programs of varying types and focus.
 
    We believe that our business units individually and our organization as a whole have a variety of competitive advantages that have allowed us to compete successfully in the marketplaces for our services.  These advantages include the following:

·  
Leading Position Within Service Categories:  We believe that our operating divisions, and the business units within each operating division, have achieved positions of leadership within their respective service areas.  inVentiv Communications, through its well known agencies, such as GSW Worldwide, Palio and Chandler Chicco, is a major force in healthcare advertising, public relations and communications.  Prior to our acquisition of inVentiv Communications, Inc., that company was the largest privately-held healthcare marketing organization in the world.   inVentiv Clinical, through its Smith Hanley division, is recognized as a leader in clinical trials staffing and a leading provider of clinical trials-related SAS programmers, statisticians, data management and monitoring personnel to the major pharmaceutical and life sciences companies.  inVentiv Pharma Teams is the leading provider of outsourced product detailing services in the pharmaceutical industry.  Our business units have extensive experience and proven track records that support our business development efforts.

·  
Comprehensive Service Offering:  We are one of the largest providers of services to the pharmaceutical and life sciences industries in the U.S. and offer among the broadest range of services.  These are important factors to our clients and potential clients, many of whom prefer to work with organizations that can provide a comprehensive suite of complementary services and have a proven track record of execution.

·  
Broad and Diversified Client Base:  In addition to serving most of the largest pharmaceutical companies, we also serve a large number of mid-size and smaller biotechnology and life sciences companies.  As each of these companies uses our services, our relationship is expanded and the opportunity to cross-sell our services increases.   Our client base of over 325 pharmaceutical and biotechnology clients is broad and diversified, and with many of these clients we have maintained long-term relationships that help us in continuing to win new business.
 
·  
Well-Recongized Trade Names:  The Company recognizes that the established trade names with a long history possess a powerful and enduring nature that transcends general trade name recognition.  One of the most valuable assets to inVentiv is the trade names of many of our business units.  These names are a competitive advantage in the marketplace because they generate a favorable customer perception in brand name recognition in the pharmaceutical, life sciences and healthcare industries.  inVentiv's focus on building a comprehensive suite of best-in-class service providers with strong marketplace awareness has been a key strategy in its acquisitions.  A few examples of our strong brand names in their respective marketplaces include Smith Hanley, GSW Worldwide, Palio, Chandler Chicco, Chamberlain, Ignite, Adheris, and AWAC.
 
·  
Proprietary Technologies and Data:  We maintain and operate a number of proprietary software programs and systems for marketing development and data gathering.  We invest in technology and have developed and deployed cutting-edge marketing and sales force automation tools.  Our technology advantages in the sales force automation and in the virtual events areas are important for the management of sales and marketing campaigns for pharmaceutical products throughout their life cycle, particularly during the product launch phase.  Our patient compliance offerings rely on a broad network of retail pharmacies and our use of proprietary technologies and safeguards to effectively manage the large amount of underlying data in a timely and targeted manner. Our medical cost containment business unit utilizes an electronic claims surveillance system to monitor medical claims data, prescriptions and pre-certification records, which are then reviewed by our expert physicians and case managers.

·  
Experienced Management Team: Our management team includes executives with substantial expertise in pharmaceutical and healthcare services, as well as substantial background within pharmaceutical companies themselves, including managing pharmaceutical sales forces, establishing sales and marketing strategies, and product management industry experience.  The team also has extensive experience in the areas of outsourced staffing, permanent placement and executive search services.  We believe our mix of senior management with pharmaceutical and healthcare services experience, entrepreneurial talent and strategic perspective is unique in the industry.

Seasonality
 
   Although our business is subject to some variability as a result of the ongoing startup and completion of contracts, periodic receipt of incentive fees and the ramp up of product revenues in certain contracts, and select businesses do have some degree of seasonality, our business in aggregate is not generally subject to significant seasonal variation.

Employees
 
    At December 31, 2007, we employed approximately 5,700 people in our operations.  Many aspects of our business are very labor intensive and the turnover rate of employees in our industry, and in corresponding segments of the pharmaceutical industry, is generally high, particularly with respect to sales force employees.  We believe our turnover rate is comparable to that of other outsourced service organizations and that turnover in our contract sales and communications businesses is comparable to turnover in internal pharmaceutical sales and marketing departments.  We have no collective bargaining agreements covering any of our employees and are unaware of any current efforts or plans to organize any of our employees.  We believe that our relations with our employees are satisfactory.

Government Regulation
 
    Our inVentiv Communications segment is subject to all of the risks, including regulatory risks, that advertising companies generally experience as well as risks that relate specifically to the provision of advertising services to the pharmaceutical industry.  There has been an increasing tendency in the U.S. on the part of advertisers to resort to the courts and industry and self-regulatory bodies to challenge comparative advertising on the grounds that the advertising is false and deceptive. Through the years, there has been a continuing expansion of specific rules, prohibitions, media restrictions, labeling disclosures and warning requirements with respect to the advertising for certain products.
 
    Adheris, a part of our inVentiv Patient Outcomes segment, provides persistence and compliance programs, principally in the form of refill reminder communications, to pharmacy chains.  These activities are subject to regulation under HIPAA, the Federal Health Care Programs Antikickback Law and corresponding state laws.  We believe that Adheris's activities comply with all applicable federal and state laws in all material respects.  Certain of these laws are subject to interpretation that is evolving.  We could incur significant expenses if Adheris's activities are determined to be non-compliant and, depending the extent and scope of any such regulatory developments, our consolidated financial condition and results of operations could be materially and adversely affected.
 
    Our inVentiv Commercial segment provides contract sales services to the pharmaceutical industry and employs sales representatives who handle and distribute samples of pharmaceutical products.  The handling and distribution of prescription drug products are subject to regulation under the Prescription Drug Marketing Act of 1987 and other applicable federal, state and local laws and regulations. These laws and regulations regulate the distribution of drug samples by mandating storage, handling, solicitation and record-keeping requirements for drug samples and by banning the purchase or sale of drug samples.
 
    Some of our physician education services in our inVentiv Commercial and inVentiv Communications segments are subject to a variety of federal and state regulations relating to both the education of medical professionals and the marketing and sale of pharmaceuticals. In addition, certain ethical guidelines promulgated by the American Medical Association ("AMA") govern the receipt by physicians of gifts in connection with the marketing of healthcare products. These guidelines govern the honoraria and other items of value that AMA physicians may receive, directly or indirectly, from pharmaceutical companies. Any changes in such regulations or their application could have a material adverse effect on inVentiv. Failure to comply with these requirements could result in the imposition of fines, loss of licenses and other penalties and could have a material adverse effect on our consolidated financial condition and results of operations.
 
    From time to time, state and federal legislation is proposed with regard to the use of proprietary databases of consumer and health groups. The uncertainty of the regulatory environment is increased by the fact that we generate and receive data from many sources. As a result, there are many ways government might attempt to regulate our use of this data. Any such restriction could have a material adverse effect on our consolidated financial condition and results of operations.
 
    Our pharmaceutical and life sciences clients are subject to extensive government regulation. Generally, compliance with these regulations is the responsibility of those clients. However, several of our businesses are themselves subject to the direct effect of government regulation.  In addition, we may be liable under certain of our customer contracts for the violation of government regulations by the applicable customers to the extent those violations result from or relate to the services we have performed for such customers.  We could be subject to a variety of enforcement or private actions for our failure or the failure of our clients to comply with such regulations.

Available Information
 
    We make available on our website, located at www.inventivhealth.com, the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the United States Securities and Exchange Commission (“SEC”): our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All such filings are available free of charge.  Information found on our website should not be considered part of this annual report on Form 10-K.

 
 

 


 
Item 1A. Risk Factors
 
Risks Related to Our Business
 
    inVentiv Health is a multi-faceted organization encompassing four segments, each with its own particular risks and uncertainties.  A wide range of factors could materially affect our financial results and the performance of our stock price.  The factors affecting our operations include the following:

Our revenues are dependent on expenditures by companies in the pharmaceutical and life sciences industries, third party administrators, employee benefit plans, employer groups, managing general underwriters and insurance carriers and others, and a variety of factors could cause the overall levels of those expenditures to decline.
 
    The revenues of our inVentiv Clinical, inVentiv Communications and inVentiv Commercial divisions are highly dependent on expenditures by companies in the pharmaceutical industry (and, to a lesser extent, other life sciences industries) for advertising, promotional, marketing and sales, recruiting, clinical staffing and support and compliance services. Any decline in aggregate demand for these services could negatively affect these businesses.

·  
Advertising, promotional, marketing and sales expenditures by pharmaceutical manufacturers have in the past been, and could in the future be, negatively impacted by, among other things, governmental reform or private market initiatives intended to reduce the cost of pharmaceutical products or by governmental, medical association or pharmaceutical industry initiatives designed to regulate the manner in which pharmaceutical manufacturers promote their products.
·  
Consolidation in the pharmaceutical industry could negatively affect certain of our business units by reducing overall outsourced expenditures, particularly in the sales, marketing and staffing areas.
·  
Companies may elect to perform advertising, promotional, marketing, sales, compliance and other services internally based on industry and company-specific factors such as the rate of new product development and FDA approval of those products, number of sales representatives employed internally in relation to demand for or the need to promote new and existing products and competition from other suppliers.
·  
Companies may elect to perform clinical tasks internally based on industry and company-specific factors such as the rate of new product development and FDA approval of those products, the number of clinical professionals employed internally in relation to the demand for or the need to develop new drug candidates, and competition from other suppliers.
 
    AWAC has not yet deeply penetrated the medical payor marketplace, particularly the third party administrator marketplace.  Furthermore, any decline in aggregate demand for medical cost containment services could negatively affect AWAC's business.  Consolidation among AWAC's customer base could negatively affect AWAC by reducing overall outsourced expenditures in the medical cost containment area.  Furthermore, companies may elect to perform medical cost containment services internally based on industry and company-specific factors, including competition from other suppliers.


Many of the contracts under which we provide services are subject to termination on short notice, which may make our revenues less predictable.
 
    We provide services to many of our most significant clients under contracts that our clients may cancel on short notice (generally 10 to 120 days, depending on the specific business unit). In addition, many of our pharmaceutical sales contracts provide our clients with the opportunity to internalize the sales forces under contract. Although we have been successful in a number of cases in negotiating longer-term commitments and a non-cancelable initial period for pharmaceutical sales contracts, we cannot be assured that clients will renew relationships beyond the expiration date of existing contracts in any of our business units. We cannot assure you that our most significant clients will continue to do business with us over the long term. If any of our significant clients elect to cancel, convert or not renew their contracts, it could have a material adverse effect on our consolidated financial condition and results of operations.
 
We are in the process of integrating a significant number of acquisitions and expect to make future acquisitions, which will involve additional risks
 
    For the past several years, a significant component of our growth strategy has been the addition through acquisitions of business units that are accretive to earnings.  We have and will continue to seek to address the need to offer additional services through acquisitions of other companies, including the personnel such acquisitions may bring to us.  The current market for acquisition targets in our industry is competitive, and we may not be successful in continuing to identify, successfully bid for and complete acquisitions necessary to achieve our operational and financial goals.
 
    Our acquisitions of Ignite, Chamberlain, Addison Whitney, Strategyx, CCA and AWAC were completed during 2007.  Operational and financial integration of the acquired businesses is not yet complete and we may experience difficulties in completing the integration processes.  Among other things, we are generally required to document internal controls under Section 404 of the Sarbanes-Oxley Act for each of our acquired business units by the end of the first fiscal year following the year in which the acquisition occurs.  We may not be successful in recognizing material weaknesses in internal controls over financial reporting for our acquired businesses and may have difficulty remedying any such material weaknesses on a timely basis.  More generally, we may experience difficulties in the integration of personnel and technologies across diverse business platforms.
 
    Acquisitions involve numerous risks in addition to integration risk, including the following:
 
·  
diversion of management’s attention from normal daily operations of the business;
 
·  
insufficient revenues to offset increased expenses associated with acquisitions;
 
·  
assumption of liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for their failure to comply with healthcare and tax regulations;
 
·  
the potential loss of key customers or employees of the acquired companies; and
 
·  
difficulties integrating acquired personnel and distinct cultures into our business.
 
    Acquisitions, and related acquisition earnouts, may also cause us to deplete our cash reserves and/or increase our leverage, and therefore increase the financial risk of our capital structure; assume liabilities of the acquired businesses; record goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential periodic impairment charges; incur amortization expenses related to certain intangible assets; or become subject to litigation.
 
    Mergers and acquisitions of new businesses are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful and will not materially and adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions we make could harm our operational and consolidated financial condition and results of operations in a material way.

We may not be successful in managing our infrastructure and resources to support continued growth.
 
    Our ability to grow also depends to a significant degree on our ability to successfully leverage our existing infrastructure to perform services for our clients, develop and successfully implement new sales channels for the services we offer and to enhance and expand the range of services that we can deliver to our customers.  We have historically maintained a relatively flat management structure; as the sizes of our business units grow and the number of our acquired business units increases, the breadth and depth of the responsibilities of our senior management team has increased as well.  Our growth will also depend on a number of other factors, including our ability to:

·  
maintain the high quality of the services we provide to our customers;

·  
increase our penetration with existing customers;

·  
recruit, motivate and retain qualified personnel;

·  
economically train existing sales representatives and recruit new sales representatives; and

·  
implement operational and financial systems and additional management resources to operate efficiently and effectively regardless of market conditions.
 
    We are dependent on the proper functioning of our information systems in operating our business. Critical information systems used in daily operations perform billing and accounts receivable functions. Additionally, we rely on our information systems in managing our accounting and financial reporting. Our information systems are protected through physical and software safeguards and we have backup remote processing capabilities.  However, they are still vulnerable to fire, storm, flood, power loss, telecommunications failures, physical or software break-ins and similar events. In the event that critical information systems fail or are otherwise unavailable, these functions would have to be accomplished manually, which could temporarily impact our ability to identify business opportunities quickly, to maintain billing and clinical records reliably, to bill for services efficiently and to maintain our accounting and financial reporting accurately.
 
    We cannot assure you that we will be able to manage or expand our operations effectively to address current or future demand and market conditions, or that we will be able to do so without incurring increased costs in order to maintain appropriate infrastructure and senior management capabilities.  If we are unable to manage our infrastructure and resources effectively, our business, consolidated financial condition and results of operations could be materially and adversely affected.

We employ sophisticated computer technology to deliver our services, and any failure of or damage to this technology could impair our ability to conduct our business.
 
    We have invested significantly in sophisticated and specialized computer technology and have focused on the application of this technology to provide customized solutions to meet many of our clients' needs. We have also invested significantly in sophisticated end-user databases and software that enable us to market our clients' products to targeted markets. We anticipate that it will be necessary to continue to select, invest in and develop new and enhanced technology and end-user databases on a timely basis in the future in order to maintain our competitiveness. In addition, our business is dependent on our computer equipment and software systems, and the temporary or permanent loss of this equipment or systems, through casualty or operating malfunction, could have a material adverse effect on our consolidated financial condition and results of operations.  Our property and business interruption insurance may not adequately compensate us for all losses that we may incur in any such event.  Changes in the technology environment or our inability to update our technology to service clients could impact our financial performance.

We are subject to a high degree of government regulation.
 
    We are subject to a high degree of government regulation.  Significant changes in these regulations, or our failure to comply with them, could impose additional costs on us or otherwise negatively affect our operations.  See the discussion under "Business – Government Regulation" above.

Our services are subject to evolving industry standards and rapid technological changes.
 
    The markets for our services are characterized by rapidly changing technology, evolving industry standards and frequent introduction of new and enhanced services.  To succeed, we must continue to enhance our existing services; introduce new services on a timely and cost-effective basis to meet evolving customer requirements; integrate new services with existing services; achieve market acceptance for new services; and respond to emerging industry standards and other technological changes.

We may be adversely affected by customer concentration.
 
    We have no customers, individually, that accounted for in excess of 10% of our revenues for the year ended December 31, 2007, and our largest customer during such year accounted for 9% of revenues.  Our top 10 customers account for 51% of our revenue.  If any large customer decreases or terminates its relationship with us, our business and consolidated financial position and results of operations could be materially and adversely affected.

Substantial defaults by our customers on our accounts receivable could have a significant negative impact on our business, results of operations, financial condition or liquidity.
 
    A significant portion of our working capital consists of accounts receivable from customers. If customers responsible for a significant amount of accounts receivable were to become insolvent or otherwise unable to pay for products and services, or were to become unwilling or unable to make payments in a timely manner, our business, consolidated results of operations, consolidated financial position or liquidity could be materially and adversely affected. In the event of an economic or industry downturn, such downturn could have an adverse affect on the servicing of these accounts receivable, which could result in longer payment cycles, increased collection costs and defaults in excess of management’s expectations.

We may lose or fail to attract and retain key employees and management personnel.
 
    Our key managerial and other employees are among our most important assets. An important aspect of our competitiveness is our ability to attract and retain key employees and management personnel.  A significant aspect of our acquisition strategy is the retention of key employees of target companies for significant periods of time.  The loss of the services of any key executive for any reason could have a material adverse effect upon the Company.
 
    Compensation for key employees and management personnel is an essential factor in attracting and retaining them, and there can be no assurance that we will offer a level of compensation sufficient to do so. Equity-based compensation, including compensation in the form of options and restricted stock, plays an important role in our compensation of new and existing employees.  Because of limitations on the number of shares available for future grant under our equity incentive plan, we may be unable to meet the compensation requirements of our key employees and management personnel.  In addition, as a result of our adoption of SFAS 123R effective January 1, 2006, equity-based compensation is reflected in our income statement and has a negative impact on earnings.
 
We may incur liability in connection with litigation.
 
    We are subject to lawsuits, investigations and claims arising out of the conduct of our business, including those related to commercial transactions, contracts, government regulation and employment matters. Certain claims, suits and complaints have been or may in the future be filed against us as described under "Legal Proceedings" in Part I, Item 3 below.  Litigation is inherently uncertain and we cannot assure you that we will not suffer a material, adverse effect as a consequence of any pending or future claims.  Moreover, new or adverse developments in existing litigation claims or legal proceedings involving the Company could require us to establish or increase litigation reserves.
 
    We have been and may in the future become a party to legal actions related to the design and management of our service offerings, including, among others, privacy-based actions and contract disputes.  Adheris is the subject of a pending action asserting, among other claims, violation of the California Confidentiality of Medical Information Act and has had asserted against it in the past other claims based on purported violations of privacy statutes and common law arising from its patient refill reminder programs.  Although it has not been the subject of litigation to date, AWAC could become the subject of medical malpractice claims based on the design and management of its service offerings.  Adheris and AWAC each maintain errors and omissions insurance and other traditional business coverage.  AWAC does not insure for medical malpractice since it does not deem itself to be practicing medicine.  Although we believe that all of our businesses are adequately insured, certain types of claims, such as punitive damages, are not covered by insurance.
 
    We could face substantial product liability claims in the event any of the pharmaceutical or other products we have previously marketed or market now or may in the future market are alleged to cause negative reactions or adverse side effects or in the event any of these products causes injury, is alleged to be unsuitable for its intended purpose or is alleged to be otherwise defective. We rely on contractual indemnification provisions with our customers to protect us against certain product liability related claims. There is no assurance that these provisions will be fully enforceable or that they will provide adequate protection against claims intended to be covered.
 
We may not be able to comply with the requirements of our credit facility.
 
    On July 6, 2007, the Company entered into an Amended and Restated Credit Agreement with UBS AG, Stamford Branch and others.  The outstanding balance under this facility was approximately $330 million as of the closing date under the facility, which is attributable to a $330 million secured term loan component.  The Amended and Restated Credit Agreement also provided for up to $20 million in additional term loans ("delayed draw term loans") to be advanced no later than January 6, 2008 which we elected to not draw.  The agreement also provides a $50 million revolving credit facility, of which $10 million is initially available for the issuance of letters of credit, and a swingline facility.  The term loan will mature on the seventh anniversary of the Amended and Restated Credit Agreement, with scheduled quarterly amortization of 1% per year during years one through six and 94% during year seven.  The revolving loans will mature on the sixth anniversary of the Amended and Restated Credit Agreement.  Amounts advanced under the credit facility must be prepaid with a portion of our "Excess Cash Flow", as defined in the credit agreement.  The credit facility contains numerous operating covenants that have the effect of reducing management's discretion in operating our businesses, including covenants limiting:

·  
the incurrence of indebtedness;

·  
the creation of liens on our assets;

·  
sale-leaseback transactions;

·  
acquisitions;

·  
guarantees;

·  
payment of dividends; and

·  
fundamental changes and transactions with affiliates.

The Amended and Restated Credit Agreement also includes a financial covenant under which inVentiv is required to maintain a total leverage ratio that does not exceed, as of the last day of any four consecutive fiscal quarters, 4.0 to 1.0 through December 31, 2009 and 3.5 to 1.0 thereafter.  If we are unable to comply with the requirements of the credit facility, our lenders could refuse to advance additional funds to us and/or seek to enforce remedies against us.  Any such developments would have a material adverse effect on inVentiv.  As of the date of this report, we comply with the requirements of our credit facility.

Our future financial results may not be consistent with our guidance.
 
    From time to time, we communicate to the market guidance relating to our revenue, earnings per share and other financial measures. These statements are intended to provide metrics against which to evaluate our performance, but they should not be understood as predictions or assurances of our future performance. Any downward variance in operating results as compared to announced guidance can be expected to result in a decline in our stock price.  Our ability to meet any projected financial result milestone is subject to inherent risks and uncertainties, and we caution investors against placing undue reliance on our published guidance. See "Cautionary Statement Regarding Forward-Looking Disclosure" above.

We may experience further writedowns of our financial instruments and other losses related to volatile and illiquid market conditions.

    At December 31, 2007, we had $45.3 million of marketable securities on our Balance Sheet which have been classified as restricted. We recorded $0.8 million of impairment related to our marketable securities in the fourth quarter of fiscal 2007 as a result of fluctuation in the value of our investment in the Columbia Strategic Cash Portfolio (the "CSCP").  The CSCP maintained a net asset value of $1 per unit until December 2007, after which the net asset value per unit fluctuated, and will continue to fluctuate, based on changes in market values of the securities held by the portfolio.  The process of liquidating CSCP’s portfolio was initiated in December 2007 and is anticipated to continue through 2008.  Future impairment charges may result until the fund is fully liquidated, depending on market conditions.

    We continue to have exposure to markets and products and as market conditions continue to evolve the fair value of our marketable securities could further deteriorate. In addition, recent market volatility has made it extremely difficult to value certain of our securities.  Subsequent valuations, in light of factors then prevailing, may result in significant changes in the values of these securities in future periods. In addition, at the time of any sales and settlements of these securities, the price we ultimately realize will depend on the demand and liquidity in the market at that time and may be materially lower than their current fair value. Any of these factors could require us to take further writedowns in the value of our securities portfolio, which may have an adverse effect on our results of operations in future periods.
 
The inability to generate sufficient cash flows to support operations and other activities could prevent future growth and success.
 
    Our inability to generate sufficient cash flows to support capital expansion, business acquisition plans, share repurchases and general operating activities could negatively affect our operations and prevent our expansion into existing and new markets. Our ability to generate cash flows is dependent in part upon obtaining necessary financing at favorable interest rates. Interest rate fluctuations and other capital market conditions may prevent us from doing so.
 
If our goodwill or indefinite-lived intangible assets become impaired, we may be required to record a significant charge to earnings.
 
    Under United States generally accepted accounting principles, goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment on an annual basis or more frequently whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or indefinite-lived intangible assets is determined, resulting in an impact on our results of operations.
 
Risks Related to our Common Stock
 
The trading price of our common stock may be volatile, and you may not be able to sell your shares at or above the price at which you acquire them.
 
    The trading price of our common stock may fluctuate significantly.  Factors affecting the trading price of our common stock include:
 
·  
variations in operating results;
 
·  
the gain or loss of significant customers or suppliers;

·  
announcements relating to our acquisition of other businesses;

·  
changes in the estimates of our operating results or downward variances in operating results as compared to guidance;

·  
changes in recommendations by any securities analysts that elect to follow our common stock; and

·  
market conditions in our industry, the industries of our customers and our suppliers and the economy as a whole.
 
    In addition, if the market for health care stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, consolidated operating results or consolidated financial condition.

 
Anti-takeover provisions in our organizational documents make any change in control more difficult.

    Our certificate of incorporation and by-laws contain provisions that may delay or prevent a change in control, may discourage bids at a premium over the market price of our common stock and may affect adversely the market price of our common stock and the voting and other rights of the holders of our common stock. These provisions include:

·  
limitations on the ability of our shareholders to call a special meeting of shareholders;

·  
our ability to issue additional shares of our common stock without shareholder approval;

·  
our ability to issue preferred stock with voting or conversion rights that adversely affect the voting or other rights of holders of common stock without their approval;

·  
provisions that provide that vacancies on the board of directors, including any vacancy resulting from an expansion of the board, may be filled by a vote of the directors in office at the time of the vacancy; and

·  
advance notice requirements for raising matters of business or making nominations at shareholders’ meetings.

Our acquisition activity may dilute your equity interest and negatively affect the trading price of our common stock.
 
    We have historically chosen to satisfy a significant portion of the consideration paid for acquired businesses in the form of shares of our common stock, including by reserving the right to satisfy a portion of any contingent, or "earnout", consideration, by issuing additional shares of our common stock.  The potential earnout obligations under the terms of our completed acquisitions may be material individually or in the aggregate.  Acquisitions we make in the future, and any earnout consideration from completed acquisitions that we satisfy through the issuance of our common stock, may significantly dilute your equity interest and may negatively affect the trading price of our common stock.

A substantial number of our securities are eligible for future sale and this could affect the market price for our stock.
 
    The market price of our common stock could drop due to sales of a large number of shares of our common stock or the perception that these sales could occur. As of February 25, 2008, we had 32,421,673 shares of common stock outstanding.  Of these shares, approximately 2.1 million shares, excluding shares held in street names, were subject to contractual resale restrictions under acquisition agreements (as well as resale restrictions under Rule 144) and will become eligible for sale over the next several years.  Shares issued in future acquisitions, and shares issued in satisfaction of earnout obligations under completed acquisitions, may add substantially to the number of shares available for future sale.
 
    In addition, as of February 22, 2007, approximately 2,192,521 shares of our common stock were subject to outstanding stock options.  Holders of our stock options are likely to exercise them, if ever, at a time when we otherwise could obtain a price for the sale of our securities that is higher than the exercise price per security of the options or warrants. This exercise, or the possibility of this exercise, may reduce the price of our common stock.

 
Item 1B. Unresolved Staff Comments
 
    We have received no written comments regarding its periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of its 2007 fiscal year and that remain unresolved.
 

 
    As of December 31, 2007, we leased 50 facilities totaling 986,578 square feet, including our principal executive offices located in Somerset, New Jersey.  Eleven facilities totaling 84,553 square feet are leased by the inVentiv Clinical segment, 22 facilities totaling 419,212 square feet are leased by the inVentiv Communications segment, 13 facilities totaling 352,849 square feet are leased by the inVentiv Commercial segment, three facilities totaling 73,964 square feet are leased by the inVentiv Patient Outcomes segment and one facility with approximately 56,000 square feet is leased by the Other (corporate) segment. These leases expire at varying dates through 2025.  We believe that our facilities are adequate for our present and reasonably anticipated business requirements.

 
    Weisz v. Albertsons, Inc. (San Diego Superior Court Case No. GIC 830069): This action was filed on May 17, 2004 in San Diego Superior Court, California by Utility Consumer Action Network against Albertsons, Inc. and its affiliated drug store chains and seventeen pharmaceutical companies.  This complaint alleged, among other claims, violation of the California Unfair Competition Law and the California Confidentiality of Medical Information Act (“CMIA”) arising from the operation of manufacturer-sponsored, pharmacy-based compliance programs similar to Adheris’ refill reminder programs.  An amended complaint was filed on November 4, 2004 adding Adheris as a defendant to the lawsuit.  A subsequent amendment to the complaint substituted Plaintiff Kimberly Weisz (“Plaintiff”) as the class representative to this purported class action.
 
    After several rounds of pleading challenges to Plaintiff’s various renditions of the complaint, all but one pharmaceutical manufacturing company, AstraZeneca, LP, were dismissed from the case, leaving only Albertsons, Inc., Adheris, and AstraZeneca as the remaining defendants (“Defendants”) in this action.  In the latest pleading challenge to Plaintiff’s Fifth Amended Complaint, the remaining defendants were successful in eliminating a number of claims, including fraud-based and breach of privacy claims.  Defendants also successfully moved to strike Plaintiff’s class allegations as improper.  The operative Sixth Amended Complaint, which was filed on January 6, 2008, alleges five causes of action against Defendants.  Only three of these claims – violation of the CMIA, breach of fiduciary duty, and unjust enrichment – are alleged against Adheris.  Adheris intends to continue to defend this action vigorously, and we do not believe that this action will have a material adverse effect on our consolidated balance sheets, results of operations or cash flows. It is impossible to predict the outcome of litigation with certainty, however, and there can be no assurance that an adverse result in this proceeding would not have a potentially material adverse effect on our consolidated balance sheets, results of operations or cash flows.  Our insurer, AIG, is defending this action under reservation of rights.
 
    Indemnification Claim. In January 2008, PRS received a demand for indemnification from one of its customers relating to a lawsuit filed against the customer.   The lawsuit seeks class action certification and brings claims against the customer pursuant to the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005, 47 U.S.C. § 227, a state consumer fraud statute and common law conversion; and seeks statutory and actual damages allegedly caused by the sending of unsolicited fax advertisements related to the customer’s product.  PRS assisted the customer in sending the faxes in question, although the actual faxing was done by an unaffiliated entity.  The customer bases its demand for indemnification on an indemnification clause found in its services contract with PRS.  PRS has declined to indemnify the customer and if claims are asserted against PRS, PRS intends to defend such claims vigorously.  
 
    Other.  We are subject to lawsuits, investigations and claims arising out of the conduct of our business, including those related to commercial transactions, contracts, government regulation and employment matters. Certain such claims have been filed or are pending against us.  All such matters are of a kind routinely experienced in our business and are consistent with our historical experience.  We do not believe that any such routine action will have a material adverse effect on us.


 
No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2007.

 
 

 



The following table contains the high and low sales prices of our common stock traded on the Nasdaq Global Select Market (ticker symbol “VTIV”) during the periods indicated:

 
High
Low
Year ended December 31, 2007
   
First Quarter
$39.09
           $34.49
Second Quarter
$40.00
$34.56
Third Quarter
$43.82
$35.17
Fourth Quarter
$46.01
$27.56
     
 
High
Low
Year ended December 31, 2006
   
First Quarter
$33.22
           $23.91
Second Quarter
$32.67
$26.77
Third Quarter
$32.70
$26.99
Fourth Quarter
$35.35
$27.19

On February 25, 2008, there were approximately 320 record holders of our common stock.  A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions.
 
    To date, we have not declared cash dividends on our common stock and are currently restricted from doing so under our credit agreement. We do not anticipate paying any cash dividends in the foreseeable future.
 
    During the fourth quarter of 2007, we did not repurchase any of our outstanding equity securities and, to our knowledge, no “affiliated purchaser” of inVentiv repurchased any of our outstanding securities.
 
    The transfer agent for our common stock is American Stock Transfer and Trust Company, 6201 Fifteenth Avenue, Brooklyn, New York, 11219.
 

Item 6.  Selected Financial Data.

SELECTED FINANCIAL DATA

The following table summarizes certain of our historical financial data and is qualified in its entirety by reference to, and should be read in conjunction with, our historical consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Historical financial information may not be indicative of our future performance. See also "Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations".

   
For the Years Ended December 31,
 
   
2007
   
2006
   
2005
   
2004
   
2003
 
   
(in thousands, except per share data)
 
Revenues
  $ 977,300     $ 766,245     $ 556,312     $ 352,184     $ 224,453  
Income from continuing operations
  $ 47,226     $ 49,198     $ 43,082     $ 30,130     $ 9,895  
Income (losses) from discontinued operations
  $ 258     $ 2,037     $ 781     $ 1,002     $ (4,119 )
Net income
  $ 47,484     $ 51,235     $ 43,863     $ 31,132     $ 5,776  
                                         
Basic earnings (losses) per share:
                                       
Continuing operations
  $ 1.50     $ 1.69     $ 1.60     $ 1.26     $ 0.43  
Discontinued operations
  $ 0.00     $ 0.07     $ 0.03     $ 0.04     $ (0.18 )
Basic earnings per share
  $ 1.50     $ 1.76     $ 1.63     $ 1.30     $ 0.25  
                                         
Diluted earnings (losses) per share:
                                       
Continuing operations
  $ 1.46     $ 1.64     $ 1.53     $ 1.18     $ 0.42  
Discontinued operations
  $ 0.01     $ 0.06     $ 0.03     $ 0.04     $ (0.18 )
Diluted earnings per share
  $ 1.47     $ 1.70     $ 1.56     $ 1.22     $ 0.24  
                                         
Shares used in computing basic earnings (losses) per share
    31,578       29,159       26,875       23,951       22,919  
                                         
Shares used in computing diluted earnings (losses) per share
    32,267       30,058       28,165       25,437       23,801  
                                         
Balance sheet data:
                                       
Total assets
  $ 1,110,856     $ 771,054     $ 583,894     $ 287,452     $ 180,708  
                                         
Long-term debt (a)
  $ 345,995     $ 184,717     $ 190,508     $ 24,898     $ 18,488  
                                         
Total equity
  $ 477,466     $ 358,462     $ 253,219     $ 172,444     $ 107,725  

(a) Long-term debt includes the non-current portion of our credit arrangement (for 2005-2007) and capital lease obligations (for all years), but excludes the current portion of our credit agreement and capital lease obligations.
 
 

 
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
    This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements, accompanying notes and other financial information included in this Annual Report on Form 10-K for the years ended December 31, 2007, 2006 and 2005.

Introduction
 
    We currently manage four operating segments based on the way management makes operating decisions and assesses performance:

·  
inVentiv Clinical, which provides services related to permanent placement, clinical staffing, data collection and management and functional outsourcing.

·  
inVentiv Communications, which provides services related to pharmaceutical advertising, branding, public relations, interactive communications and physician education.

·  
inVentiv Commercial, which consists of our outsourced sales and marketing teams, planning and analytics services, sample accountability services, marketing support services, professional development and training, and recruitment of sales representatives in the commercial services area. This segment includes inVentiv Strategy & Analytics and inVentiv Selling Solutions.

·  
inVentiv Patient Outcomes, which provides services related to patient adherence, patient assistance and reimbursement, clinical educator teams and medical cost containment and disease management.
 
    Our non-operating segment "Other" encompasses the activities of the corporate management group.
 
    Our business is heavily dependent on the willingness and propensity of our customers to seek outsourced solutions for the services we provide.  We believe that our business has been positively affected by a trend of large pharmaceutical manufacturers toward utilizing outsourcing arrangements as a means of controlling variable unit cost and increasing flexibility. Although large contracts with these manufacturers remain an important component of our overall business activity, there is a potential for margin contraction and the termination of contracts resulting from downsizing and other cost control measures by large pharmaceutical manufacturers.

 
    We believe that the increasing percentage of New Drug Application (“NDA”) and New Molecular Entity (“NME”) approvals attributable to small and mid-tier pharmaceutical and biotechnology companies presents an opportunity for companies providing outsourced services because these companies often prefer to employ high-quality, third party service providers (either directly or in co-promotion situations with pharmaceutical partners) to effect critical late-stage developmental and commercialization functions, rather than building significant infrastructure internally.  We therefore target a broad spectrum of companies within the pharmaceutical and life sciences industry in seeking to develop business opportunities.

 
 

 

Critical Accounting Policies

Revenue Recognition

The following is a summary of our revenue recognition policy, based on the segment and services we provide:

 
inVentiv Clinical

·  
Clinical Staffing and Recruiting- Revenues are recognized and recorded when services are rendered.

·  
Functional Outsourcing- Revenues are recognized and recorded when milestones are achieved, in accordance with the terms of the contracts.

·  
Executive Placement- Revenues are recognized and recorded at the time a candidate begins full-time employment.  Any write-offs due to cancellations and/or billing adjustments historically have been insignificant.

inVentiv Communications

·  
Advertising and Communication support- Revenues are recognized and recorded under the proportional performance method, by relating the actual hours of work performed to date to the current estimated total hours of the respective projects. Any anticipated losses on projects are recognized when such losses are anticipated.  Time and production billings are billed as incurred for actual time and expenses.

·  
Public Relations- Revenues are recognized and recorded as time and production billings are billed as incurred for actual time and expenses.

·  
Branding- Revenues are recognized and recorded on a fee for service basis, in accordance with the terms of the contracts; and revenues for certain contracts are recorded based on completed contract method.

·  
Interactive Communications- Revenues are recognized and recorded under the proportional performance method based on services performed.

·  
Patient and Physician Education- Revenues are recognized and recorded using either the completed contract method or when milestones are achieved, depending on the terms of the specific contracts.


inVentiv Commercial

·  
inVentiv Pharma Teams- Revenues and associated costs are recognized and recorded under pharmaceutical detailing contracts based on the number of physician calls made or the number of sales representatives utilized.  Most of our Sales and Marketing Teams’ contracts involve two phases, a “Implementation phase", formerly referred to as "Deployment phase" ,typically one to three months, in which we perform initial recruiting, training and preparation for deployment of the field force at the start of a new contract, and the “Deployment phase", formerly referred to as “Promotion phase”, in which our deployed field force actively promotes specified products for clients through face-to-face interactions with physicians or other targets  referred to as “detailing”.

Our inVentiv Pharma Teams contracts specify a separate fee for the initial “Implementation phase” of a project.  We consider the implementation  phase to be a separate and distinct earnings process and recognize the related revenues throughout the implementation phase , which typically spans a period of one to three months at the beginning of the first year of a contract.  We generally recognize revenue during the "Deployment phase" of our inVentiv Pharma Teams contracts on a straight-line basis based on the size of the deployed field force.  The accounting for the two phases is based on our analysis of Emerging Issues Task Force (“EITF”) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, in which we have concluded that the deployment and promotion phases are being sold separately and therefore qualify as separate units of accounting within the meaning of paragraph 9 of EITF 00-21.

Many of the product detailing contracts allow for additional periodic incentive fees to be earned once agreed upon performance benchmarks have been attained.  Revenue from incentive fees is recognized and recorded when we are reasonably assured that payment will be made, and is typically based upon verification through calculation of achievement, third party data or client verification.  Many contracts also stipulate penalties if agreed upon performance benchmarks have not been met.  These penalties are recognized upon verification of performance shortfalls.

Non-refundable conversion fees are recognized and recorded as revenue when one of our sales professionals accepts a firm offer of permanent employment from a customer during the term of a contract.

·  
Recruiting- Revenues are recognized based on placement of candidates.

·  
Professional Development and Training- Revenues are generally recognized and recorded as training courses are completed.

·  
Regulatory Compliance Services- Regulatory compliance revenues for both fixed fees services and fees for specific compliance related services are recognized and recorded when monthly services are performed.

·  
Non-Personal Promotion- Revenues are recognized and recorded based on time incurred and fulfillment requirements in accordance with the terms of the contracts.

·  
Virtual Event Services- Revenues are recognized based on the frequency and upon completion of live events.

·  
Sales Force Automation/Data Analysis- A majority of revenues are recognized based on straight-line basis.  For certain analytics projects, revenues are recognized upon completion.

·  
Planning and Analytics- Revenues for HPR generally include fixed fees, which are recognized and recorded when monthly services are performed based on the proportional performance method and when payment is reasonably assured.  HPR’s initial contracts typically range from one month to one year.  Revenues for additional services are recognized and recorded when the services are provided and payment is reasonably assured.

·  
Strategic Consulting- For most contracts, revenues are recognized and recorded on a fee for service basis, in accordance with the terms of the contracts.  Certain contracts are also recorded based on the proportional performance method.

·  
Product Access and Managed Market Support- Consulting fee revenues are recognized and recorded when services are rendered.   Other services are based on milestones.

·  
Consulting and Contract Marketing- Revenues are recognized and recorded on a fee for service basis, in accordance with the terms of the contracts.

inVentiv Patient Outcomes

·  
Patient Pharmaceutical Compliance Programs- Revenues are mainly recognized based on the volume of correspondence sent to patients.

·  
Patient Support Programs- Patient assistance programs revenues depend on the number of patients served and are recognized and recorded as each service is performed.

·  
Clinical Nurse Educators, On-Call Specialists, and Medical Science Liaison Programs- Revenue recognition is the same as inVentiv Pharma Teams, as the two services are similar in the business arrangement and fee structure.

·  
Medical Cost Containment and Consulting Solutions- The majority of revenues are recognized on a completed contract basis, based on an analysis of claims as a percentage of savings realized by our clients.  Certain services are performed on a fee-for-services basis and recognized when the service is rendered.

General Revenue Recognition

Reimbursable Costs
Reimbursable costs, including those relating to travel and out-of pocket expenses, sales force bonuses tied to individual or product revenues, and other similar costs, are generally included in revenues, and an equivalent amount of reimbursable expenses is included in costs of services in the period in which such amounts have been finalized.  In certain cases, based on our analysis of EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, and related accounting literature, we may also record certain reimbursable transactions, such as the placement of media advertisements where we act as an agent, as net revenues.

Loss Contracts
We periodically analyze our contracts to determine the likelihood and amount of any potential loss on a contract resulting from lower than anticipated product, field force or other performance.  In the event that current information illustrates a loss is likely to be incurred over the remaining life of the contract, we accrue that loss at the time it becomes probable.  We did not have any material loss contracts in 2007, 2006 or 2005.

Billing
        
Customers are invoiced according to agreed upon billing terms.  Contracts that are invoiced prior to performance of related services are recorded as client advances and unearned revenue and are not recognized as revenues until earned, in accordance with our revenue recognition policies.  Amounts earned for revenues recognized before the agreed upon invoicing terms have been met are recorded as revenue and included in unbilled services. Upon billing, these amounts are transferred to billed accounts receivable.

 Goodwill and Other Intangible Assets
 
    Goodwill and other indefinite-life intangibles are assessed for potential impairment pursuant to the guidelines of SFAS No. 142, Goodwill and Other Intangible Assets, on an annual basis (at June 30) or when management determines that the carrying value of goodwill or an indefinite-lived intangible asset may not be recoverable based upon the existence of certain indicators of impairment.  We applied aggregation criteria consistent with the definitions under SFAS 142, as well as the related guidance in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, for purposes of aggregating business units in our goodwill impairment testing.  Goodwill is tested for impairment at least annually using a two-step process that begins with an estimation of the fair value of a business unit. The first step is a screen for potential impairment, and the second step measures the amount of impairment, if any.  We calculate and compare the fair value of the goodwill and indefinite-lived intangible asset to its carrying value.  If the carrying value exceeds the fair value, an impairment loss will be recognized in an amount equal to the difference. If we deem the useful life to be no longer indefinite after testing for impairment in accordance with the applicable rules stated above, we amortize the intangible asset over its remaining estimated useful life, following the pattern in which the expected benefits will be consumed or otherwise used up and we continue to review for impairment on an annual basis.
 
    We performed annual impairment tests as of June 30, 2007 and concluded that the existing goodwill and  indefinite-lived intangible tradename balances were not impaired and continue to maintain this position as of December 31, 2007, based on various factors, including updated forecasts and the current condition of the Company.  As of December 31, 2007, we had goodwill of approximately $383.7 million and other intangibles (net) of $281.1 million in the Consolidated Balance Sheet.

Stock-based Compensation
 
    In December 2004, the Financial Accounting Standards Board ("FASB") revised SFAS No. 123 (“SFAS 123R”), Share-Based Payment, which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period.  On April 14, 2005, the SEC adopted a new rule amending the effective dates for SFAS 123R.  In accordance with the new rule, the Company adopted the accounting provisions of SFAS 123R as of January 1, 2006.
 
    On January 1, 2006, the Company adopted SFAS 123R using the modified prospective application method, as permitted under SFAS 123R, which requires measurement of compensation cost of all stock-based awards at fair value on the date of grant and recognition of compensation over the service periods for awards expected to vest.  Under this method, compensation cost in 2006 includes the portion vesting in the period for (1) all stock-based awards granted prior to, but not vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and (2) all stock-based awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.  The Company will recognize the cost of all employee stock awards on a straight-line basis over their respective vesting periods, net of estimated forfeitures.  Accordingly, prior periods amounts have not been restated.  Under this method, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.
 
    With the adoption of SFAS 123R in 2006, the Company has limited its issuance of stock options to senior executives, while granting restricted shares to employees at various levels.  During the fourth quarter of 2005, prior to the adoption of SFAS 123R, management analyzed its expected volatility and expected life of stock options and concluded that the expected volatility for options granted during the fourth quarter of 2005 should be 45% and the expected life of the options granted should range between 5.5 and 6.0 years, depending on the grantee’s employee status.  The Company analyzed historical trends in these variables on a quarterly basis; during 2007 and 2006 the volatility remains at a range of 39-40%.  For the year ended December 31, 2007 the Company elected to use the simplified method of determining the expected term as permitted by SAB 107 and the range of the expected term remained unchanged at 5.5 to 6 years.  The Company continues to base the estimate of risk-free rate on the U.S. Treasury yield curve in effect at the time of grant. The Company has never paid cash dividends, does not currently intend to pay cash dividends, and has certain restrictions under its credit facility to pay dividends and thus has assumed a 0% dividend yield.  These conclusions were based on several factors, including past company history, current and future trends, comparable benchmarked data and other key metrics.
 
    As part of the requirements of SFAS 123R, the Company is required to estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly.  The forfeiture rate was estimated based on historical forfeitures.  The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.  The forfeiture rates utilized for the years ended December 31, 2007 and 2006 were 3.91% and 3.25%, respectively.

Claims and Insurance Accruals
 
    We maintain self-insured retention limits for certain insurance policies.  The liabilities associated with the risk we retain are estimated in part based on historical experience, third-party actuarial analysis, demographics, nature and severity, past experience and other assumptions, which have been consistently applied. The liabilities for self-funded retention are included in claims and insurance reserves based on claims incurred, with liabilities for unsettled claims and claims incurred but not yet reported being actuarially determined with respect to workers’ compensation and auto liability claims and estimated based on management’s evaluation of the nature and severity of individual claims and historical experience with respect to all other liabilities. A significant number of these claims typically take several years to develop and even longer to ultimately settle. These estimates tend to be reasonably accurate over time; however, the actual liabilities could vary materially from management's estimates and assumptions regarding severity of claims, medical cost inflation, as well as specific case facts can create short-term volatility in estimates.  Management believes that these reserves are adequate.

Income Taxes
 
    Deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax bases of assets and liabilities and are measured using the tax rates and laws that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established, when necessary, to reduce deferred income tax assets to the amount that is more likely than not to be realized.  Realization is dependent on generating sufficient taxable income of a specific nature prior to the expiration of any loss carryforwards or capital losses. The asset may be reduced if estimates of future taxable income during the carryforward period are reduced. In addition, we maintain reserves for certain tax items, which are included in income taxes payable on our consolidated balance sheet. We periodically review these reserves to determine if adjustments to these balances are necessary.

Derivative Financial Instruments
 
    The Company enters into interest rate swap agreements to modify the interest rate characteristics of our outstanding long-term debt.  At hedge inception, and at least quarterly thereafter, the Company assesses whether derivatives used to hedge transactions are highly effective in offsetting changes in the cash flow of the hedged item.  To the extent the instruments are considered to be effective, changes in fair value are recorded as a component of other comprehensive income (loss). To the extent there is any hedge ineffectiveness, changes in fair value relating to the ineffective portion are immediately recognized in earnings (interest expense).   The fair values of the Company’s interest rate swaps are obtained from dealer quotes. These values represent the estimated amount the Company would receive or pay to terminate the agreement taking into consideration the difference between the contract rate of interest and rates currently quoted for agreements of similar terms and maturities.

Recent Accounting Pronouncements
 
 
    In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”), which addresses the accounting and reporting framework for minority interests by a parent company.  SFAS 160 also addresses disclosure requirements to distinguish between interests of the parent and interests of the noncontrolling owners of a subsidiary. SFAS 160 will become effective January 1, 2009.  We are currently evaluating the impact of this standard on our Consolidated Financial Statements.
 
    In February 2007,  FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.  SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value.  This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements.  The Company has evaluated the provisions of SFAS 159, did not elect early adoption of eligible assets and liabilities of SFAS 159 and does not expect the issuance of SFAS 159 to have a material effect on our consolidated balance sheets, results of operations and cash flows.
 
    In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".  SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for the fiscal year beginning January 1, 2008.  The Company has evaluated the provisions of SFAS 157 and does not expect the issuance of SFAS 157 to have a material effect on our consolidated balance sheets, results of operations and cash flows.
 
    In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for our 2006 annual financial statements.  The adoption of SAB No. 108 did not have a material impact on our consolidated results of operations or consolidated financial position.
 
    In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.  FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the consolidated financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, Accounting for Income Taxes (“FASB No. 109”). FIN 48 is effective for fiscal years beginning after December 15, 2006; as such, the Company has adopted FIN 48 as of January 1, 2007, as required.  Differences between the amounts recognized in the consolidated financial statements prior to the adoption of FIN 48 and the amounts reported after adoption are accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings.   The adoption of FIN 48 did not have a material impact on the Company’s consolidated statements of operations, financial position, cash flows, and other significant matters, such as debt covenants or the Company’s normal business practices.



 
 

 


The following sets forth, for the periods indicated, certain components of our operating earnings, including such data stated as a percentage of revenues:
   
For the Years Ended December 31,
 
   
2007
   
2006
   
2005
 
   
(in thousands, except for per share data)
 
Revenues:
       
Percentage*
         
Percentage*
         
Percentage *
 
inVentiv Clinical
  $ 186,927       19.1 %   $ 149,786      
19.5
%   $ 113,700       20.4 %
inVentiv Communications
    289,113       29.6 %     207,398       27.1 %     46,426       8.3 %
inVentiv Commercial
    400,786       41.0 %     347,117       45.3 %     370,278       66.6 %
inVentiv Patient Outcomes
    100,474       10.3 %     61,944       8.1 %     25,908       4.7 %
Total revenues
    977,300       100.0 %     766,245       100.0 %     556,312       100.0 %
                                                 
Cost of services:
                                               
inVentiv Clinical
    127,492       68.2 %     100,632       67.2 %     75,177       66.1 %
inVentiv Communications
    175,801       60.8 %     131,991       63.6 %     31,282       67.4 %
inVentiv Commercial
    317,693       79.3 %     271,651       78.3 %     293,617       79.3 %
    inVentiv Patient Outcomes
    60,576       60.3 %     42,475       68.6 %     16,949       65.4 %
Total cost of services
    681,562       69.7 %     546,749       71.4 %     417,025       75.0 %
                                                 
Selling, general and administrative expenses
    200,945       20.6 %     141,418       18.4 %     79,313       14.3 %
                                                 
Total operating income
    94,793       9.7 %     78,078       10.2 %   $ 59,974       10.8 %
Interest expense
    (20,717 )     (2.1 )%     (11,361 )     (1.5 )%     (3,955 )     (0.7 )%
Interest income
    3,039       0.3 %     2,694       0.4 %     1,409       0.3 %
Income from continuing operations before income tax  provision, minority interest in income of subsidiary and income from equity investments
      77,115       7.9 %       69,411       9.1 %       57,428       10.4 %
Income tax provision
    (29,401 )     (3.0 )%     (19,166 )     (2.5 )%     (14,229 )     (2.6 )%
Income from continuing operations before minority
  interest in income of subsidiary and income from
  equity investments
    47,714       4.9 %     50,245       6.6 %     43,199       7.8 %
   Minority interest in income of subsidiary
    (1,070 )     (0.1 )%     (1,207 )     (0.2 )%     (224 )     --  
   Equity earnings in investments
    582       --       160       --       107       --  
Income from continuing operations
    47,226       4.8 %     49,198       6.4 %     43,082       7.8 %
Income from discontinued operations:
                                               
Gains on disposals of discontinued operations, net of taxes
    258       0.1 %     2,037       0.3 %     781       0.1 %
Income from discontinued operations
    258       0.1 %     2,037       0.3 %     781       0.1 %
                                                 
Net income
  $ 47,484       4.9 %   $ 51,235       6.7 %   $ 43,863       7.9 %
                                                 
Earnings per share:
                                               
Continuing operations:
                                               
Basic
  $ 1.50             $ 1.69             $ 1.60          
Diluted
  $ 1.46             $ 1.64             $ 1.53          
Discontinued operations:
                                               
Basic
  $ 0.00             $ 0.07             $ 0.03          
Diluted
  $ 0.01             $ 0.06             $ 0.03          
Net income:
                                               
Basic
  $ 1.50             $ 1.76             $ 1.63          
Diluted
  $ 1.47             $ 1.70             $ 1.56          

* Cost of services is expressed as a percentage of segment revenue.  All other line items are displayed as a percentage of total revenues.
 

 

    Year Ended December 31, 2007 Compared to Year Ended December 31, 2006 
 
    Revenues: Revenues increased by approximately $211 million, or 28%, to $977 million during 2007, from $766 million during 2006.  Net revenues increased by approximately $165 million, or 26%, to $797 million during 2007, from $632 million during 2006.
 
    inVentiv Clinical’s revenues were $187 million during 2007, an increase of $37 million, or 25%, compared to $150 million during  2006.  Revenues in inVentiv Clinical were higher in 2007 predominantly due to increased placement of temporary personnel and new business wins to provide functional outsourcing services.  Also, in April 2006, the Company acquired Synergos, which complements the segment by strengthening the functional outsourcing service.
 
    inVentiv Communications’ revenues were $289 million during 2007, an increase of $82 million, or 39%, from 2006.  inVentiv Communications’ revenues accounted for 30% of total inVentiv revenues during 2007.  Approximately $70 million of this increase relates to incremental revenue relating to the timing of the 2007 acquisitions of Ignite, Chamberlain, Addison Whitney and CCA, and the 2006 acquisition of JSAI.  The remainder of this variance mainly relates to recent business wins in various advertising and communications’ agencies.
 
    inVentiv Commercial’s revenues were $401 million during 2007, an increase of $54 million, or 15%, from 2006.  Most of the variance relates to new business wins, which more than offset revenues from contracts that wound down in the ordinary course.  The remaining increase predominately relates to the acquisition of Medconference, DialogCoach, and Strategyx.
 
    inVentiv Patient Outcomes’ revenues were $100 million during 2007, up $38 million from 2006. Growth in the segment was both organic as well as from the addition of AWAC. The inVentiv Patient Outcomes segment, which was formed in August 2007, more closely links our various patient-oriented business units, including Adheris, which was formerly reported in the Communications’ segment, Franklin’s patient assistance and reimbursement offerings, which was formerly reported in the Commercial segment, The Therapeutics Institute’s clinical education services which was formerly reported in the Commercial segment, and AWAC, which the Company acquired in July 2007.
 
    Cost of Services: Cost of services increased by approximately $135 million or 25%, to $682 million for 2007 from $547 million in 2006.  Cost of services decreased as a percentage of revenues from 71% in 2006 to 70% in 2007.     
 
    inVentiv Clinical’s cost of services increased by approximately $26 million, or 26%, to $127 million during 2007 from $101 million during 2006.  Cost of services as a percentage of revenues slightly increased from 67% during 2006 to 68% during 2007 as we made infrastructure investments in preparation for a material functional outsourcing win with a top 20 pharmaceutical company.
 
    inVentiv Communications’ cost of services increased by approximately $44 million, or 33%, to $176 million during 2007 from $132 million during 2006.  Cost of services as a percentage of revenues decreased from 64% in 2006 to 61% in 2007, mainly due to the addition of higher margin businesses in 2007.
 
    inVentiv Commercial’s cost of services increased by approximately $46 million, or 17%, to $318 million during 2007 from $272 million during 2006.  Cost of services as a percentage of revenues slightly increased from 78% during 2006 to 79% during 2007.  The increase in the cost of sales percentage was driven by the increase in limited scope sales force services, including the new on-boarding program with a top 20 pharmaceutical company.
 
    inVentiv Patient Outcomes’ cost of services increased by approximately $19 million, or 45%, to $61 million during 2007 from $42 million during 2006, mainly due to increased business at Adheris and Franklin as well as the acquisition of AWAC, as mentioned above.
 
    Selling, General and Administrative ("SG&A"): SG&A expenses, which also encompasses the activities of the corporate management group, increased by approximately $60 million, or 43%, to $201 million in 2007 from $141 million 2006, mainly due to additional acquisitions in 2006 and 2007.
 
    SG&A expenses at inVentiv Clinical was approximately $45 million in 2007, compared to $38 million in 2006 due to increased selling expense and commissions from additional business; additional staffing requirements; and SG&A expense from Synergos, which was acquired on April 1, 2006.
 
    SG&A expenses at inVentiv Communications increased $22 million to $71 million in 2007.  New acquisitions contributed to the majority of this increase.
 
    SG&A expenses at inVentiv Commercial increased by approximately $16 million to $46 million during 2007 from 2006.  Approximately 50% of this increase was due to recording a receivables reserve relating to two accounts, including a client that declared Chapter 11 bankruptcy subsequent to the end of the second quarter of 2007.  We have previously never had a collections issue as a result of client bankruptcy, with virtually all of our clients having excellent payment histories, and do not believe the circumstances giving rise to these receivables reserves are likely to reoccur in future periods.  SG&A also increased due to annual increases in equity and non-equity compensation, and SG&A from the new inVentiv Commercial divisions acquired during the fourth quarter of 2006 and second quarter of 2007.
 
    SG&A expenses at inVentiv Patient Outcomes increased by $10 million to $22 million during 2007, mainly due to the additions of Adheris and AWAC over the last two years.
 
    Other SG&A increased by approximately 36%, or $5 million from 2006 to 2007.   This increase mainly relates to $2.1 million of additional stock compensation expense and $0.8 million of other than temporary impairment of marketable securities. See Liquidity and Capital Resources section for further discussion on other than temporary impairment of marketable securities.
 
    Interest Expense:  Interest expense almost doubled to approximately $21 million in 2007 from 2006.  Approximately $6 million of the difference was due to higher interest on the additional $166 million borrowed under our amended credit agreement entered into in July 2007, as more fully explained in Liquidity and Capital Resources.  In addition, as mentioned in Item 3, Quantitative and Qualitative Disclosures About Market Risk, the Company did not designate its initial hedge for hedge accounting until July 2006, which resulted in a $2.1 million net reduction to interest expense relating to the mark-to-market adjustment during the 2006 versus $1.2 million of interest expense due to the financing element embedded in the interest rate swap during 2007.
 
    Provision for Income Taxes:  In March 2007, we recognized a tax benefit of approximately $1.0 million related to federal tax benefits of state tax reserves.  Including these tax benefits, our annual effective tax rate was 38.4% in 2007.
 
    In June 2006, we recognized a tax benefit of approximately $9.1 million related to net operating losses associated with a previously-divested unit, as management determined that it is more likely than not that this deferred tax asset will be realized.  Including these tax benefits, our annual effective tax rate was 28.0% in 2006.
 
    Our current effective tax rate is based on current projections for earnings in the tax jurisdictions in which we do business and is subject to taxation.  Our effective tax rate could fluctuate due to changes in earnings between operating entities and related tax jurisdictions, or due to the potential tax impact arising from previous divestitures.
 
    In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.  FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the consolidated financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, Accounting for Income Taxes (“FASB No. 109”). FIN 48 is effective for fiscal years beginning after December 15, 2006; as such, the Company has adopted FIN 48 as of January 1, 2007, as required.  Differences between the amounts recognized in the consolidated financial statements prior to the adoption of FIN 48 and the amounts reported after adoption are accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings.   The adoption of FIN 48 did not have a material impact on the Company’s consolidated statements of operations, financial position, cash flows, and other significant matters, such as debt covenants or the Company’s normal business practices.
 
    Net Income and Earnings Per Share ("EPS"): inVentiv’s net income decreased by approximately $4 million to $47 million during 2007 when compared to the same period in 2006, and diluted earnings per share decreased to $1.47 per share in 2007 from $1.70 per share during the 2006.  However, excluding the impact of the increase in the uncollectible receivable reserve during the second quarter of 2007 and the distinct tax benefits in 2007 and 2006, overall EPS and net income increased over the respective periods, driven by increased wins and new acquisitions.

 
 

 
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 
 
    Revenues: Revenues increased by approximately $210 million, or 38%, to $766 million in the year ended December 31, 2006, from $556 million in the year ended December 31, 2005.
 
    inVentiv Clinical’s revenues were $150 million during the year ended December 31, 2006, an increase of $36 million compared to $114 million during  the year ended December 31, 2005.  Revenues in the clinical staffing and recruiting division were higher in 2006 predominantly due to increased placement of clinical staffing personnel.  The clinical staffing and recruiting division also typically experiences a decrease in personnel during the first quarter of a year as clients may decide not to continue to employ these temporary personnel.  This “falloff” was less significant in 2006 than 2005.  Finally, in April 2006, the Company acquired Synergos, which complements the segment by strengthening the functional outsourcing service.
 
    inVentiv Communications was established principally through the acquisitions of  inVentiv Communications, Inc. (then known as inChord Communications, Inc.) in October 2005 and JSAI in April 2006, and contributed approximately $207 million of revenues during the year ended December 31, 2006, versus approximately $46 million of revenue from the acquisition date of inVentiv Communications, Inc. through December 31, 2005.  This segment specializes in pharmaceutical advertising, branding and marketing.
 
    Revenues in our inVentiv Commercial business were $347 million, a decrease of $23 million or 6% from the $370 million in the same period in 2005.  This decrease resulted primarily from anticipated wind-downs of certain contracts, and was partially offset by additional revenue during 2006 from acquisitions, such as PRS, which was acquired in August 2005, and MedConference and DialogCoach, which were acquired during the fourth quarter of 2006.
 
    inVentiv Patient Outcomes’ revenues were $62 million during the year ended December 31, 2006, up $36 million from the year ended December 31, 2005.  Growth in the segment was both organic as well as from the acquisition of Adheris in February 2006.
 
    Cost of Services: Cost of services increased by approximately $130 million or 31%, to $547 million for the year ended December 31, 2006 from $417 million in the year ended December 31, 2005. Cost of services decreased as a percentage of revenues to 71% from 75% in the year ended December 31, 2006 and 2005, respectively, mainly due to increased acquisitions that are contributing higher margins than the historical Commercial business.  Overall cost of services increased due to increased revenue over the same period; in addition, cost of services increased due to $2.4 million of share-based compensation expense not recorded in prior years.  On January 1, 2006, inVentiv adopted the provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004) (SFAS 123R), Share-Based Payment, which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period.  In prior periods, inVentiv recorded compensation expense for unvested restricted shares over the applicable vesting periods.  Starting in January 2006, as a result of adopting SFAS 123R, inVentiv has also recorded compensation expense for its stock options.  For further details on the new accounting policy, see "-- Critical Accounting Policies" above.  
 
    inVentiv Clinical’s cost of services increased by approximately $26 million, or 35%, to $101 million during the year ended December 31, 2006 from $75 million during the year ended December 31, 2005.  Cost of services as a percentage of revenues increased from 66% during the year ended December 31, 2005 to 67% during the same period in 2006.
 
    inVentiv Communications was acquired starting in October 2005 and incurred approximately $132 million of cost of sales during the year ended December 31, 2006.  Cost of services was $31 million from the inVentiv Communications, Inc. acquisition date through December 31, 2005.  Cost of sales was 64% of this segment’s revenues in 2006 and 67% for 2005.  This segment specializes in pharmaceutical advertising, branding and marketing.  Pursuant to the acquisition of inVentiv Communications, Inc., the Company assumed a $7.5 million existing incentive plan liability (out of a potential $15 million liability) on inVentiv Communications, Inc.’s  balance sheet relating to certain performance thresholds of the segment over a three-year period from 2005 through 2007.  The Company has monitored these performance thresholds on a quarterly basis.  At December 31, 2006, as a result of new business and a strengthened outlook for inVentiv Communications, Inc.’s business during 2007, management felt it was appropriate to record an additional $3.5 million (of which $1.2 million is recorded in cost of services and $2.3 million is recorded in SG&A) of the potential $15 million liability since the likelihood of achieving the next threshold was probable and the amount was estimable, pursuant to SFAS No. 5, Accounting for Contingencies.
 
    Cost of services at inVentiv Commercial decreased by approximately $22 million, or 7%, to $272 million in the year ended December 31, 2006 from $294 million in the year ended December 31, 2005, mainly due to the decrease in revenues.  Cost of services was 78% of inVentiv Commercial revenue in the year ended December 31, 2006, compared to 79% in the year ended December 31, 2005, mainly due to increased compensation expense in 2006 for unvested shares as discussed above.
 
    inVentiv Patient Outcomes cost of services increased by approximately $25 million, or 147%, to $42 million during the year ended December 31, 2006 from $17 million during the year ended December 31, 2005, mainly due to the acquisition of Adheris and increased organic business at Franklin, as mentioned above.
 
    SG&A: SG&A expenses increased by approximately $62 million, or 78%, to $141 million from $79 million in the year ended December 31, 2006 and 2005, respectively.  This increase was primarily due to SG&A expenses at inVentiv Communications, Inc., which was acquired in October 2005, and additional SG&A from acquisitions consummated in 2006; increased compensation levels in 2006 versus 2005; and $5.1 million of share-based compensation expense, which was new in 2006, as described above in the cost of services section.
 
    SG&A expenses at inVentiv Clinical was approximately $38 million in 2006, compared to $29 million during 2005 due to increased selling expense and commissions from additional business; additional staffing requirements; SG&A expense from Synergos, which was acquired on April 1, 2006; and increased compensation expense relating to the adoption of SFAS 123R.
 
    SG&A expenses at inVentiv Communications, which was acquired in October 2005, was approximately $49 million for the year ended December 31, 2006, and $10 million for the period in 2005 subsequent to the acquisition. As described in the cost of services’ section, the Company recorded an additional $3.5 million (of which $1.2 million is recorded in cost of services and $2.3 million is recorded in SG&A) of potential $15.0 million in liabilities relating to certain performance thresholds of the segment over a three-year period.  See above for further details.
 
    SG&A expenses at inVentiv Commercial increased by approximately $3 million, or 9%, to $30 million in the year ended December 31, 2006 from $27 million incurred in the year ended December 31, 2005.  This increase was mainly due to the increased compensation expense attributable to the adoption of SFAS 123R this year, and additional SG&A from new acquisitions during the fourth quarter of 2006.
 
    SG&A expenses at inVentiv Patient Outcomes increased by $10 million to $12 million during the year ended December 31, 2006, mainly due to the acquisitions of Adheris.
 
    Other SG&A was approximately $13 million for the year ended December 31, 2006, an increase of approximately $2 million or 18% from $11 million for the year ended December 31, 2005.  Almost all of this increase was related to increases in stock-based compensation expense in 2006, as described above.
 
    Provision for Income Taxes: In June 2006, we recognized a tax benefit of approximately $9.1 million related to net operating losses associated with a previously-divested unit, as management determined that it is more likely than not that this deferred tax asset will be realized.  Including these tax benefits, our annual effective tax rate was 28.0% in 2006.
 
    In March 2005, we recognized a tax benefit of approximately $1.6 million primarily related to prior period tax contingencies, which are no longer required.  During the third quarter of 2005, we recorded a tax benefit of approximately $6.7 million primarily related to the reversal of a previously recorded valuation allowance as we determined an additional portion of its deferred tax asset was more likely than not expected to be realized.  Including these tax benefits, our annual effective tax rate was 24.8% in 2005.
 
    Our current effective tax rate is based on current projections for earnings in the tax jurisdictions in which we do business and is subject to taxation.  Our effective tax rate could fluctuate due to changes in earnings between operating entities and related tax jurisdictions, or due to the potential tax impact arising from previous divestitures.
 
    In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, to create a single model to address accounting for uncertainty in tax positions.  FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the consolidated financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, Accounting for Income Taxes (“FASB No. 109”). FIN 48 is effective for fiscal years beginning after December 15, 2006; as such, the Company will adopt FIN 48 as of January 1, 2007, as required.  Differences between the amounts recognized in the consolidated financial statements prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings.   We conducted an internal review of its uncertain tax positions resulting from the adoption of FIN 48.  The adoption of FIN 48 is not expected to have a material impact on our consolidated results of operations, financial position and cash flows.
 
    Discontinued Operations:  For the year ended December 31, 2006 and 2005, earnings from discontinued operations, net of taxes, were approximately $2.0 million and $0.8 million, respectively.  The gains on disposals of discontinued operations mainly consisted of contingency payments due from our previously-divested Germany-based unit.  In addition, approximately $1.2 million of tax liability was reversed since the receivership of the previously-divested France-based unit was finalized during the fourth quarter of 2006.
 
    Net Income and EPS: inVentiv’s net income increased by approximately 16% to $51 million, from net income of $44 million in the year ended December 31, 2006 and 2005, respectively.  Diluted earnings per share increased to earnings of $1.70 per share for the 2006 from earnings of $1.56 per share for 2005.  Operating results were higher due to increased results in inVentiv Communications and the new acquisitions, offset by stock-based compensation expense recorded as a result of adopting SFAS 123R.  Earnings per share were also affected because of approximately 1.9 million additional shares outstanding in 2006 over 2005.
 

 
    At December 31, 2007, we had $51 million of unrestricted cash and equivalents, a decrease of $29 million from December 31, 2006.  For the year ended December 31, 2006 compared to 2007, cash provided by operations decreased by $27 million from $86 million to $59 million.  Cash used in investing activities increased from $70 million to $246 million for the year ended December 31, 2006 and 2007, respectively.  Cash from financing activities increased from a use of $9 million to a source of $159 million over the same comparative periods.
 
    Cash provided by operations was $59 million during the year ended December 31, 2007, while cash provided by operations was $86 million in the year ended December 31, 2006.  This decrease was, in large part, due to the timing of certain payments in the Commercial and Clinical segments, as well as timing of acquisition-related liabilities and our derivative instruments, which are now in an out-of market position as opposed to the in-the market position in 2006 due to changes in the interest rates over these respective periods.  The derivative instruments are expected to zero at the end of the respective derivative instrument agreements, as further explained in Note 11.
 
    Cash used in investing activities increased by $176 million from $70 million to $246 million for the years ended December 31, 2006 and 2007, respectively.  The Company paid $61 million for the 2006 acquisitions of Adheris, JSAI, Synergos, MedConference and DialogCoach, while spending $170 million for the 2007 acquisitions of Ignite, Chamberlain, Strategyx, Addison Whitney, Advogent, CCA, AWAC and Liedler.   The Company also paid $8 million in acquisition earnouts in 2006, while paying $24 million in acquisition earnouts in 2007.  As of December 31, 2007, the Company had $45 million invested in the Columbia Strategic Cash Portfolio ("CSCP"), which is classified as restricted cash and marketable securities on the December 31, 2007 Balance Sheet.  During December 2007, the Company recorded $0.8 million relating to an impairment of the Company's investment in CSCP, which held certain complex asset-backed securities.  As of February 27, 2008, the CSCP balance was approximately $30 million as a result of some liquidation of the portfolio.  The remaining funds are considered short-term in nature and are expected to be distributed over the next six to 12 months.  With the liquidity issues experienced in global credit and capital markets, the CSCP experienced losses, partially due to the subprime market crisis.
 
    The CSCP maintained a net asset value of $1 per unit until December 2007, after which the net asset value per unit fluctuated, and will continue to fluctuate, based on changes in market values of the securities held by the portfolio.  The process of liquidating CSCP’s portfolio was initiated in December 2007 and is anticipated to continue through 2008.  Future impairment charges may result depending on market conditions until the fund is fully liquidated. The $0.8 million impairment charge does not have a material impact on the company's liquidity or financial flexibility.
 
    On February 27, 2008, we entered into an unsecured credit facility (the "Blue Ridge facility") with Blue Ridge Investments, L.L.C., an affiliate of Bank of America, N.A., to allow us to separately borrow up to the current balance remaining in the CSCP, which, at the date of agreement, was approximately $30 million.  We have not borrowed any funds under this credit facility.  The Blue Ridge facility provides for multiple draw downs from time to time until maturity, which shall be the later of the day following the redemption of all of our shares of the CSCP and December 1, 2008.  The outstanding balance under the facility may not (subject to limited exceptions) exceed our account value in the CSCP, and distributions from the CSCP must be applied to reduce the outstanding principal balance under the facility.  Amounts borrowed bear interest at the one-month LIBOR rate plus 0.35% per annum, fluctuating daily.
 
    Cash from financing activities increased from a use of $9 million to a source of $159 million over the same comparative periods, mainly due to the Company’s Amended and Restated Credit Agreement, resulting in a $166 million net cash inflow, as more fully described below.
 
    Our principal external source of liquidity is our syndicated, secured credit agreement, which we entered into with UBS AG, Stamford Branch, and others in connection with the inVentiv Communications, Inc. acquisition.  On July 6, 2007, we amended this credit facility and in connection therewith entered into an Amended and Restated Credit Agreement with UBS AG, Stamford Branch and the other lenders party to the credit facility.  The key features of the Amended and Restated Credit Agreement are as follows:
 
·  
A $330 million term loan facility was made available to inVentiv in a single drawing, which was used to
 
·  
refinance the existing October 2005 credit facility, which had a remaining balance of  $164 million, and
 
·  
fund the acquisitions of CCA and AWAC and pay the fees associated with the new credit facility, with the balance retained by inVentiv as working capital.
 
The credit agreement also included up to $20 million in additional term loans (“delayed draw term loans”) that was to be advanced no later than January 6, 2008.  The Company elected not to draw additional amounts under the agreement.  The agreement also contains a $50 million revolving credit facility, of which $10 million is available for the issuance of letters of credit, and a swingline facility.  The term loan will mature on the seventh anniversary of the Amended and Restated Credit Agreement, with scheduled amortization of 1% per year during years one through six and 94% during year seven.  The revolving loans will mature on the sixth anniversary of the Amended and Restated Credit Agreement.
 
·  
Amounts advanced under the credit agreement must be prepaid with a percentage, determined based on a leverage test set forth in the credit agreement, of Excess Cash Flow (as defined in the credit agreement) and the proceeds of certain non-ordinary course asset sales and certain issuances of debt obligations and 50% of certain issuances of equity securities of inVentiv and its subsidiaries, subject to certain exceptions. We may elect to prepay the loans, in whole or in part at any time, in certain minimum principal amounts, without penalty or premium (other than normal LIBOR break funding costs). Amounts borrowed under the Amended and Restated Credit Agreement in respect of term loans (including delayed draw term loans) that are repaid or prepaid may not be reborrowed.  Amounts borrowed under the Amended and Restated Credit Agreement in respect of revolving loans may be paid or prepaid and reborrowed.
 
·  
Interest on the loans accrue, at our election, at either (1) the Alternate Base Rate (which is the greater of UBS’s prime rate and federal funds effective rate plus 1/2 of 1%) or (2) the Adjusted LIBOR Rate, with interest periods determined at our option of 1, 2, 3 or 6 months (or, if the affected lenders agree, 9 months), in each case plus a spread based on the type of loan and method of interest rate determination elected.
 
·  
The Amended and Restated Credit Agreement contains, among other things, conditions precedent, representations and warranties, covenants and events of default customary for facilities of this type. Such covenants include certain limitations on indebtedness, liens, sale-leaseback transactions, guarantees, fundamental changes, dividends and transactions with affiliates. The Amended and Restated Credit Agreement also includes a financial covenant under which inVentiv is required to maintain a total leverage ratio that does not exceed, as of the last day of any four consecutive fiscal quarters, 4.0 to 1.0 through December 31, 2009 and 3.5 to 1.0 thereafter.
 
    Effective October 2005, we entered into a three- year swap arrangement for $175 million to hedge against the original $175 million loan arrangement entered into to facilitate the acquisition of inVentiv Communications, Inc. As more fully described in Part II, Item 7A below, effective September 6, 2007, we entered into a five-year swap arrangement for $165 million to hedge against the additional credit exposure under the Amended and Restated Credit Agreement.
 
    We believe that our cash and equivalents, cash to be provided by operations and available credit under our credit facility will be sufficient to fund our current operating requirements over the next 12 months.  However, we cannot assure you that these sources of liquidity will be sufficient to fund all internal growth initiatives, investments and acquisition activities that we may wish to pursue. If we pursue significant internal growth initiatives or if we wish to acquire additional businesses in transactions that include cash payments as part of the purchase price, we may pursue additional debt or equity sources to finance such transactions and activities, depending on market conditions.  The acquisition agreements entered into in connection with our 2005, 2006 and 2007 acquisitions include earn-out provisions pursuant to which the sellers will become entitled to additional consideration, which may be material, if the acquired businesses achieve specified performance measurements.  See Note 3 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Commitments and Contractual Obligations
 
    A summary of our current contractual obligations and commercial commitments is as follows:

(Amounts in thousands)
       
Amounts Due In
 
Contractual Obligations
 
Total Obligation
   
Less than 1 Year
   
1 – 3 years
   
3 -5 years
   
More than 5 years
   
Other
 
Long term debt obligations (a)
  $ 457,841     $ 24,725     $ 49,448     $ 48,570     $ 335,098      $ --  
Capital lease obligations (b)
    42,523       19,489       19,726       3,308       --       --  
Operating leases (c)
    90,048       18,458       29,437       21,224       20,929       --  
Acquisition-related incentive (d)
    9,503       9,503       --       --       --       --  
Unrecognized tax benefits (e)
    9,023       --       --       --       --       9,023  
Total obligations
  $ 608,938     $ 72,175     $ 98,611     $ 73,102     $ 356,027     $ 9,023  


(a)  
These future commitments represent the principal and interest payments under the $330 million term loan under our credit facility.
(b)  
These future commitments include interest and management fees, which are not recorded on the Consolidated Balance Sheet as of December 31, 2007 but will be recorded as incurred.
(c)  
Operating leases include facility lease obligations in which the lease agreement may expire during the five-year period, but are expected to continue on a monthly basis beyond the lease term, as provided for in the leasing arrangements.
(d)  
The former stockholders of inVentiv Communications, Inc. are contractually obligated to reimburse us for $5.0 million of this amount.
(e)  
The timing of future cash outflows associated with these unrecognized tax benefits is highly uncertain and accordingly have been excluded from this table. 
 
    The acquisition agreements entered into in connection with all of our acquisitions include earn-out provisions pursuant to which the sellers will become entitled to additional consideration, which may be material, if the acquired businesses achieve specified performance measurements.  See note 3 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Effect of Inflation
 
    Because of the relatively low level of inflation experienced in the United States, inflation did not have a material impact on our consolidated results of operations for 2007, 2006 or 2005.

Off-Balance Sheet Arrangements
 
    As of December 31, 2007, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

 
 

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
 
Long-Term Debt Exposure
 
    At December 31, 2007, we had $328.4 million debt outstanding under our secured term loan as described in "Liquidity and Capital Resources" in Item 7 above.  We will incur variable interest expense with respect to our outstanding loan.  This interest rate risk may be partially offset by our derivative financial instrument, as described below.  Based on our debt obligation outstanding at December 31, 2007, a hypothetical increase or decrease of 10% in the variable interest rate would have an immaterial effect on interest expense due to the fixed rate associated with the derivative financial instrument.
 
 Derivative Financial Instrument
 
    Effective October 2005, we entered into an amortizing three-year interest rate swap arrangement with a notional amount of $175 million at inception to apply a fixed interest rate against the original six-year $175 million loan arrangement entered into to facilitate the acquisition of inVentiv Communications, Inc. We entered into this interest rate swap agreement to modify the interest rate characteristics of its outstanding long-term debt.  At inception, and at least quarterly thereafter, we assess whether derivatives used to hedge transactions are highly effective in offsetting changes in the interest cash flows of the hedged item. To the extent the derivatives instruments are highly effective hedges, the change in fair value of the effective portion is recorded as a component of other comprehensive income (loss). To the extent there is any hedge ineffectiveness, changes in fair value relating to the ineffective portion are immediately recognized in earnings (interest expense).

    From October 2005 to July 2006, we did not designate its original swap arrangement for hedge accounting and recorded an approximate $2.9 million reduction to interest expense relating to the mark-to-market adjustment, and a corresponding derivative asset for approximately $2.9 million, which was recorded in Deposits and Other Assets on the Consolidated Balance Sheet.  The fair values of the interest rate swaps were obtained from dealer quotes.  The fair value of the swaps represent the estimated amount we would receive or pay to terminate the agreement taking into consideration the difference between the contract rate of interest and rates currently quoted for agreements of similar terms and maturities.
 
    On July 17, 2006, we formally designated the interest rate swap as a cash flow hedge pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.  We employed the dollar offset method to assess effectiveness by performing a shock test and utilized the hypothetical derivative method under DIG Issue G7 to measure ineffectiveness.  The hypothetical derivative contains the same terms and conditions as the debt agreement with an inception date of July 17, 2006.  The hypothetical swap had a fair value of zero on the date of designation and the hedging swap had a fair value of $2.9 million on the date of designation.  As the swap fair value will decline to zero at maturity, the $2.9 million of fair value will be recognized in earnings over the remaining life of the swap as part of the ineffectiveness calculation.  During the year-ended December 31, 2007, the fair market value of the original derivative asset decreased by $2.1 million to a derivative liability of approximately $1.0 million.  Approximately $1.2 million was recorded as interest expense, attributable to the financing component embedded within the interest rate swap, while the remaining $0.9 million ($0.6 million, net of taxes) was recorded as a decrease to Other Comprehensive Income.

    On September 6, 2007, we entered into a new amortizing five-year interest rate swap arrangement with a notional amount of $165 million at hedge inception, with an accretive notional amount increase to $325 million effective December 31, 2008 to hedge the total outstanding debt notional when our original 2005 three-year interest rate swap arrangement described above expires.  At hedge inception, we employed the dollar offset method by performing a shock test to assess effectiveness and utilized the hypothetical derivative method under DIG Issue G7 to measure ineffectiveness.  The hypothetical derivative contains the same terms and conditions as the original derivative.  As a result of the hypothetical derivative method, there was no ineffectiveness for the period ended December 31, 2007, and as a result, $10.3 million ($6.1 million, net of taxes) was recorded as a decrease to Other Comprehensive Income and an increase to the swap liability, recorded as Other non-current liabilities in our Consolidated Balance Sheet as of December 31, 2007.
 
Foreign Currency Exchange Rate Exposure
 
    We are not currently affected by foreign currency exchange rate exposure, except for any fluctuations in the foreign bank accounts remaining from the divestitures of our European business units, from continuing operations of our UK, France and Canadian subsidiaries and equity investments and minority interests in our foreign business units, which are not material to our consolidated financial statements.  Our treatment of foreign subsidiaries is consistent with the guidelines set forth in SFAS 52, Foreign Currency Translations.   The financial statements of our subsidiaries expressed in foreign currencies are translated from the respective functional currencies to U.S. Dollars, with results of operations and cash flows translated at average exchange rates during the period, and assets and liabilities translated at end of the period exchange rates.  At December 31, 2007, the accumulated other comprehensive earnings related to foreign currency translations was approximately $0.8 million.  Foreign currency transaction gains and (losses) are included in the results of operations and are not material.

 
 

 


INDEX TO FINANCIAL STATEMENTS



 
 

 

 
 
 
Management's Report on Financial Statements
 
 
Our management is responsible for the preparation, integrity and fair presentation of information in our consolidated financial statements, including estimates and judgments. The consolidated financial statements presented in this report have been prepared in accordance with accounting principles generally accepted in the United States of America. Our management believes the consolidated financial statements and other financial information included in this report fairly present, in all material respects, our consolidated financial condition, consolidated results of operations and consolidated cash flows as of and for the periods presented in this report. The consolidated financial statements have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
 
 
Management's Report on Internal Control Over Financial Reporting
 
 
Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
 
 
Our internal control over financial reporting includes those policies and procedures that:
 
       
 
·
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;

 
·
 provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and

 
·
 provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements.

Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Our system contains self monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.

Our management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Our assessment excludes the Ignite, Chamberlain, Strategyx, Addison Whitney, CCA, Liedler and AWAC businesses we acquired in 2007 as allowed under the rules and clarifications provided by the Securities and Exchange Commission and the Public Company Accounting Oversight Board (United States).  The financial statements of these acquired businesses constitute 23% and 8% of total assets and revenues, respectively, of the consolidated financial statement amounts as of and for the year ended December 31, 2007.  Based on this evaluation, our management concluded that our system of internal control over financial reporting was effective as of December 31, 2007. Deloitte & Touche LLP has issued its report, which is part of its report set forth below, on our management's assessment of the effectiveness of our internal control over financial reporting.

 
 

 


Board of Directors and Stockholders of inVentiv Health, Inc.
Somerset, New Jersey

We have audited the accompanying consolidated balance sheets of inVentiv Health, Inc. and subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2007.  Our audits also included the financial statement schedules listed in the Index at Item 15 (a).  We also have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management's Report on Internal Control Over Financial Reporting, management excluded from their assessment the internal control over financial reporting at Ignite, Chamberlain, Strategyx, Addison Whitney, CCA, Liedler and AWAC which were acquired in 2007, and whose financial statements reflect total assets and revenues constituting 23% and 8% of the related consolidated financial statement amounts as of and for the year ended December 31, 2007.  Accordingly, our audit did not include the internal control over financial reporting at the aforementioned Ignite, Chamberlain, Strategyx, Addison Whitney, CCA, Liedler and AWAC.  The Company's management is responsible for these consolidated financial statements and financial statement schedules, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule, an opinion on management's assessment, and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of inVentiv Health, Inc. as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedules, when considered in relation to basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.  Also, in our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2007, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.


/s/ Deloitte & Touche LLP
Parsippany, New Jersey
February 28, 2008
 
 


INVENTIV HEALTH, INC.
(in thousands, except share amounts)

   
December 31,
 
   
2007
   
2006
 
ASSETS
           
Current assets:
           
Cash and equivalents
  $ 50,973     $ 79,835  
Restricted cash and marketable securities
    47,164       50  
Accounts receivable, net of allowances for doubtful accounts of $3,098 and $3,583 at
               
December 31, 2007 and 2006, respectively
    162,198       124,283  
Unbilled services
    89,384       75,691  
Prepaid expenses and other current assets
    19,836       8,524  
Current deferred tax assets
    4,279       834  
Total current assets
    373,834       289,217  
                 
Property and equipment, net
    54,740       43,380  
Equity investments
    309       5,076  
Goodwill
    383,714       266,827  
Other intangibles, net
    281,122       152,637  
Deposits and other assets
    17,137       13,917  
Total assets
  $ 1,110,856     $ 771,054  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current liabilities:
               
Current portion of capital lease obligations
  $ 17,464     $ 11,708  
Current portion of long-term debt
    3,300       1,667  
Accrued payroll, accounts payable and accrued expenses
    138,708       123,175  
Current income tax liabilities
    6,814       1,475  
Client advances and unearned revenue
    76,696       64,508  
Total current liabilities
    242,982       202,533  
                 
Capital lease obligations, net of current portion
    20,945       21,800  
Long-term debt
    325,050       162,917  
Non-current income tax liabilities
    7,323       --  
Deferred tax liabilities
    13,164       6,756  
Other non-current liabilities
    23,766       18,471  
Total liabilities
    633,230       412,477  
                 
Commitments and contingencies
               
                 
Minority interests
    160       115  
                 
Stockholders’ Equity:
               
   Preferred stock, $.001 par value, 10,000,000 shares authorized, none issued and outstanding at
               
  December 31, 2007 and 2006, respectively
    --       --  
  Common stock, $.001 par value, 50,000,000 shares authorized; 32,325,109 and 29,975,710
               
  Shares issued and outstanding at December 31, 2007 and 2006, respectively
    32       30  
  Additional paid-in-capital
    362,116       284,331  
  Accumulated other comprehensive losses
    (6,493 )     (226 )
  Accumulated earnings
    121,811       74,327  
              Total stockholders’ equity
    477,466       358,462  
                 
              Total liabilities and stockholders’ equity
  $ 1,110,856     $ 771,054  

The accompanying notes are an integral part of these consolidated financial statements.

 
 

 

INVENTIV HEALTH, INC.

(in thousands, except per share amounts)

   
For the Years Ended December 31,
 
   
2007
   
2006
   
2005
 
Net Revenues
  $ 796,659     $ 631,620     $ 467,013  
Reimbursable out-of-pockets
    180,641       134,625       89,299  
Revenues
    977,300       766,245       556,312  
Operating expenses:
                       
Cost of services
    498,106       410,184       327,648  
Reimbursed out-of-pocket expenses
    183,456       136,565       89,377  
Selling, general and administrative expenses
    200,945       141,418       79,313  
Total operating expenses
    882,507       688,167       496,338  
Operating income
    94,793       78,078       59,974  
Interest expense
    (20,717 )     (11,361 )     (3,955 )
Interest income
    3,039       2,694       1,409  
Income from continuing operations before income tax provision, minority interest in
  income of subsidiary and income from equity investments
    77,115       69,411       57,428  
  Income tax provision
    (29,401 )     (19,166 )     (14,229 )
Income from continuing operations before minority interest in income of subsidiary and
  income from equity investments
    47,714       50,245       43,199  
    Minority interest in income of subsidiary
    (1,070 )     (1,207 )     (224 )
    Income from equity investments
    582       160       107  
Income from continuing operations
    47,226       49,198       43,082  
                         
Income from discontinued operations:
                       
Gains on disposals of discontinued operations, net of tax (expense) benefit of
$(131), $749 and ($442) for the years ended December 31, 2007, 2006 and 2005, respectively
    258       2,037       781  
Income from discontinued operations
    258       2,037       781  
                         
Net income
  $ 47,484     $ 51,235     $ 43,863  
                         
Earnings per share:
                       
Continuing operations:
                       
Basic
  $ 1.50     $ 1.69     $ 1.60  
Diluted
  $ 1.46     $ 1.64     $ 1.53  
Discontinued operations:
                       
Basic
  $ 0.00     $ 0.07     $ 0.03  
Diluted
  $ 0.01     $ 0.06     $ 0.03  
Net income:
                       
Basic
  $ 1.50     $ 1.76     $ 1.63  
Diluted
  $ 1.47     $ 1.70     $ 1.56  
Weighted average common shares outstanding:
                       
Basic
    31,578       29,159       26,875  
Diluted
    32,267       30,058       28,165  

The accompanying notes are an integral part of these consolidated financial statements.

 
 

 

INVENTIV HEALTH, INC.

For the years ended December 31, 2007, 2006 and 2005
(in thousands)

 
 
 
Common Stock
 
 
Additional Paid-In
Capital
 
 
Accumulated
earnings
(deficit)
 
 
Deferred Compen-
Sation
 
 
Compre-hensive
Income
(Losses)
 
 
Accumulated Other Comprehen-sive Income (Losses)
 
 
 
 
Total
Balance at January 1, 2005
$26
$193,061
$(20,543)
$(420)
 
$320
172,444
Net income
--
--
43,863
--
$43,863
--
43,863
Foreign currency translation
  Adjustment
 
--
 
--
 
--
 
--
 
(99)
 
(99)
 
(99)
         
$43,764
   
Vesting of restricted shares
--
--
--
694
 
--
694
Compensation expense
--
435
--
--
 
--
435
Exercise of stock options
1
6,831
--
--
 
--
6,832
Issuance of restricted shares
--
3,858
--
(3,858)
 
--
--
Cancellation of restricted shares
--
(21)
--
21
 
--
--
Tax benefit from exercise of employee stock options and vesting  of restricted stock
 
--
 
9,772
 
--
 
--
 
 
--
 
9,772
Issuance of shares in connection with acquisitions
 
1
 
19,505
 
--
 
--
 
 
--
 
19,506
Cash distribution TSP
--
--
(228)
--
 
--
(228)
Balance at December 31, 2005
28
233,441
23,092
(3,563)
 
221
253,219
Net income
--
--
51,235
--
$51,235
--
51,235
Foreign currency translation
  Adjustment
 
--
 
--
 
--
 
--
 
225
 
225
 
225
Net change in effective portion of derivative, net of taxes
 
--
 
--
 
--
 
--
 
(672)
 
(672)
 
(672)
         
$50,788
   
Reclassification of unvested restricted shares to additional paid in capital
 
--
 
(3,563)
 
--
 
3,563
 
 
--
 
--
Vesting of restricted shares
--
3,089
--
--
 
--
3,089
Withhold shares for taxes
--
(190)
--
--
 
--
(190)
Consultant compensation
--
728
--
--
 
--
728
Exercise of stock options
1
6,525
--
--
 
--
6,526
Stock option expense
--
4,450
--
--
 
--
4,450
Tax benefit from exercise of employee stock options and vesting  of restricted stock
--
8,959
--
--
 
--
8,959
Issuance of shares in connection with acquisitions
 
1
 
30,892
 
--
 
--
 
 
--
 
30,893
Balance at December 31, 2006
30
284,331
74,327
--
 
(226)
358,462
Net income
   
47,484
 
47,484
 
47,484
Foreign currency translation
  Adjustment
       
 
396
 
396
 
396
Net change in effective portion of derivative, net of taxes
       
 
(6,663)
 
(6,663)
 
(6,663)
         
41,217
   
Vesting of restricted shares
 
5,222
       
5,222
Withhold shares for taxes
 
(873)
       
(873)
Consultant compensation
 
796
       
796
Exercise of stock options
1
6,908
       
6,909
Stock option expense
 
4,494
       
4,494
Tax benefit from exercise of employee stock options and vesting  of restricted stock
 
 
 
8,066
       
 
 
8,066
Issuance of shares in connection with acquisitions
 
1
 
53,172
       
 
53,173
Balance at December 31, 2007
32
$362,116
$121,811
--
 
$(6,493)
$477,466


The accompanying notes are an integral part of these consolidated financial statements.

 
 

 

INVENTIV HEALTH, INC.
(in thousands)

   
For the Years Ended
 
   
December 31,
 
   
2007
   
2006
   
2005
 
Cash flows from operating activities:
                 
    Net income
  $ 47,484     $ 51,235     $ 43,863  
Income from discontinued operations
    (258 )     (2,037 )     (781 )
Income from continuing operations
    47,226       49,198     $ 43,082  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation
    18,169       15,130       15,491  
Amortization
    10,939       5,610       1,934  
Income from equity investments
    (582 )     (160 )     (107<