S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on January 23, 2009

Registration No. 333-          

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Medidata Solutions, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7389   52-2319066

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

79 Fifth Avenue, 8th Floor

New York, New York 10003

(212) 918-1800

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

Tarek A. Sherif, Chief Executive Officer

79 Fifth Avenue, 8th Floor

New York, New York 10003

(212) 918-1800

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

 

 

With copies to:

Paul Jacobs, Esq.

Warren J. Nimetz, Esq.

Fulbright & Jaworski L.L.P.

666 Fifth Avenue

New York, New York 10103

Telephone (212) 318-3000

Fax (212) 318-3400

 

Christopher J. Austin, Esq.

Michael D. Beauvais, Esq.

Ropes & Gray LLP

One International Place

Boston, MA 02110-2624

Telephone (617) 951-7000

Fax (617) 951-7050

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

 

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

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

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

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

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

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Proposed Maximum
    Aggregate Offering Price(1)(2)    
  Amount of
Registration Fee

Common stock, $0.01 par value per share

 

$86,250,000

 

$3,390

 
(1) Estimated solely for the purpose of calculating the registration fee under Rule 457(o) of the Securities Act.
(2) Includes shares of common stock that may be purchased by the underwriters to cover over-allotments, if any.

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

 

 

 


Table of Contents

Subject to Completion, dated January 23, 2009

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the Registration Statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell the securities, nor is it a solicitation of an offer to buy the securities, in any state where an offer or sale of the securities is not permitted.

 

PROSPECTUS

Shares

LOGO

Common Stock

 

 

This is an initial public offering of common stock of Medidata Solutions, Inc.

We are selling                      shares of our common stock in this initial public offering and will receive all of the net proceeds from the sale of our common stock.

No public market currently exists for our common stock. We intend to apply to list our common stock on the NASDAQ Global Market under the symbol “MDSO.” We currently expect that the initial public offering price will be between $                 and $                 per share.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 8.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per Share    Total

Initial public offering price

   $                     $                 

Underwriting discount

   $      $  

Proceeds, before expenses, to Medidata Solutions, Inc.

   $      $  

We have granted the underwriters a 30-day option to purchase up to an aggregate of                      additional shares on the same terms and conditions as set forth above if the underwriters sell more than                      shares of common stock in this offering.

The underwriters expect to deliver the shares on or about                     , 2009.

 

 

 

Citi    Credit Suisse

 

Jefferies & Company    Needham & Company, LLC

 

 

Prospectus dated                     , 2009


Table of Contents

TABLE OF CONTENTS

 

     Page

PROSPECTUS SUMMARY

   1

RISK FACTORS

   8

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

   22

USE OF PROCEEDS

   23

DIVIDEND POLICY

   24

CAPITALIZATION

   25

DILUTION

   27

SELECTED CONSOLIDATED FINANCIAL INFORMATION

   29

UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS

   32

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   39

BUSINESS

   61

MANAGEMENT

   75

PRINCIPAL STOCKHOLDERS

   89

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   92

DESCRIPTION OF CAPITAL STOCK

   94

SHARES ELIGIBLE FOR FUTURE SALE

   98

UNDERWRITING

   100

LEGAL MATTERS

   104

EXPERTS

   104

WHERE YOU CAN FIND MORE INFORMATION

   104

INDEX TO FINANCIAL STATEMENTS

   F-1

 

 

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different from that contained in this prospectus. This prospectus may only be used where it is legal to sell these securities. The information in this prospectus may be accurate only on the date of this prospectus regardless of the time of delivery of this prospectus.

Dealer Prospectus Delivery Obligation

Until                     , 2009 (the 25th calendar day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

Industry and Market Data

This prospectus includes market share and industry data that we obtained from internal research, publicly available information and industry publications and surveys. Our internal research is based upon management’s understanding of industry conditions and has not been verified by any independent sources. Industry surveys and publications generally state that the information contained therein has been obtained from sources believed to be reliable. Neither we nor the underwriters make any representation as to the accuracy of such information.

Trademarks, Trade Names and Servicemarks

This prospectus includes trademarks, trade names and servicemarks of Medidata Solutions, Inc. and its subsidiaries, including Medidata®, Medidata Designer™, Medidata CRO Contractor™, Medidata Rave®, Medidata Grants Manager™ and ASPire to Win®. This prospectus also refers to trademarks, trade names and servicemarks of other entities. All rights are reserved. The mention of such trademarks, trade names and servicemarks in this prospectus is made with due recognition of the rights of these entities and without any intent to misappropriate such names or marks. All other trademarks, trade names and servicemarks appearing in this prospectus are the property of their respective owners.

General

All references in this prospectus to “our company,” “Medidata,” “we,” “us” and “our” refer to Medidata Solutions, Inc. and its consolidated subsidiaries and their predecessors.


Table of Contents

Prospectus Summary

This summary highlights information contained elsewhere in this prospectus but might not contain all of the information that is important to you. Before investing in our common stock, you should read the entire prospectus carefully, including the “Risk Factors” section and our historical and pro forma condensed consolidated financial statements and the notes thereto included elsewhere in this prospectus.

Unless otherwise indicated, the information contained in this prospectus assumes that the underwriters’ option to purchase additional shares is not exercised.

Medidata Solutions, Inc.

Our Business

We are a leading global provider of hosted clinical development solutions that enhance the efficiency of our customers’ clinical development processes and optimize their research and development investments. Our customers include pharmaceutical, biotechnology and medical device companies, academic institutions, contract research organizations, or CROs, and other organizations engaged in clinical trials to bring innovative medical products to market and explore new indications for existing medical products. Our solutions allow our customers to achieve clinical results more efficiently and effectively by streamlining the design, planning and management of key aspects of the clinical development process, including protocol development, CRO negotiation, investigator contracting, the capture and management of clinical trial data and the analysis and reporting of that data on a worldwide basis. Our customers rely on our solutions to safely accelerate the clinical development process and maximize the commercial life of their products. Our diverse and expanding customer base currently includes 21 of the top 25 global pharmaceutical companies measured by revenue and many middle-market life sciences companies, as well as CROs through our ASPire to Win program. In 2007, and in the nine months ended September 30, 2008, Johnson & Johnson, AstraZeneca, Amgen, Astellas Pharma and Takeda Pharmaceutical were our largest customers measured by revenue.

Our principal offering, Medidata Rave, is a comprehensive platform that integrates electronic data capture, or EDC, with a clinical data management system, or CDMS, in a single solution that replaces traditional paper-based methods of capturing and managing clinical data. In addition, our on-demand, hosted technology platform facilitates rapid and cost-effective deployment of our solutions on a global basis. We have designed our Medidata Rave software to scale reliably and cost-effectively for clinical trials of all sizes and phases, including those involving substantial numbers of clinical sites and patients worldwide. We also offer applications that improve efficiencies in protocol development and trial planning, contracting and negotiation through Medidata Designer, Medidata Grants Manager and Medidata CRO Contractor.

We derive a majority of our revenues from Medidata Rave application services through multi-study arrangements for a pre-determined number of studies. We also offer our application services on a single-study basis that allows customers to use our solution for a limited number of studies or to evaluate it prior to committing to multi-study arrangements. We support our solutions with comprehensive service offerings, which include global consulting, implementation, technical support and training for customers and investigators. We invest heavily in training our customers, their investigators and other third parties to configure clinical trials independently. We believe this knowledge transfer accelerates customer adoption of our solutions.

For 2007, we generated $86.3 million in revenues, a 71.0% increase over 2006 revenues of $50.5 million. For the nine months ended September 30, 2008, we generated $84.8 million in revenues, a 37.6% increase over revenues of $61.6 million in the comparable period in 2007. Our business model provides us with a recurring revenue stream that we believe delivers greater revenue visibility than perpetual software licensing models.

 

 

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The Opportunity for Clinical Trial Solutions

The traditional process of capturing and analyzing data in clinical trials relies on pre-printed, paper case report forms to submit data from the clinical trial sites to the clinical trial sponsor. Each case report form is manually checked for accuracy at the clinical site and subsequently entered into a computerized CDMS. Inconsistent, questionable, or missing data items are identified and must be addressed by facsimile, mail or hand-delivered document exchange. Each change in data requires documentation. These paper-based processes result in significant complexity and cost. Key limitations include:

 

   

Delay in clinical development process. Manual data collection can delay interim and final data analysis, which may reduce the exclusive sales period available under patent protection.

 

   

Impaired data quality. Paper-based data collection and reporting are more susceptible to transcription and other errors.

 

   

Limited data visibility to effect real-time decision making. With manual data collection, sponsors cannot evaluate trial status until relatively late in the process.

Compared to traditional paper-based data collection, EDC technology provides substantial benefits at all stages of the clinical development process and has become widely accepted across the industry. However, we believe that most clinical trials are still conducted using the traditional paper-based format. We believe the total annual market opportunity for EDC solutions is in excess of $1.4 billion.

Despite the increased efficiency provided by EDC, early generation solutions have typically faced the following challenges:

 

   

Integration. EDC solutions have had difficulty integrating complex, diverse and large volumes of data across multiple applications.

 

   

Investigator site requirements. EDC installations can impose specific software and hardware requirements on trial sponsors and their investigator sites.

 

   

Complex customization. EDC solutions often require custom programming to meet the requirements of diverse therapeutic areas across multiple phases.

 

   

Usability. The user interface of EDC solutions often does not accommodate the needs and preferences of the medical researchers, limiting the pace of adoption.

 

   

Workflow and security limitations. EDC solutions often have limited ability to manage multiple languages, multiple workflows and blinded data.

 

   

Scalability. EDC solutions often lack the ability to scale against multiple studies in a single database, requiring increased effort and expense.

The Medidata Solution

Our solutions allow users to accurately and efficiently design clinical trials and capture, manage and report clinical trial data through an easy-to-use, Internet-enabled platform. We believe our solutions provide our customers with the following benefits:

 

   

Accelerated time to market. Our on-demand platform and delivery model streamlines the clinical development process, enabling users to compress the time associated with designing and implementing clinical trials and entering, cleansing and analyzing data.

 

   

Improved quality and visibility of results. Medidata Rave allows users to enhance the quality and completeness of their data earlier in the process by providing real-time data cleansing and eliminating duplicative manual entry of data.

 

 

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Comprehensive clinical development solution. We have designed our comprehensive solutions to provide support throughout the clinical development process, from protocol authoring to preparing data for regulatory analysis and submission. Medidata Rave can be integrated easily with auxiliary systems, making it the backbone for a complete end-to-end solution.

 

   

Enhanced investigator acceptance. We have designed the user interface of our application services to meet the needs of clinicians, with intuitive, consistent point-and-click navigation and a familiar clinical data entry approach.

 

   

Seamless execution of global trials. Medidata Rave provides a single data repository that can be used in multiple languages simultaneously, avoiding the need for the installation and maintenance of parallel versions of the system.

 

   

Lower cost of ownership. Our product architecture scales reliably and cost-effectively across clinical trials of all sizes. Our customers can run all clinical trials on a single instance, further reducing deployment cost per study.

Our Growth Strategy

Our strategy is to become the global standard for application service solutions for EDC and complementary technologies for the clinical development process. Key elements of our strategy include:

 

   

Expand our global customer base. We will continue to pursue new relationships with large global pharmaceutical and biotechnology companies, as well as to dedicate resources to small- and middle-market life sciences companies, as we believe the middle-market represents an under-penetrated opportunity for customer expansion.

 

   

Increase sales to our existing customers. We intend to drive adoption of our products and services within our existing customer base by facilitating the use of our application services in new trials and converting existing single-study customers into multi-study customers.

 

   

Enhance our suite of products and services. We intend to add new features to our existing offerings and add new offerings to maximize the efficiency of the clinical development process. We believe our clinical trials expertise will enable us to leverage our customers’ operational data to provide metrics-driven insights and advisory services to facilitate enhanced market penetration.

 

   

Expand indirect sales channel initiatives. We will continue to pursue strategic partnerships with CROs and healthcare information technology consultants to position our software solutions as the platform of choice for their outsourced clinical trial management services.

Risks Associated with Our Business

Our business is subject to a number of risks of which you should be aware before making an investment decision. Those risks are discussed in “Risk Factors” beginning on page 8.

Corporate Information

We were organized as a New York corporation in June 1999 and reincorporated in the State of Delaware in May 2000. Our principal executive offices are located at 79 Fifth Avenue, 8th Floor, New York, New York 10003, and our telephone number is (212) 918-1800. Our website is located at www.mdsol.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus.

 

 

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The Offering

 

Common stock offered by us

             shares (or              shares if the underwriters exercise their over-allotment option in full)

 

Common stock to be outstanding after the offering(1)

             shares (or              shares if the underwriters exercise their over-allotment option in full)

 

Underwriters’ option

We have granted the underwriters a 30-day option to purchase from us up to an aggregate of              additional shares of our common stock if they sell more than              shares in the offering.

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $            . We expect to use the net proceeds for general corporate purposes, including working capital, capital expenditures and potential acquisitions. We may also repay all or a portion of our $15 million senior secured credit facility, plus accrued interest and any fees relating to our prepayment, in the event that we are unable to restructure the credit facility or obtain alternative debt financing on more favorable terms. See “Use of Proceeds.”

 

Dividend policy

We currently do not intend to pay dividends on our common stock.

 

Risk factors

An investment in our common stock involves a high degree of risk. You should carefully consider the risk factors set forth under “Risk Factors” beginning on page 8 and the other information contained in this prospectus prior to making an investment decision regarding our common stock.

 

Listing

We intend to apply to list our common stock on the NASDAQ Global Market under the symbol “MDSO.”

 

(1) The number of shares of common stock to be outstanding after the offering is based on 7,035,100 shares of common stock outstanding as of December 31, 2008 and the issuance of 9,014,658 shares of common stock upon the automatic conversion of all of the outstanding shares of our preferred stock upon the closing of the offering. In addition, the number of shares of common stock to be outstanding after the offering assumes that accumulated accrued dividends on the convertible preferred stock of approximately $2.1 million (as of December 31, 2008) will be paid from cash on hand upon closing of the offering. The number of shares of common stock to be outstanding after the offering:

 

   

excludes 2,431,550 shares of common stock issuable upon the exercise of stock options outstanding as December 31, 2008 at a weighted average exercise price of $6.63 per share;

 

   

excludes              shares of common stock reserved for future grants or awards from time to time under our 2009 Long-Term Incentive Plan;

 

   

assumes no exercise by the underwriters of their option to purchase up to              additional shares of common stock from us if they sell more than              shares in the offering; and

 

   

excludes              shares issueable if holders of our senior preferred stock elect to receive shares of common stock valued at the initial public offering price as payment of their accumulated and accrued dividends.

 

 

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Summary Consolidated Financial Information and Other Data

The summary consolidated statement of operations data presented for each of the years ended December 31, 2005, 2006 and 2007 and the summary consolidated balance sheet data as of December 31, 2006 and 2007 were derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data for the years ended December 31, 2003 and 2004 and the summary consolidated balance sheet data as of December 31, 2003, 2004 and 2005 were derived from our audited consolidated financial statements which are not included in this prospectus. The summary consolidated statements of operations data presented for the nine months ended September 30, 2007 and 2008 and the summary consolidated balance sheet data as of September 30, 2008 were derived from our unaudited condensed consolidated interim financial statements included elsewhere in this prospectus. The results of operations for the nine months ended September 30, 2008 are not necessarily indicative of the results to be expected for the full year ending December 31, 2008.

On March 17, 2008, we acquired Fast Track, a provider of clinical trial planning solutions, including software, proprietary contracting data and professional services. The consolidated statement of operations data for the nine months ended September 30, 2008 includes the impact of the acquisition of Fast Track beginning on the date of acquisition. The consolidated statement of operations data for the prior periods do not include the impact of the acquisition of Fast Track. The information contained in this table should also be read in conjunction with “Use of Proceeds,” “Capitalization,” “Selected Consolidated Financial Information,” “Unaudited Pro Forma Statements of Operations,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes thereto, all included elsewhere in this prospectus.

Consolidated Statement of Operations Data

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
    2003     2004     2005     2006     2007     2007     2008(1)  
    (in thousands, except share and per share amounts)  

Revenues:

             

Application services

  $ 1,166     $ 3,226     $ 13,069     $ 31,953     $ 48,378     $ 34,678     $ 54,446  

Professional services

    2,899       4,304       6,759       18,508       37,896       26,957       30,353  
                                                       

Total revenues

    4,065       7,530       19,828       50,461       86,274       61,635       84,799  

Cost of revenues:(2)

             

Application services(3)

    174       1,074       2,059       7,288       13,170       9,318       14,590  

Professional services

    1,294       4,878       14,459       20,462       33,035       24,200       23,815  
                                                       

Total cost of revenues

    1,468       5,952       16,518       27,750       46,205       33,518       38,405  

Gross profit

    2,597       1,578       3,310       22,711       40,069       28,117       46,394  

Operating costs and expenses:(2)

             

Research and development(4)

    883       2,859       4,104       5,905       10,716       7,404       14,632  

Sales and marketing(5)

    1,819       3,829       7,733       13,379       16,485       11,785       18,095  

General and administrative

    2,117       4,068       4,574       8,335       13,361       8,435       20,047  
                                                       

Total operating costs and expenses

    4,819       10,756       16,411       27,619       40,562       27,624       52,774  

(Loss) income from operations

    (2,222 )     (9,178 )     (13,101 )     (4,908 )     (493 )     493       (6,380 )

Interest and other expenses (income), net

    2       31       38       195       364       23       1,182  
                                                       

(Loss) income before provision for income taxes

    (2,224 )     (9,209 )     (13,139 )     (5,103 )     (857 )     470       (7,562 )

Provision for income taxes(6)

    2       23       110       306       515       351       481  
                                                       

Net (loss) income

    (2,226 )     (9,232 )     (13,249 )     (5,409 )     (1,372 )     119       (8,043 )

Preferred stock dividends and accretion

    5       303       498       498       498       374       374  
                                                       

Net loss available to common stockholders

  $ (2,231 )   $ (9,535 )   $ (13,747 )   $ (5,907 )   $ (1,870 )   $ (255 )   $ (8,417 )
                                                       

Basic and diluted loss per share(7)

  $ (0.38 )   $ (1.57 )   $ (2.24 )   $ (0.94 )   $ (0.29 )   $ (0.04 )   $ (1.25 )
                                                       

Weighted average basic and diluted common shares outstanding(7)

    5,800,000       6,056,422       6,135,341       6,296,830       6,384,557       6,499,012       6,712,338  
                                                       

Pro forma(8)

             

Pro forma basic and diluted loss per share

          $ (0.09 )     $ (0.51 )
                         

Pro forma weighted average basic and diluted common shares outstanding

            15,399,215         15,726,996  
                         

 

 

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     Year Ended December 31,    Nine Months
Ended
September 30,
     2003    2004    2005    2006    2007    2007    2008(1)
     (in thousands)

Stock-based compensation

Stock-based compensation expense included in cost of revenues and operating costs and expenses is as follows:

Cost of revenues

   $ —      $ —      $ 178    $ 108    $ 172    $ 125    $ 210

Research and development expenses

     —        —        27      89      183      114      334

Sales and marketing

     —        —        69      304      448      329      470

General and administrative expenses

     —        —        118      218      491      242      1,221
                                                

Total stock-based compensation

   $ —      $ —      $ 392    $ 719    $ 1,294    $ 810    $ 2,235
                                                

Depreciation and amortization of intangible assets included in cost of revenues and operating costs and expenses is as follows:

Depreciation

                    

Cost of revenues

   $ —      $ —      $ 563    $ 1,237    $ 3,605    $ 2,358    $ 4,459

Research and development expenses

     —        —        136      289      463      321      494

Sales and marketing

     —        —        91      202      243      165      289

General and administrative expenses

     141      347      104      228      305      214      348
                                                

Total depreciation

     141      347      894      1,956      4,616      3,058      5,590
                                                

Amortization of intangible assets(4)

                    

Cost of revenues

     —        —        —        —        —        —        826

Sales and marketing

     —        —        —        —        —        —        54
                                                

Total amortization of intangible assets

     —        —        —        —        —        —        880
                                                

Total depreciation and amortization of intangible assets

   $ 141    $ 347    $ 894    $ 1,956    $ 4,616    $ 3,058    $ 6,470
                                                

Consolidated Balance Sheet Data

 

     As of December 31,     As of
September 30,
2008
 
     2003     2004     2005     2006     2007    
     (in thousands)  

Cash and cash equivalents

   $ 1,457     $ 7,595     $ 6,450     $ 7,016     $ 7,746     $ 11,479  

Total current assets

     2,854       13,149       13,218       18,328       27,810       37,066  

Restricted cash

     221       306       305       305       387       545  

Total assets

     3,554       14,824       16,406       24,376       42,733       68,809  

Total deferred revenue

     2,474       11,253       21,501       25,017       35,024       46,076  

Total capital lease obligations

     —         289       507       2,281       8,527       8,399  

Total long-term debt

     1,500       1,500       4,000       3,514       10,781       14,452  

Convertible redeemable preferred stock

     1,130       11,252       11,751       12,249       12,747       13,121  

Convertible preferred stock

     24       24       24       24       24       24  

Stockholders’ deficit

     (2,383 )     (13,706 )     (27,656 )     (32,614 )     (39,023 )     (27,854 )

Notes to Summary Consolidated Financial Information and Other Data

 

(1) On March 17, 2008, we acquired Fast Track, a provider of clinical trial planning solutions. Our results of operations for the nine months ended September 30, 2008 include the operations of Fast Track since the date of acquisition. Please refer to “Unaudited Pro Forma Statements of Operations” for the pro forma effects of our acquisition of Fast Track.

 

 

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(2) Prior to January 1, 2006, we accounted for our stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB No. 25, and related interpretations. Under APB No. 25, compensation expense of fixed stock options is based on the difference, if any, on the date of the grant between the fair value of our stock and the exercise price of the option. Compensation expense is recognized on a straight-line basis over the requisite service period.

On January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, or SFAS No. 123(R), requiring us to recognize expense related to the fair value of our stock-based compensation awards. We elected the modified prospective transition method as permitted by SFAS No. 123(R). Under this transition method, stock-based compensation expense for the fiscal year ended December 31, 2006, includes compensation expense for all stock based compensation awards granted prior to, but not yet 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, or SFAS No. 123, and compensation expense for all stock based compensation awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).

 

(3) In 2006, it was claimed that certain applications offered to our customers potentially infringed on intellectual property rights held by a third party. As a result of negotiations with the third party, we entered into a license and settlement agreement in June 2007, pursuant to which we licensed the intellectual property held by the third party for use in our future sales to customers and settled all past infringement claims. We paid a settlement amount of $2.2 million to the third party in 2007. Such amount was recorded in cost of revenues under application services for the year ended December 31, 2006 and in accrued expenses on the consolidated balance sheet as of December 31, 2006.

 

(4) We determined that technological feasibility had not been established for certain in-process research and development projects acquired from Fast Track. These projects were written off, resulting in $0.7 million of additional research and development expenses included in the consolidated statement of operations for the nine months ended September 30, 2008. This write-off is not included in amortization of intangible assets in our consolidated statement of operations.

 

(5) In 2006, a former employee made a claim seeking compensation of approximately $1.6 million in relation to the termination of her employment. Subsequently, the claim has been reduced to approximately $1.4 million as of September 30, 2008. We recorded approximately $0.6 million in sales and marketing expenses during the year ended December 31, 2006 related to this matter. A hearing was held in November 2008 and the court rendered its decision on January 15, 2009, which awarded approximately $0.1 million to the plaintiff. While we believe this decision was favorable to us, it may be appealed by the plaintiff.

 

(6) For the years ended December 31, 2003 to 2007 and the nine months ended September 30, 2008, we did not realize an income tax benefit for available net operating loss carryforwards. As of December 31, 2007, we had approximately $17.2 million of federal and $20.8 million of state net operating loss carryforwards available to offset future taxable income expiring from 2019 through 2027.

 

(7) Basic and diluted net loss per share amounts and basic and diluted weighted average common shares outstanding have been adjusted to reflect a two-for-one stock split effective on August 10, 2004.

 

(8) The pro forma information represents the pro forma effect of converting all outstanding shares of convertible preferred stock into common stock at the applicable conversion ratio upon the completion of this offering, as if it had occurred on January 1, 2007 for the basic and diluted net loss per share presented on the consolidated statements of operations data for the year ended December 31, 2007 and for the nine months ended September 30, 2008.

 

 

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RISK FACTORS

An investment in our common stock involves a high degree of risk. Before making an investment in our common stock, you should carefully consider the following risks, as well as the other information contained in this prospectus, including our consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The risks described below are those which we believe are the material risks we face. Any of the risk factors described below or additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could have a material adverse effect on our business, financial condition and results of operations. As a result, the trading price of our common stock could decline and you may lose a part or all of your investment.

Risks Related to Our Business

We have incurred significant operating losses during our limited operating history and may not be profitable in the future.

We began providing EDC services in 2001. We have recognized operating losses in each year since 1999, and our cumulative operating loss since 1999 totaled approximately $38.0 million at September 30, 2008. We may make significant future expenditures related to the development and expansion of our business. In addition, following this offering we will incur significant legal, accounting and other expenses that we did not incur as a private company. As a result of these increased expenditures, we will have to generate and sustain increased revenue to achieve future profitability. While our revenues have grown in recent periods, this growth may not be sufficient to offset the increase in our expenses and may not be sustainable. We may incur significant losses in the future for a number of reasons, including the other risks described in this prospectus. Accordingly, we cannot give you any assurance regarding our future profitability.

Our quarterly operating results fluctuate and may continue to fluctuate in the future, and if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.

Our quarterly and annual revenues and operating results have varied in the past and may vary significantly in the future depending on factors such as:

 

   

budgeting cycles of our customers;

 

   

the length of our sales cycle;

 

   

increased competition;

 

   

our ability to develop innovative products;

 

   

the timing of new product releases by us or our competitors;

 

   

market acceptance of our products;

 

   

changes in our and our competitors’ pricing policies;

 

   

the financial condition of our current and potential customers;

 

   

changes in the regulatory environment;

 

   

changes in operating expenses and personnel changes;

 

   

our ability to hire and retain qualified personnel;

 

   

the effect of potential acquisitions and consequent integration;

 

   

changes in our business strategy; and

 

   

general economic factors, including factors relating to the disruptions in the world credit and equity markets and the related impact on our customers’ access to capital.

 

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In addition, a significant portion of our operating expense is relatively fixed and planned expenditures are based in part on expectations regarding future revenues. Accordingly, unexpected revenue shortfalls may decrease our gross margins and could cause significant changes in our operating results from quarter to quarter. As a result, in future quarters our operating results could fall below the expectations of securities analysts or investors, in which event our stock price would likely decrease.

The loss of one or more major customers could materially and adversely affect our business, results of operations or financial condition.

Our top five customers accounted for approximately 47% of our revenues in the nine months ended September 30, 2008 and approximately 53% of our revenues in fiscal 2007. For the nine months ended September 30, 2008, two customers, Johnson & Johnson and AstraZeneca, accounted for approximately 14% and 11% of our total revenues, respectively. For 2007, three customers, Johnson & Johnson, AstraZeneca and Amgen, accounted for approximately 15%, 13% and 11% of our total revenues, respectively. The loss of any of our major customers could have a material adverse effect on our results of operations and financial condition. We may not be able to maintain our customer relationships, and our customers may delay performance under or fail to renew their agreements with us, which could adversely affect our business, results of operations or financial condition. Any reduction in the amount of revenues that we derive from these customers, without an offsetting increase in new sales to other customers, could have a material adverse effect on our operating results. A significant change in the liquidity or financial position of any of these customers could also have a material adverse effect on the collectability of our accounts receivables, our liquidity and our future operating results.

If our customers cancel their contracts or terminate or delay their clinical trials, we may lose or delay revenues and our business may be harmed.

Certain of our customer contracts are subject to cancellation by our customers at any time with limited notice. Customers engaged in clinical trials may terminate or delay a clinical trial for various reasons, including the failure of the tested product to satisfy safety or efficacy requirements, unexpected or undesired clinical results, decisions to de-emphasize a particular product or forego a particular clinical trial, decisions to downsize clinical development programs, insufficient patient enrollment or investigator recruitment and production problems resulting in shortages of required clinical supplies. In the case of our hosted solutions, any termination or delay in the clinical trials would likely result in a consequential delay or termination in those customers’ service contracts. We have experienced terminations and delays of our customer service contracts in the past and expect to experience additional terminations and delays in the future. The termination of a single-study arrangement could result in decreased revenues and the delay of our customers’ clinical trials could result in delayed professional services revenues, which could materially harm our business.

We currently have material weaknesses in our internal controls over financial reporting. If we fail to remedy our material weaknesses or otherwise fail to maintain effective internal controls over our financial reporting, the accuracy and timing of our financial reporting may be adversely affected.

In connection with the audit of our consolidated financial statements for the years ended December 31, 2007 and 2006, we, together with our independent registered public accounting firm, identified a number of material weaknesses in our internal controls over financial reporting, as defined in rules established by the Public Company Accounting Oversight Board, or PCAOB. A “material weakness” is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements would not be prevented or detected on a timely basis.

The material weaknesses were attributable to deficiencies in our revenue recognition and expense cut-off procedures, and resulted in the recording of audit adjustments over the two-year period ended December 31, 2007. While we have initiated a remediation plan to address these issues, we have had only limited operating experience with the remedial measures that have been implemented to date and cannot provide any assurance that

 

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these measures or any future measures will adequately remediate the material weaknesses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Controls over Financial Reporting.” In addition, other material weaknesses or significant deficiencies in our internal controls over financial reporting may be identified in the future. If we fail to remediate the material weaknesses, or fail to implement required new or improved controls, or encounter difficulties in their implementation, it could harm our operating results, cause failure to meet our SEC reporting obligations on a timely basis or result in material misstatements in our annual or interim financial statements.

Our failure to remediate the material weaknesses identified as of December 31, 2007 or the identification of additional material weaknesses could also prohibit us from complying with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002, which could apply to us as early as the filing of our annual report on Form 10-K for 2010 and which requires annual management assessments of the effectiveness of our internal controls over financial reporting as well as a report by our independent registered public accounting firm regarding the effectiveness of such internal control. If we are unable to comply with Section 404 or otherwise are unable to produce timely and accurate financial statements, our stock price may be adversely affected and we may be unable to maintain compliance with the listing requirements of the NASDAQ Global Market.

The length of our sales cycle may cause us to incur substantial expenses without realizing sales or revenues.

The sales cycle for some of our software solutions frequently takes in excess of nine months from initial customer contact to contract execution. During this period, we may expend substantial time, effort and financial resources without realizing any revenues with respect to the potential sale. In addition, it may be difficult for us to rapidly increase our revenues through additional sales in any period, as license revenues and, when applicable, related services revenues from new customers are recognized over the applicable license term, typically one to five years.

Substantially all of our computer and communications hardware is located at a single facility, the failure of which would harm our business and results of operations.

Substantially all of the computer hardware necessary to operate our hosting service, which is used by the majority of our customers, is located at our hosting facility in Houston, Texas. Our systems and operations could suffer damage or interruption from human error, fire, flood, power loss, telecommunications failure, break-ins, terrorist attacks, acts of war and similar events, and we do not presently have hosting systems in multiple locations. The occurrence of a natural disaster, an act of terrorism or other unanticipated problems at our hosting facility could result in lengthy interruptions in our service. Although we maintain back-up facilities and disaster recovery services in the event of a system failure, these may be insufficient or fail. Any failure or breach of security of our systems could damage our reputation and cause us to lose customers, which would harm our business and results of operations. Our business may be harmed if our customers and potential customers believe our service is unreliable.

Defects or errors in our software could harm our reputation, result in significant cost to us and impair our ability to market our solutions.

The software applications underlying our hosted products and services, including Medidata Rave, are inherently complex and may contain defects or errors, some of which may be material. Errors may result from our own technology or from the interface of our software with legacy systems and data which we did not develop. The risk of errors is particularly significant when a new product is first introduced or when new versions or enhancements of existing products are released.

We have from time to time found defects in our software, and material performance problems or defects may arise in the future. Material defects in our software could result in a reduction in sales, delay in market

 

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acceptance of our software or credits or refunds to our customers. In addition, such defects may lead to the loss of existing customers and difficulty in attracting new customers, diversion of development resources or harm to our reputation.

Correction of defects or errors could prove to be impossible or impracticable. The costs incurred in correcting any defects or errors or in responding to resulting claims or liability may be substantial and could adversely affect our operating results.

If we are not able to reliably meet our data storage and management requirements, or if we experience any failure or interruption in the delivery of our services over the Internet, customer satisfaction and our reputation could be harmed and customer contracts may be terminated.

As part of our current business model, we store and manage hundreds of terabytes of data for our customers, resulting in substantial information technology infrastructure and ongoing technological challenges, which we expect to continue to increase over time. If we do not reliably meet these data storage and management requirements, or if we experience any failure or interruption in the delivery of our services over the Internet, customer satisfaction and our reputation could be harmed and lead to reduced revenues and increased expenses. Our hosting services are subject to service level agreements and, in the event that we fail to meet guaranteed service or performance levels, we could be subject to customer credits or termination of these customer contracts. If the cost of meeting these data storage and management requirements increases, our results of operations could be harmed.

The failure of our Medidata Rave software solution to achieve or maintain wide acceptance would materially harm our operating results.

Continued use of our key product offering, Medidata Rave software solution, is critical to our future success and is subject to a number of significant risks, some of which are outside our control. These risks include:

 

   

our customers and prospective customers’ desire for and acceptance of our software solutions;

 

   

our ability to meet product development and release schedules;

 

   

Medidata Rave’s ability to support large numbers of users and manage vast amounts of data;

 

   

our ability to comply with applicable regulations and regulatory guidance;

 

   

our customers’ ability to use Medidata Rave, train their employees on its use and successfully deploy our technology in their clinical trials; and

 

   

our ability to expand our internal resources and increase our capital and operating expenses to support the anticipated growth and expansion of Medidata Rave’s functionalities.

Our failure to address, mitigate or manage these risks would seriously harm our business. The failure of Medidata Rave to achieve or maintain market acceptance would likely negatively affect sales of our other clinical trial solutions.

We may expand our business through new acquisitions that could disrupt our business, harm our financial condition and dilute current stockholders’ ownership interests in our company.

We intend to pursue potential acquisitions of, and investments in, businesses, technologies, or products complementary to our business and periodically engage in discussions regarding such possible acquisitions. For example, in March 2008, we acquired Fast Track.

Acquisitions, including the Fast Track acquisition, involve numerous risks, including some or all of the following:

 

   

difficulties in identifying and acquiring complementary products, technologies or businesses;

 

   

substantial cash expenditures;

 

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incurrence of debt and contingent liabilities, some of which we may not identify at the time of acquisition;

 

   

difficulties in assimilating the operations and personnel of the acquired companies;

 

   

diversion of management’s attention away from other business concerns;

 

   

risk associated with entering markets in which we have limited or no direct experience;

 

   

potential loss of key employees, customers and strategic alliances from either our current business or the target company’s business; and

 

   

delays in customer purchases due to uncertainty and the inability to maintain relationships with customers of the acquired businesses.

If we fail to properly evaluate acquisitions or investments, we may not achieve the anticipated benefits of such acquisitions, we may incur costs in excess of what we anticipate, and management resources and attention may be diverted from other necessary or valuable activities. Any acquisition, including the Fast Track acquisition, may not result in short-term or long-term benefits to us. The failure to evaluate and execute acquisitions or investments successfully or otherwise adequately address these risks could materially harm our business and financial results. We may incorrectly judge the value or worth of an acquired company or business. In addition, our future success will depend in part on our ability to manage the growth anticipated with these acquisitions.

Furthermore, the development or expansion of our business or any acquired business or companies may require a substantial capital investment by us. We may not have these necessary funds or they might not be available to us on acceptable terms or at all. We may also seek to raise funds for an acquisition by issuing equity securities or convertible debt, as a result of which our existing stockholders may be diluted or the market price of our stock may be adversely affected.

Our revenues derived from international operations are subject to risk.

Approximately 15.9%, 30.5%, 34.1% and 34.3% of our net revenues in each of the years ended December 31, 2005, 2006 and 2007, and in the nine months ended September 30, 2008, respectively, were derived from international operations. We expect that international customers will continue to account for a substantial percentage of our revenues.

International operations are subject to inherent risks. These risks include:

 

   

the economic conditions in these various foreign countries and their trading partners, including conditions resulting from the disruptions in the world credit and equity markets;

 

   

political instability;

 

   

longer payment cycles;

 

   

greater difficulty in accounts receivable collection and enforcement of agreements;

 

   

compliance with foreign laws;

 

   

changes in regulatory requirements;

 

   

fewer legal protections for intellectual property and contract rights;

 

   

tariffs or other trade barriers;

 

   

difficulties in obtaining export licenses;

 

   

staffing and managing foreign operations;

 

   

exposure to currency exchange and interest rate fluctuations;

 

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transportation delays; and

 

   

potentially adverse tax consequences.

Moreover, with regard to our international operations, we frequently enter into transactions in currencies other than the U.S. dollar and we incur operating expenses in currencies other than the U.S. dollar. For the year ended December 31, 2007 and the nine months ended September 30, 2008, approximately 6.0% and 7.8%, respectively, of our sales were denominated in foreign currencies. This creates a foreign currency exchange risk for us that could have a material adverse effect on our business, results of operations and financial condition.

If we fail to recruit and retain key personnel, we may not meet our goals and our business may be harmed.

Our success depends in large part upon the continued services of our executive team and many highly skilled personnel involved in management, research and development and sales and marketing and upon our ability to attract and retain additional highly qualified employees. Our employees are not subject to employment agreements and may voluntarily terminate their employment with us at any time. Competition for these individuals from a variety of employers, including our competitors and companies in computer or technology-related industries, is intense, especially for engineers with high levels of experience in designing and developing software and Internet-related services and senior sales executives. We may be unable to retain our existing personnel or attract and retain additional personnel. Volatility in the price of our stock may, therefore, adversely affect our ability to attract or retain key employees. If we fail to attract new personnel or to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

We rely on third parties for our help desk support and technology partnerships, and our business may suffer if these relationships do not continue.

We currently outsource our help desk support functions, which involve important direct interactions with users of our products. In the event that our vendor becomes unable or unwilling to provide these services to us, we are not equipped to provide the necessary range of help desk support and service functions to our customers. We also work with companies such as Integrated Clinical Systems, Inc., Business Objects SA, invivodata, Inc. and SAS Institute Inc. to allow our EDC platform to interface with their products. If we are unable to develop and maintain effective relationships with a wide variety of technology partners, if companies adopt more restrictive policies with respect to, or impose unfavorable terms and conditions on, access to their products, we may not be able to continue to provide our customers with a high degree of interoperability with their existing information technology and business infrastructure, which could reduce our sales and adversely affect our business, operating results and financial condition.

Claims that we or our technologies infringe upon the intellectual property or other proprietary rights of a third party may require us to incur significant costs, to enter into royalty or licensing agreements or to develop or license substitute technology.

We have been, and may in the future be, subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of a third party. For instance, we were recently subject to a patent infringement claim by a third party as a result of which we paid $2.2 million to settle the claim. In addition, the vendors who provide us with technology that we incorporate in our product offerings could become subject to various infringement claims. The technologies used in our product offerings may infringe patents held by others or that they may do so in the future. Any future claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is without merit, and could distract our management from our business. Moreover, any settlement or adverse judgment resulting from the claim could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. Any required licenses may not be available to us on acceptable terms, if at all. If we do not obtain any required licenses, we could encounter delays in product

 

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introductions if we attempt to design around the technology at issue or attempt to find another provider of suitable alternative technology to permit us to continue offering the applicable software solution. In addition, we generally provide in our customer agreements that we will indemnify our customers against third-party infringement claims relating to our technology provided to the customer, which could obligate us to fund significant amounts. Infringement claims asserted against us may have a material adverse effect on our business, results of operations or financial condition.

We may be unable to adequately enforce or defend our ownership and use of our intellectual property and other proprietary rights.

Our success is heavily dependent upon our intellectual property and other proprietary rights. We rely upon a combination of trademark, trade secret, copyright, patent and unfair competition laws, as well as license and access agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual property and proprietary information by requiring certain of our employees and consultants to enter into confidentiality, non-competition and assignment of inventions agreements. The steps we take to protect these rights may not be adequate to prevent misappropriation of our technology by third parties or may not be adequate under the laws of some foreign countries, which may not protect our intellectual property rights to the same extent as do the laws of the United States.

Our attempts to protect our intellectual property may be challenged by others or invalidated through administrative process or litigation, and agreement terms that address non-competition are difficult to enforce in many jurisdictions and may not be enforceable in any particular case. Moreover, the degree of future protection of our intellectual property and proprietary rights is uncertain for products that are currently in the early stages of development because we cannot predict which of these products will ultimately reach the commercial market or whether the commercial versions of these products will incorporate proprietary technologies. In addition, there remains the possibility that others will “reverse engineer” our products in order to determine their method of operation and introduce competing products or that others will develop competing technology independently.

If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and expensive, even if we were to prevail. The failure to adequately protect our intellectual property and other proprietary rights may have a material adverse effect on our business, results of operations or financial condition.

We could incur substantial costs resulting from product liability claims relating to our products or services or our customers’ use of our products or services.

Any failure or errors in a customer’s clinical trial caused or allegedly caused by our products or services could result in a claim for substantial damages against us by our customers or the clinical trial participants, regardless of our responsibility for the failure. Although we are generally entitled to indemnification under our customer contracts against claims brought against us by third parties arising out of our customers’ use of our products, we might find ourselves entangled in lawsuits against us that, even if unsuccessful, may divert our resources and energy and adversely affect our business. Further, in the event we seek indemnification from a customer, a court may not enforce our indemnification right if the customer challenges it or the customer may not be able to fund any amounts for indemnification owed to us. In addition, our existing general liability insurance coverage may not continue to be available on reasonable terms or may not be available in amounts sufficient to cover one or more large claims, or the insurer may disclaim coverage as to any future claim.

Our failure to properly protect any personal medical information we possess or are deemed to possess in connection with the conduct of clinical trials could subject us to significant liability.

Our customers use our software solutions to collect, manage and report information in connection with the conduct of clinical trials. This information may be considered personal medical information of the clinical trial participants or patients. Regulation related to the use and disclosure of personal medical information continues to

 

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expand in scope and complexity. Increased focus on individuals’ rights to confidentiality of their personal information, including personal medical information, could lead to an increase of existing and future legislative or regulatory initiatives giving direct legal remedies to individuals, including rights to damages, against entities deemed responsible for not adequately securing such personal information. In addition, courts may look to regulatory standards in identifying or applying a common law theory of liability, whether or not that law affords a private right of action. Since we receive and process personal information of clinical trial participants and patients from customers utilizing our hosted solutions, there is a risk that we could be liable if there were a breach of any obligation to a protected person under contract, standard of practice or regulatory requirement. If we fail to protect personal information that is in our possession or deemed to be in our possession properly, we could be subjected to significant liability and our reputation would be harmed.

We may require additional capital to support business growth, and this capital might not be available.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges or opportunities, including the need to develop new products and services or enhance our existing products and services, enhance our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. Disruptions in the world credit and equity markets may limit our and our customers’ access to financing. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

Failure to manage our growth effectively could harm our business.

We have experienced a period of rapid growth, which has placed a significant strain on our management and our operational and financial resources. We have also experienced rapid growth in the number of clinical trials we host and the number of customer relationships we manage. To manage our future growth effectively, we will likely need to enhance our information technology infrastructure, financial and accounting systems and controls and manage expanded operations in geographically distributed locations. We will also be required to attract, integrate, train and retain a significant number of qualified sales and marketing personnel, professional services personnel, software engineers and other management personnel. Failure to manage our growth effectively may result in weaknesses in our infrastructure, systems or controls, and the loss of productivity, business opportunities and key employees. Our growth may require significant capital expenditures, potentially diverting financial resources from other projects, such as the development of new services. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our revenues could decline or may grow more slowly than expected and we may be unable to implement our business strategy.

Current and future litigation against us could be costly and time consuming to defend.

We are from time to time subject to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by our customers in connection with commercial disputes and employment claims made by our current or former employees. For example, we are currently party to a lawsuit in Belgium brought by a former employee seeking approximately $1.4 million. Litigation may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, overall financial condition and operating results. Insurance may not cover such claims, may not be sufficient for one or more such claims and may not continue to be available on terms acceptable to us. A claim brought against us that is

 

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uninsured or underinsured could result in unanticipated costs, thereby reducing our operating results and leading analysts or potential investors to reduce their expectations of our performance, resulting in a reduction in the trading price of our stock.

Risks Related to Our Industry

We face significant competition, which could cause us to lose business or achieve lower margins.

The market for our clinical trial solutions is intensely competitive and characterized by rapidly changing technologies, evolving industry standards and frequent new product and service introductions and enhancements that may render existing products and services obsolete. Accordingly, our market share and margins are subject to sudden declines. Some of our competitors have longer operating histories, greater financial, technical, marketing and other resources and greater name recognition than we do. These competitors may respond more quickly than we can to new and emerging technologies and changing customer and regulatory requirements, or devote greater resources to the development, promotion and sale of their solutions. We anticipate that new competitors will enter our market in the future, as barriers to entry are relatively low in our industry. Increased competition is likely to result in pricing pressures, which could negatively impact our sales, gross margins or market share. In addition, current and potential competitors have established, and may in the future establish, relationships with vendors of complementary products, technologies or services to increase the penetration of their products in the marketplace. Even if our products and services are more effective than the products or service offerings of our competitors, current or potential customers might accept competitive products and services in lieu of purchasing our software products, services and hosted solutions. Our failure to compete effectively could materially adversely affect our business, financial condition or results of operations.

If we do not continue to innovate and provide solutions that meet the needs of our customers, we may not remain competitive, and our revenues and operating results could suffer.

Our future success will depend in large part on our ability to enhance and broaden our software products and services to meet the evolving needs of our customers. As a result, we must continue to invest significant resources in research and development in order to enhance our existing offerings and introduce new high-quality solutions that will be useful to our customers. If we are unable to respond effectively to our customers’ needs, technological changes and new industry standards and developments in a timely manner, demand for our solutions could suffer and our revenues and operating results could be materially adversely affected. Our operating results could also suffer if our innovations are not appropriately timed with market opportunity or not effectively brought to market.

We depend entirely on the clinical trial market, and a downturn in this market could cause our revenues to decrease.

Our business depends entirely on the clinical trials conducted or sponsored by pharmaceutical, biotechnology and medical device companies, CROs and other entities. Our revenues may decline as a result of conditions affecting these industries, including general economic downturns, increased consolidation, decreased competition or fewer products under development. Other developments that may affect these industries and harm our operating results include product liability claims, changes in government regulation, changes in governmental price controls or third-party reimbursement practices and changes in medical practices. Disruptions in the world credit and equity markets and the current global recession may also result in a global downturn in spending on research and development and clinical trials and may impact our customers’ access to capital. Any decrease in research and development expenditures or in the size, scope or frequency of clinical trials could materially adversely affect our business, results of operations or financial condition.

 

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Extensive governmental regulation of the clinical trial process and our products and services could require significant compliance costs and have a material adverse effect on the demand for our solutions.

The clinical trial process is subject to extensive and strict regulation by the U.S. Food and Drug Administration and other regulatory authorities worldwide. Our software products, services and hosted solutions are also subject to state, federal and foreign regulations. Demand for our solutions is largely a function of such government regulation, which is generally increasing at the state and federal levels in the United States and elsewhere, and subject to change at any time. Changes in the level of regulation, including a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, could have a material adverse effect on the demand for our solutions. For example, proposals to place caps on drug prices could limit the profitability of existing or planned drug development programs, making investment in new drugs and therapies less attractive to pharmaceutical companies. Similarly, the requirements in the United States, the European Union and elsewhere to create a detailed registry of all clinical trials could have an impact on customers’ willingness to perform certain clinical studies. Likewise, a proposal for government-funded universal health care could subject expenditures for health care to governmental budget constraints and limits on spending. In addition, the uncertainty surrounding the possible adoption and impact on health care of any Good Clinical Practice reforms could cause our customers to delay planned research and development until some of these uncertainties are resolved.

Modifying our software products and services to comply with changes in regulations or regulatory guidance could require us to incur substantial costs. Further, changing regulatory requirements may render our solutions obsolete or make new products or services more costly or time consuming than we currently anticipate. Failure by us, our customers, or our competitors to comply with applicable regulations could result in increased regulatory scrutiny and enforcement. If our solutions fail to comply with government regulations or guidelines, we could incur significant liability or be forced to cease offering our applicable products or services. If our solutions fail to allow our customers to comply with applicable regulations or guidelines, customers may be unwilling to use our solutions and any such non-compliance could result in the termination of or additional costs arising from contracts with our customers.

Consolidation among our customers could cause us to lose customers, decrease the market for our products and result in a reduction of our revenues.

Our customer base could decline because of industry consolidation, and we may not be able to expand sales of our products and services to new customers. Consolidation in the pharmaceutical, biotechnology and medical device industries and among CROs has accelerated in recent years, and we expect this trend to continue. In addition, new companies or organizations that result from such consolidation may decide that our products and services are no longer needed because of their own internal processes or the use of alternative systems. As these entities consolidate, competition to provide products and services to industry participants will become more intense and the importance of establishing relationships with large industry participants will become greater. These industry participants may try to use their market power to negotiate price reductions for our products and services. Also, if consolidation of larger current customers occurs, the combined organization may represent a larger percentage of business for us and, as a result, we are likely to rely more significantly on the combined organization’s revenues to continue to achieve growth.

Risks Related to Our Common Stock and this Offering

There is no existing market for our common stock, and a trading market that will provide you with adequate liquidity may not develop. The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest will lead to the development of an active and liquid trading market in our common stock on the NASDAQ Global Market or otherwise. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy.

 

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The initial public offering price for the shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common stock that will prevail in the trading market. The market price of our common stock may decline below the initial public offering price. The market price of our common stock may also be influenced by many factors, some of which are beyond our control, including:

 

   

our quarterly or annual earnings or those of other companies in our industry;

 

   

announcements by us or our competitors of significant contracts or acquisitions;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

general economic and stock market conditions, including the disruptions in the world credit and equity markets;

 

   

the failure of securities analysts to cover our common stock after this offering or changes in financial estimates by analysts;

 

   

future sales of our common stock; and

 

   

the other factors described in these “Risk Factors.”

In recent years, the stock market in general, and the market for Internet-related companies in particular, has experienced extreme price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The price of our common stock could fluctuate based upon factors that have little to do with our performance, and these fluctuations could materially reduce our stock price.

In the past, some companies that have had volatile market prices for their securities have had securities class action suits filed against them. The filing of a lawsuit against us, regardless of the outcome, could have a material adverse effect on our business, financial condition and results of operations, as it could result in substantial legal costs and a diversion of our management’s attention and resources.

Future sales of shares of our common stock by existing stockholders could depress the market price of our common stock.

Upon completion of this offering, there will be              shares of our common stock outstanding. The              shares being sold in this offering (or              shares, if the underwriters exercise their option to purchase additional shares in full) will be freely tradable immediately after this offering (except for shares purchased by affiliates). Of the              shares outstanding upon the completion of this offering (assuming no exercise of the underwriters’ option to purchase additional shares),              shares will be freely tradeable shares saleable under Rule 144 that are not subject to a lock-up,              shares will be shares saleable under Rules 144 and 701 that are not subject to a lock-up,              shares will be restricted securities held for              or less and              shares will be permitted to be sold upon expiration of lock-up agreements 180 days after the date of this offering (subject in some cases to volume limitations). In addition, as of                     , we had outstanding options to purchase              shares of common stock that, if exercised, will result in these additional shares becoming available for sale upon expiration of the lock-up agreements. Sales by these stockholders or optionholders of a substantial number of shares after this offering could significantly reduce the market price of our common stock. We are party to a registration rights agreement with certain holders of our senior preferred stock, which provides them with rights to register under the Securities Act of 1933, as amended (Securities Act), shares of our common stock presently held by them and shares of common stock that are issued following the conversion of their shares of convertible preferred stock upon the completion of this offering. Under this agreement, holders of preferred stock are entitled to unlimited piggyback registration rights (other than in connection with this offering), up to two demand registrations and unlimited registrations on Form S-3. In addition, we are party to a registration rights agreement with certain former holders of shares of capital stock of Fast Track, which we acquired in March 2008. This agreement provides for unlimited piggyback registration rights (other than in connection with

 

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this offering) to former holders of shares of Fast Track who hold 10,000 or more shares of our common stock at the time we determine to register any of our securities under the Securities Act, either for our own account or for the account of others. Please refer to “Description of Capital Stock—Registration Rights” for a description of these registration rights.

We also intend to register all common stock that we may issue under our Amended and Restated 2000 Stock Option Plan and our 2009 Long-Term Incentive Plan. Effective upon the completion of this offering, an aggregate of              shares of our common stock will be reserved for future issuance under the Amended and Restated 2000 Stock Option Plan and an aggregate of              shares of our common stock will be reserved for future issuance under our 2009 Long-Term Incentive Plan. Once we register these shares, which we plan to do shortly after the completion of this offering, they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock. See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

You will experience immediate and substantial dilution in net tangible book value.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our outstanding common stock. As a result, you will pay a price per share that substantially exceeds the tangible book value of our assets after subtracting liabilities. You will incur immediate and substantial dilution of $             per share. You will suffer additional dilution if stock, restricted stock units, restricted stock, stock options, warrants or other equity awards, whether currently outstanding or subsequently granted, are exercised.

We have not determined any specific use for a significant portion of the proceeds from this offering and we may use the proceeds in ways with which you may not agree.

Our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that may not improve our financial condition and results of operations or increase our stock price. See “Use of Proceeds.”

A limited number of stockholders will have the ability to influence the outcome of director elections and other matters requiring stockholder approval.

After this offering, our directors, executive officers and their affiliated entities will beneficially own more than         % of our outstanding common stock. These stockholders, if they act together, could exert substantial influence over matters requiring approval by our stockholders, including the election of directors, the amendment of our certificate of incorporation and bylaws and the approval of mergers or other business combination transactions. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our stockholders of an opportunity to receive a premium for their stock as part of a sale of our company and might reduce our stock price. These actions may be taken even if they are opposed by other stockholders, including those who purchase shares in this offering.

Provisions of Delaware law and our organizational documents may discourage takeovers and business combinations that our stockholders may consider in their best interests, which could negatively affect our stock price.

Provisions of Delaware law and our fourth amended and restated certificate of incorporation and amended and restated bylaws to be in effect upon completion of this offering may have the effect of delaying or preventing a change in control of our company or deterring tender offers for our common stock that other stockholders may consider in their best interests.

 

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Our certificate of incorporation to be in effect upon completion of this offering authorizes us to issue up to              shares of preferred stock in one or more different series with terms to be fixed by our board of directors. Stockholder approval is not necessary to issue preferred stock in this manner. Issuance of these shares of preferred stock could have the effect of making it more difficult and more expensive for a person or group to acquire control of us, and could effectively be used as an anti-takeover device. Following the closing of this offering, no shares of our preferred stock will be outstanding.

Our bylaws to be in effect upon completion of this offering provide for an advance notice procedure for stockholders to nominate director candidates for election or to bring business before an annual meeting of stockholders, including proposed nominations of persons for election to our board of directors, and require that special meetings of stockholders be called only by our chairman of the board, president or secretary after written request of a majority of our board of directors.

The anti-takeover provisions of Delaware law and provisions in our organizational documents may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.

Being a public company will increase our administrative workload and expenses.

Prior to this offering, we operated as a private company. As a public company with common stock listed on the NASDAQ Global Market, we will need to comply with new laws, regulations and requirements, including certain provisions of the Sarbanes-Oxley Act of 2002, related regulations of the Securities and Exchange Commission, or SEC, and the requirements of the NASDAQ Global Market, which we are not required to comply with as a private company. Complying with these statutes, regulations and requirements will occupy a significant amount of the time of our board of directors and management. The hiring of additional personnel to handle these responsibilities, including in our accounting and financial reporting departments, will increase our operating costs. We will need to:

 

   

institute a more comprehensive compliance function;

 

   

design, establish, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board;

 

   

prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;

 

   

involve and retain to a greater degree outside counsel and accountants in the above activities; and

 

   

enhance our investor relations function.

In addition, we expect that being a public company and subject to these rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit and compensation committees, and qualified executive officers.

We will be exposed to risks relating to evaluations of internal controls required by Section 404 of the Sarbanes-Oxley Act of 2002.

We are in the process of evaluating our internal controls systems to allow management to report on, and our independent registered public accounting firm to audit, our internal controls over financial reporting. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We could be required to comply with Section 404 as early as the filing of our Annual Report on Form 10-K for our fiscal year ending December 31, 2010. However, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations.

 

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Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity under applicable SEC and Public Company Accounting Oversight Board rules and regulations that remain unremediated. As a public company, we will be required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that do, or are reasonably likely to, materially affect internal controls over financial reporting. See “Risk Factors—Risks Related to Our Business—We currently have material weaknesses in our internal controls over financial reporting. If we fail to remedy our material weaknesses or otherwise maintain effective internal controls over financial reporting, the accuracy and timing of our financial reporting may be adversely affected.” We are aware that we will need, and we intend, to hire additional accounting personnel in order to comply with the rules and regulations that will apply to us as a public company. If we fail to implement the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory authorities such as the SEC or the NASDAQ Global Market. Additionally, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our financial statements and our stock price may be adversely affected. If we fail to remedy any material weakness, our financial statements may be inaccurate, we may face restricted access to the capital markets, and our stock price may decline.

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. In addition, covenants in our outstanding senior secured credit facility will restrict our ability to pay dividends in the event that we do not repay the senior secured credit facility with proceeds from this offering. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. Shares of our common stock may depreciate in value or may not appreciate in value.

 

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CAUTIONARY STATEMENT

REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains “forward-looking statements” that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of management’s goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in the future tense, identify forward-looking statements.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Important factors that could cause such differences include, but are not limited to the factors discussed under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”

In light of these risks, uncertainties and assumptions, our actual results of operations and execution of our business strategy could differ materially from those expressed in, or implied by, the forward-looking statements, and you should not place undue reliance upon them. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition.

Forward-looking statements speak only as of the date the statements are made. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements included in this prospectus.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately $            , or approximately $             if the underwriters’ option to purchase additional shares is exercised in full, based on an assumed initial public offering price of $            , the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses that are payable by us in connection with the offering. We expect to use the net proceeds for general corporate purposes, including working capital, capital expenditures and possible acquisitions. We may also use these net proceeds to repay all or a portion of our senior secured credit facility in the aggregate principal amount of $15.0 million, plus accrued interest and any fees relating to such prepayment, which bears interest at a rate equal to the greater of 4.5% and the lender’s most recently announced prime rate plus 2.5% (currently 7% per year) and matures in September 2013, in the event that we are unable to restructure the credit facility or obtain alternative debt financing on more favorable terms.

The debt under our credit facility was incurred in August 2008, and the proceeds were used for working capital and to repay outstanding principal plus accrued interest in an amount equal to approximately $11.0 million under promissory notes payable to Stonehenge Capital Fund New York, LLC, which bore interest at a rate equal to 10% per year and had a maturity date of January 31, 2011.

Although we continually evaluate acquisition opportunities, we have not entered into any binding commitments or agreements with respect to future acquisitions.

Pending use of the net proceeds, we will invest the net proceeds of this offering in interest-bearing, short-term, investment grade, highly liquid securities.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We expect to pay accumulated accrued dividends on our convertible preferred stock of approximately $2.1 million (as of December 31, 2008) in cash upon completion of this offering. We currently expect to retain any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock. Any further determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors considers relevant.

 

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CAPITALIZATION

The following table sets forth our consolidated cash and cash equivalents and capitalization as of September 30, 2008:

 

   

on an actual basis;

 

   

on a proforma basis to reflect the conversion of all of our outstanding preferred stock into 9,014,658 shares of our common stock and payment of approximately $1.9 million of accumulated accrued dividends on existing preferred stock from available cash on hand upon the completion of this offering; and

 

   

on a proforma as adjusted basis to further reflect our sale of              shares of our common stock at a price of $             per share, the midpoint of the range set forth on the cover page of this prospectus; and our use of proceeds, net of estimated underwriting discounts and commissions and estimated offering expenses that are payable by us.

This table should be read in conjunction with our audited consolidated financial statements, including the notes thereto, “Use of Proceeds,” “Selected Consolidated Financial Information,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all included elsewhere in this prospectus.

 

     As of September 30, 2008
     Actual     Proforma     Proforma
As Adjusted
    

(in thousands, except share

and per share amounts)

Cash and cash equivalents

   $ 11,479     $ 9,531     $             
                      

Capital lease obligations, including current portion

     8,399       8,399    

Long-term debt, including current portion(2)

     14,452       14,452    

Convertible redeemable preferred stock:

      

Series B, $0.01 par value, 1,436,636 shares authorized, 1,335,807 shares issued and outstanding, actual; no shares authorized, issued and outstanding, proforma and proforma as adjusted(1)

     1,089       —      

Series C, $0.01 par value, 596,374 shares authorized, 180,689 shares issued and outstanding, actual; no shares authorized, issued and outstanding, proforma and proforma as adjusted(1)

     177       —      

Series D, $0.01 par value, 2,752,333 shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, proforma and proforma as adjusted(1)

     11,855       —      

Stockholders’ deficit:

      

Convertible preferred stock, Series A, $0.01 par value, 2,385,000 shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, proforma and proforma as adjusted(1)

     24       —      

Common stock, $0.01 par value, 20,000,000 shares authorized, 7,531,214 shares issued and 7,034,403 shares outstanding, actual; 20,000,000 shares authorized, 16,545,872 shares issued and 16,049,061 shares outstanding, proforma;              shares authorized,             shares issued and              shares outstanding, proforma as adjusted(1)

     75       165    

Additional paid-in capital

     21,594       32,701    

Treasury stock, 496,811 shares

     (6,000 )     (6,000 )  

Accumulated other comprehensive income

     (98 )     (98 )  

Accumulated deficit

     (43,449 )     (43,449 )  
                      

Total stockholders’ deficit

     (27,854 )     (16,681 )  
                      

Total capitalization

   $ 8,118     $ 6,170     $  
                      

 

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(1) The number of shares of capital stock to be authorized, issued and outstanding after the offering is based on 7,034,403 shares of common stock outstanding as of September 30, 2008 and the issuance of 9,014,658 shares of common stock upon the automatic conversion of all of the outstanding shares of our preferred stock upon the closing of the offering. In addition, the number of shares of common stock to be outstanding after the offering assumes that accumulated accrued dividends on the convertible preferred stock of approximately $1.9 million (as of September 30, 2008) will be paid from cash on hand upon the closing of the offering. The number of shares of capital stock to be authorized, issued and outstanding after the offering:

 

   

excludes 2,439,081 shares of common stock issuable upon the exercise of stock options outstanding as of September 30, 2008 at a weighted average exercise price of $6.63 per share;

 

   

excludes              shares of common stock reserved for future grants or awards from time to time under our 2009 Long-Term Incentive Plan;

 

   

assumes no exercise by the underwriters of their option to purchase up to additional shares of common stock from us if they sell more than              shares in the offering; and

 

   

excludes              shares issuable if holders of our senior preferred elect to receive shares of common stock valued at the initial public offering price as payment of their accumulated and accrued dividends.

 

(2) Does not reflect the potential paydown of our $15.0 million senior secured credit facility. See “Use of Proceeds.”

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after giving effect to this offering. Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the book value per share attributable to the existing stockholders for the presently outstanding stock. The information provided below assumes conversion of all our preferred stock into common stock.

Our net tangible book value as of                     , 2009 was approximately $             million, or approximately $             per share of common stock.

We have calculated this amount by:

 

   

subtracting our total liabilities from our total tangible assets; and

 

   

then dividing the difference by the number of shares of common stock outstanding.

On a pro forma as adjusted basis, after giving effect to the conversion of          shares of our preferred stock into          shares of our common stock and the sale of          shares of common stock in this offering at the initial public offering price of $             per share, the midpoint of the price range shown on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses that are payable by us, our adjusted net tangible book value as of                     , 2009 would have been approximately $            , or approximately $             per share. This represents an immediate increase in pro forma net tangible book value from this offering of $             per share to our existing stockholders and an immediate dilution of $             per share to new investors purchasing common stock in this offering.

The following table illustrates this dilution to new investors on a per share basis:

 

Assumed initial public offering price

      $             

Pro forma net tangible book value per share as of                     , 2009

   $                

Increase in pro forma net tangible book value per share attributable to investors purchasing shares in this offering

     

Pro forma net tangible book value per share after this offering

     

Dilution in pro forma net tangible book value per share to investors in this offering

      $             

The following table summarizes on the basis described above, as of                     , 2009, the difference between the number of shares of common stock purchased from us, the total cash consideration paid to us, and the average price per share paid by our existing stockholders since our inception and by new investors in this offering, at an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses that are payable by us:

 

     Shares Purchased(1)     Total Consideration     Average
Price
per Share
     Number    Percent     Amount    Percent    

Existing stockholders

               %   $                          %   $             

New public investors

            

Total

      100.0 %   $      100.0 %  

 

(1)

Before deducting estimated underwriting discounts and commissions and estimated offering expenses that are payable by us. If the underwriters exercise their option to purchase additional shares in full, the number of shares of common stock held by new investors will increase to             , or         % of the total number of shares of common stock to be outstanding immediately after this offering, our existing stockholders would

 

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own approximately         % of the total number of shares of our common stock to be outstanding after this offering, the pro forma as adjusted net tangible book value per share of common stock would be approximately $             and the dilution in pro forma as adjusted net tangible book value per share of common stock to new investors would be $            . The tables above assume no exercise of stock options outstanding on                     , 2009. As of                     , 2009, there were outstanding stock options to purchase          shares of common stock, at a weighted average exercise price of $         per share, subject to certain vesting requirements. To the extent these stock options are exercised after consummation of this offering, there will be further dilution to new investors. If all of these outstanding stock options had been exercised as of                     , 2009, net tangible book value per share after this offering would have been $         and total dilution per share to new investors would have been $            .

 

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

Our selected consolidated financial information presented for each of the years ended December 31, 2005, 2006 and 2007 and as of December 31, 2006 and 2007 was derived from our audited consolidated financial statements included elsewhere in this prospectus. Our selected financial information presented for each of the years ended December 31, 2003 and 2004 and as of December 31, 2003, 2004 and 2005 was derived from our audited consolidated financial statements, which are not included in this prospectus. Our selected unaudited consolidated financial information presented for the nine months ended September 30, 2007 and 2008 and as of September 30, 2008 was derived from our unaudited condensed consolidated interim financial statements included elsewhere in this prospectus. The results of operations for the nine months ended September 30, 2008 are not necessarily indicative of the results to be expected for the full year ending December 31, 2008.

The information contained in this table should also be read in conjunction with “Capitalization,” “Unaudited Pro Forma Condensed Consolidated Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and accompanying notes thereto included elsewhere in this prospectus.

Consolidated Statement of Operations Data

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2003     2004     2005     2006     2007     2007     2008(1)  
     (in thousands, except share and per share amounts)  

Revenues:

              

Application services

   $ 1,166     $ 3,226     $ 13,069     $ 31,953     $ 48,378     $ 34,678     $ 54,446  

Professional services

     2,899       4,304       6,759       18,508       37,896       26,957       30,353  
                                                        

Total revenues

     4,065       7,530       19,828       50,461       86,274       61,635       84,799  

Cost of revenues:(2)

              

Application services(3)

     174       1,074       2,059       7,288       13,170       9,318       14,590  

Professional services

     1,294       4,878       14,459       20,462       33,035       24,200       23,815  
                                                        

Total cost of revenues

     1,468       5,952       16,518       27,750       46,205       33,518       38,405  

Gross profit

     2,597       1,578       3,310       22,711       40,069       28,117       46,394  

Operating costs and expenses:(2)

              

Research and development(4)

     883       2,859       4,104       5,905       10,716       7,404       14,632  

Sales and marketing(5)

     1,819       3,829       7,733       13,379       16,485       11,785       18,095  

General and administrative

     2,117       4,068       4,574       8,335       13,361       8,435       20,047  
                                                        

Total operating costs and expenses

     4,819       10,756       16,411       27,619       40,562       27,624       52,774  

(Loss) income from operations

     (2,222 )     (9,178 )     (13,101 )     (4,908 )     (493 )     493       (6,380 )

Interest and other expenses (income), net

     2       31       38       195       364       23       1,182  
                                                        

(Loss) income before provision for income taxes

     (2,224 )     (9,209 )     (13,139 )     (5,103 )     (857 )     470       (7,562 )

Provision for income taxes(6)

     2       23       110       306       515       351       481  
                                                        

Net (loss) income

     (2,226 )     (9,232 )     (13,249 )     (5,409 )     (1,372 )     119       (8,043 )

Preferred stock dividends and accretion

     5       303       498       498       498       374       374  
                                                        

Net loss available to common stockholders

   $ (2,231 )   $ (9,535 )   $ (13,747 )   $ (5,907 )   $ (1,870 )   $ (255 )   $ (8,417 )
                                                        

Basic and diluted loss per share(7)

   $ (0.38 )   $ (1.57 )   $ (2.24 )   $ (0.94 )   $ (0.29 )   $ (0.04 )   $ (1.25 )
                                                        

Weighted average basic and diluted common shares outstanding(7)

     5,800,000       6,056,422       6,135,341       6,296,830       6,384,557       6,499,012       6,712,338  
                                                        

 

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    Year Ended December 31,     Nine Months Ended
September 30,
 
    2003   2004   2005   2006   2007     2007   2008(1)  
    (in thousands, except share and per share amounts)  

Pro forma(8)

             

Pro forma basic and diluted loss per share

          $ (0.09 )     $ (0.51 )
                         

Pro forma weighted average basic and diluted common shares outstanding

            15,399,215         15,726,996  
                         
    Year Ended December 31,   Nine Months Ended
September 30,
    2003   2004   2005   2006   2007   2007   2008(1)
    (in thousands)

Stock-based compensation expense included in cost of revenues and operating costs and expenses is as follows:

             

Cost of revenues

  $   $   $ 178   $ 108   $ 172   $ 125   $ 210

Research and development expenses

            27     89     183     114     334

Sales and marketing

            69     304     448     329     470

General and administrative expenses

            118     218     491     242     1,221
                                         

Total stock-based compensation

  $   $   $ 392   $ 719   $ 1,294   $ 810   $ 2,235
                                         

Depreciation and amortization of intangible assets included in cost of revenues and operating expenses is as follows:

             

Depreciation

             

Cost of revenues

  $   $   $ 563   $ 1,237   $ 3,605   $ 2,358   $ 4,459

Research and development expenses

            136     289     463     321     494

Sales and marketing

            91     202     243     165     289

General and administrative expenses

    141     347     104     228     305     214     348
                                         

Total depreciation

    141     347     894     1,956     4,616     3,058     5,590
                                         

Amortization of intangible assets(4)

             

Cost of revenues

                            826

Sales and marketing

                            54
                                         

Total amortization of intangible assets

                            880
                                         

Total depreciation and amortization of intangible assets

  $ 141   $ 347   $ 894   $ 1,956   $ 4,616   $ 3,058   $ 6,470
                                         

Consolidated Balance Sheet Data

 

     As of December 31,     As of
September 30,

2008
 
     2003     2004     2005     2006     2007    
     (in thousands)  

Cash and cash equivalents

   $ 1,457     $ 7,595     $ 6,450     $ 7,016     $ 7,746     $ 11,479  

Total current assets

     2,854       13,149       13,218       18,328       27,810       37,066  

Restricted cash

     221       306       305       305       387       545  

Total assets

     3,554       14,824       16,406       24,376       42,733       68,809  

Total deferred revenue

     2,474       11,253       21,501       25,017       35,024       46,076  

Total capital lease obligations

           289       507       2,281       8,527       8,399  

Total long-term debt

     1,500       1,500       4,000       3,514       10,781       14,452  

Convertible redeemable preferred stock

     1,130       11,252       11,751       12,249       12,747       13,121  

Convertible preferred stock

     24       24       24       24       24       24  

Stockholders’ deficit

     (2,383 )     (13,706 )     (27,656 )     (32,614 )     (39,023 )     (27,854 )

 

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Notes to Selected Consolidated Financial Information:

 

(1) On March 17, 2008, we acquired Fast Track, a provider of clinical trial planning solutions. Our results of operations for the nine months ended September 30, 2008 include the operations of Fast Track since the date of acquisition. Please refer to “Unaudited Pro Forma Statements of Operations” for the pro forma effects of our acquisition of Fast Track.

 

(2) Prior to January 1, 2006, we accounted for our stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB No. 25, and related interpretations. Under APB No. 25, compensation expense of fixed stock options is based on the difference, if any, on the date of the grant between the fair value of our stock and the exercise price of the option. Compensation expense is recognized on a straight-line basis over the requisite service period.

On January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, or SFAS No. 123(R), requiring us to recognize expense related to the fair value of our stock-based compensation awards. We elected the modified prospective transition method as permitted by SFAS No. 123(R). Under this transition method, stock-based compensation expense for the fiscal year ended December 31, 2006, includes compensation expense for all stock based compensation awards granted prior to, but not yet 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, or SFAS No. 123, and compensation expense for all stock based compensation awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).

 

(3) In 2006, it was claimed that certain applications offered to our customers potentially infringed on intellectual property rights held by a third party. As a result of negotiations with the third party, we entered into a license and settlement agreement in June 2007, pursuant to which we licensed the intellectual property held by the third party for use in our future sales to customers and settled all past infringement claims. We paid a settlement amount of $2.2 million to the third party in 2007. Such amount was recorded in cost of revenues under application services for the year ended December 31, 2006 and in accrued expenses on the consolidated balance sheet as of December 31, 2006.

 

(4) We determined that technological feasibility had not been established for certain in-process research and development projects acquired from Fast Track. These projects were written off, resulting in $0.7 million of additional research and development expenses included in the consolidated statement of operations for the nine months ended September 30, 2008. This write-off is not included in amortization of intangible assets in the consolidated statement of operations.

 

(5) In 2006, a former employee made a claim seeking compensation of approximately $1.6 million in relation to a wrongful dismissal lawsuit. Subsequently, the claim has been reduced to approximately $1.4 million as of September 30, 2008. We recorded approximately $0.6 million in sales and marketing expenses during the year ended December 31, 2006 related to this matter. A hearing was held in November 2008 and the court rendered its decision on January 15, 2009, which awarded approximately $0.1 million to the plaintiff. While we believe this decision was favorable to us, it may be appealed by the plaintiff.

 

(6) For the years ended December 31, 2003 to 2007 and the nine months ended September 30, 2008, we did not realize an income tax benefit for available net operating loss carryforwards. As of December 31, 2007, we had approximately $17.2 million of federal and $20.8 million of state net operating loss carryforwards available to offset future taxable income expiring from 2019 through 2027.

 

(7) Basic and diluted net loss per share amounts and basic and diluted weighted average common shares outstanding have been adjusted to reflect a two-for-one stock split effective on August 10, 2004.

 

(8) The pro forma information represents the pro forma effect of converting outstanding shares of convertible preferred stock into common stock at the applicable conversion ratio upon the completion of this offering, as if it had occurred on January 1, 2007 for the basic and diluted net loss per share presented on the consolidated statement of operations data for the year ended December 31, 2007 and for the nine months ended September 30, 2008.

 

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UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS

On March 17, 2008, we acquired Fast Track for a purchase price of approximately $18.1 million. The following unaudited pro forma statements of operations for the year ended December 31, 2007 and the nine months ended September 30, 2008 gives pro forma effect to the acquisition of Fast Track as if it had occurred on January 1, 2007.

The unaudited pro forma statements of operations are based on estimates and assumptions. These estimates and assumptions are preliminary and have been made solely for purposes of developing this pro forma information. Unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved if the acquisition of Fast Track had been consummated as of the date indicated, nor is it necessarily indicative of the results of future operations. The pro forma financial information does not give effect to any cost savings or restructuring and integration costs that may result from the integration of Fast Track’s business.

In connection with the purchase of Fast Track, we issued 864,440 shares of our common stock in exchange for all Fast Track’s existing preferred stock and common stock as well as 25,242, 20,004 and 444 shares of common stock reserved for the exercise of outstanding vested employee stock options, unvested employee stock options and warrants, respectively.

The Fast Track purchase price has been allocated based on preliminary estimates of the fair market value of the acquired assets and liabilities. See Note 1 to the Notes to Unaudited Pro Forma Statements of Operations. The pro forma adjustments are subject to change pending a final analysis of the fair values of the assets acquired and liabilities assumed, which is expected to be completed in connection with the issuance of our financial statements for the year ending December 31, 2008.

 

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PRO FORMA STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2007 (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 

     Medidata
Solutions,
Inc.
(Historical)
    Fast Track
Systems,
Inc.
(Historical)
    Pro Forma
Adjustments
for
Fast Track
Acquisition
(1)(2(a))
         Pro Forma
Combined
     

Revenues:

             

Application services

   $ 48,378     $ 5,398     $ (665 )   2(b)    $ 53,111    

Professional services

     37,896       —              37,896    
                                     

Total revenues

     86,274       5,398       (665 )        91,007    

Cost of revenues:

             

Application services

     13,170       1,071       1,541     2(c)      15,782    

Professional services

     33,035       —              33,035    
                                     

Total cost of revenues

     46,205       1,071       1,541          48,817    

Gross profit

     40,069       4,327       (2,206 )        42,190    

Operating cost and expenses:

             

Research and development

     10,716       886            11,602    

Sales and marketing

     16,485       1,394       110     2(c)      17,989    

General and administrative

     13,361       2,897            16,258    
                                     

Total operating expenses

     40,562       5,177       110          45,849    
                                     

Operating loss

     (493 )     (850 )     (2,316 )        (3,659 )  

Interest and other expenses (income), net

     364       (58 )          306    
                                     

Loss before income taxes

     (857 )     (792 )     (2,316 )        (3,965 )  

Provision for income taxes

     515       70       —       2(d)      585    
                                     

Net loss

     (1,372 )     (862 )     (2,316 )        (4,550 )  

Preferred stock dividends and accretion

     498       388       (388 )   2(e)      498    
                                     

Net loss available to common stockholders

   $ (1,870 )   $ (1,250 )   $ (1,928 )      $ (5,048 )  
                                     

Basic and diluted net loss per share

   $ (0.29 )          $ (0.70 )  
                         

Weighted average basic and diluted common shares outstanding

     6,384,557              7,248,997     2(f)

 

See notes to unaudited pro forma statements of operations.

 

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PRO FORMA STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 

     Medidata
Solutions,
Inc.
January 1
to
September 30,
2008
(Historical)
    Fast Track
Systems,
Inc.
January 1
to March 17,
2008
(Historical)
    Pro Forma
Adjustments
for Fast
Track
Acquisition
(1)(2(a))
         Pro Forma
Combined
     

Revenues:

             

Application services

   $ 54,446     $ 1,370     $ —       2(b)    $ 55,816    

Professional services

     30,353       —              30,353    
                                     

Total revenues

     84,799       1,370            86,169    

Cost of revenues:

             

Application services

     14,590       256       437     2(c)      15,283    

Professional services

     23,815       —              23,815    
                                     

Total cost of revenues

     38,405       256       437          39,098    

Gross profit

     46,394       1,114       (437 )        47,071    

Operating cost and expenses:

             

Research and development

     14,632       225            14,857    

Sales and marketing

     18,095       364       53     2(c)      18,512    

General and administrative

     20,047       959            21,006    
                                     

Total operating expenses

     52,774       1,548       53          54,375    
                                     

Operating loss

     (6,380 )     (434 )     (490 )        (7,304 )  

Interest and other expenses (income), net

     1,182       (9 )          1,173    
                                     

Loss before income taxes

     (7,562 )     (425 )     (490 )        (8,477 )  

Provision for income taxes

     481       11       —       2(d)      492    
                                     

Net loss

     (8,043 )     (436 )     (490 )        (8,969 )  

Preferred stock dividends and accretion

     374       81       (81 )   2(e)      374    
                                     

Net loss available to common stockholders

   $ (8,417 )   $ (517 )   $ (409 )      $ (9,343 )  
                                     

Basic and diluted net loss per share

   $ (1.25 )          $ (1.34 )  
                         

Weighted average basic and diluted common shares outstanding

     6,712,338              6,952,988     2(f)

See notes to unaudited pro forma statements of operations.

 

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NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2007 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 

(1) ACQUISITION OF FAST TRACK

The preliminary purchase price of Fast Track was based on a negotiated fair market value of Fast Track as of the acquisition date. The fair market value of our common stock issued to Fast Track shareholders of $19.66 was based on a valuation of our common stock performed by Financial Strategies Consulting Group LLC, or FSCG, an independent third-party valuation specialist, as of March 2008. FSCG used the market-comparable approach and the income approach to estimate our aggregate enterprise value at the valuation date (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Significant Factors, Assumptions and Methodologies Used in Determining the Fair Value of our Capital Stock”). The determination of fair market value of our common stock requires us to make judgments that are complex and inherently subjective.

The following table sets forth the components of the purchase price:

 

Fair market value of common stock issued (864,440 shares)

   $ 16,995

Fair market value of stock options and warrants exchanged (25,242 and 444 shares underlying the options and warrants, respectively)

     459

Transaction costs

     625
      

Total purchase price

   $ 18,079
      

The issuance of 864,440 shares of our common stock in exchange for all Fast Track’s existing preferred stock and common stock held by Fast Track employees and stockholders was based on the estimated fair market value of our common stock of $19.66 on the date of the acquisition.

The fair market value of the 25,242 shares of fully vested exchanged stock options and 20,004 shares of unvested exchanged stock options issued in connection with the acquisition was estimated using the Black-Scholes pricing model utilizing the following weighted-average assumptions:

 

Risk-free interest rate

   2.61 %

Expected life

   2.4 years  

Expected volatility

   59 %

Expected dividend yield

   —    

As a result of the valuation, the fair market value of $370 associated with the 20,004 shares of unvested exchanged stock options will be recorded into stock-based compensation expense over the stock option vesting term, which is approximately one year subsequent to the acquisition.

The fair market value of the 444 shares of exchanged warrants was also estimated using the Black-Scholes pricing model and was not material.

 

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The allocation of the purchase price paid in connection with our acquisition of Fast Track among the assets acquired and liabilities assumed is based on preliminary estimates of their fair market value. These estimates of fair market value could change based on the completion of our evaluation of the assets and liabilities of Fast Track, which is expected to be completed by the time of the issuance of our financial statements for the year ended December 31, 2008. The following table provides the preliminary allocation of the purchase price based upon Fast Track’s unaudited balance sheet as of March 17, 2008, the date of the acquisition:

 

Assets acquired

  

Cash and cash equivalents and other current assets

   $ 1,827  

Restricted cash

     158  

Furniture, fixture and equipment

     232  

Intangible assets

     8,200  

Goodwill

     9,799  
        

Total assets acquired

   $ 20,216  
        

Liabilities assumed

  

Accounts payable and accrued expenses

     (798 )

Deferred revenue

     (1,338 )

Other long-term liabilities

     (1 )
        

Net assets acquired

   $ 18,079  
        

In accordance with Statement of Financial Accounting Standards, or SFAS, No. 109, Accounting for Income Taxes, we have provided for deferred tax assets of $3,470 for the difference between the currently estimated book and tax basis of the net assets acquired. Based on our lack of a history of profits and uncertainty in regards to future profitability, we determined that it was more likely than not that such tax benefit would not be realized and therefore a valuation allowance of $3,470 was established to fully offset such net deferred tax assets. In addition, we did not recognize a deferred tax asset relating to the future tax distribution that will arise when the Fast Track employee rollover options are exercised. When such exercises occur and a tax deduction is ultimately realized, we will recognize such benefit as a reduction of goodwill prior to the effective date of SFAS No. 141(R), Business Combination, or SFAS No. 141(R), which will be adopted by us on January 1, 2009. Upon the adoption of SFAS No. 141(R), such benefit will be recognized as an adjustment to income tax expense.

 

(2) PRO FORMA FAST TRACK ACQUISITION ADJUSTMENTS

 

  (a) Adjustment to calculate goodwill and other intangible assets and to allocate the purchase price to the estimated fair value of Fast Track net assets acquired:

 

Common stock issued (see Note 1)

   $ 16,995

Common stock reserved for stock options and warrants exchanged (see Note 1)

     459

Transaction costs

     625
      

Total purchase price

   $ 18,079
      

Purchase price is allocated as follows:

  

Goodwill

   $ 9,799

Intangible assets

     8,200

Net assets assumed

     80
      

Total purchase price

   $ 18,079
      

 

  (b)

We estimated the fair value of the legal performance obligation associated with acquired deferred revenue in accordance with Emerging Issues Task Force Issue No. 01-3, Accounting in a Business

 

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Combination for Deferred Revenue of an Acquiree. We concluded that the value of the legal performance obligation represents the direct costs to fulfill such obligation plus an expected profit margin. Our valuation of the acquired deferred revenue resulted in a 38% write-down of the deferred revenue balance as of the date of the acquisition. This write-down has been reflected on a pro forma basis as of January 1, 2007, resulting an adjustment to application services revenues of $665 in the pro forma statement of operations for the year ended December 31, 2007. The performance obligation associated with the acquired deferred revenue has a duration of one year, thus a similar reduction to the pro forma statement of operations for the nine months ended September 30, 2008 was not required.

 

  (c) Adjustment to historical amortization of intangible assets expense to reflect the incremental expense associated with the preliminary purchase price allocation and estimated useful lives:

 

     Purchase
Allocation
   Estimated
Useful
Lives (Years)
   Year Ended
December 31,
2007
   Nine Months
Ended
September 30,
2008

Technology

   $ 2,400    5.00    $ 480    $ 360

Database

     1,900    5.00      380      285

Customer relationships

     1,600    5.00      110      108

Customer contracts

     1,600    3.00      681      617

Research and development

     700    None      —        —  
                       
   $ 8,200         1,651      1,370
               

Historical expense

           —        880
                   

Incremental pro forma expense for the year ended December 31, 2007 and the nine months ended September 30, 2008

         $ 1,651    $ 490
                   

Cost of revenues-application services

         $ 1,541    $ 437

Sales and marketing

           110      53
                   

Total

         $ 1,651    $ 490
                   

Of the $8,200 of acquired intangibles, $700 was assigned to in-process research and development projects. Subsequent to the date of the acquisition, we determined that technological feasibility had not been established for any of these projects, and as a result, these projects were written off. This write-off is not included as a pro forma adjustment in the pro forma statement of operations for the year ended December 31, 2007, but has been reflected as research and development expense in Medidata’s historical results of operations for the nine months ended September 30, 2008.

The acquired technology and database will be amortized on a straight-line basis over the estimated useful life of five years. The customer relationships and customer contracts will be amortized using an accelerated method which reflects the pattern in which the economic benefits derived from the related intangible assets are consumed or utilized. Amortization of customer relationships and customer contracts over their useful lives is as follows:

 

Year ending December 31,

  

2008

   $ 589

2009

     967

2010

     599

2011

     517

2012

     448

2013

     80
      
   $ 3,200
      

 

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  (d) Pro forma provision for income taxes represents only foreign, state and local income taxes imposed on a pro forma combined company basis, as we do not expect to pay U.S. income taxes on our net loss. We have not reflected a tax benefit on such loss as it is not assured that a tax benefit would be realized.

 

  (e) Pro forma adjustments for preferred stock dividends and accretion represent the elimination of Fast Track’s historical preferred stock dividends, as all of Fast Track’s preferred stock was exchanged for Medidata’s common stock in connection with the acquisition.

 

  (f) Pro forma combined weighted average basic and diluted common shares outstanding were based on Medidata’s historical weighted average basic and diluted common shares outstanding with the pro forma effect of the issuance of 864,440 shares of common stock in connection with the acquisition of Fast Track as if it had occurred on January 1, 2007.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of our financial condition and results of operations. You should read this discussion and analysis together with our consolidated financial statements and notes to those consolidated financial statements included elsewhere in this prospectus. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those described under the caption “Risk Factors” and elsewhere in this prospectus.

Overview

We are a leading global provider of hosted clinical development solutions that enhance the efficiency of our customers’ clinical development processes and optimize their research and development investments. Our solutions allow our customers to achieve clinical results more efficiently and effectively by streamlining the design, planning and management of key aspects of the clinical development process, including protocol development, CRO negotiation, investigator contracting, the capture and management of clinical trial data and the analysis and reporting of that data on a worldwide basis.

The demand for electronic clinical solutions, such as those provided by Medidata, has been driven by the increasing complexity and cost associated with paper-based trials and inefficiencies with early generation EDC solutions. Paper-based trials may delay the clinical development process, impair data quality and prevent real-time decision making, while traditional EDC solutions have faced challenges with integration, site requirements, customization and scalability.

We have grown our revenues significantly since inception by expanding our customer base, increasing penetration with existing customers, enhancing our products and services and growing our indirect channel. In order to achieve and sustain our growth objectives, we have and will continue to invest in key areas, including: new personnel, particularly in direct domestic and international sales activities; resources to support our product development, including product functionality and platform; marketing programs to build brand awareness; and infrastructure to support growth.

We derive a majority of our application services revenues through multi-study arrangements for a pre-determined number of studies. We also offer our application services on a single-study basis that allows customers to use our solution for a limited number of studies or to evaluate it prior to committing to multi-study arrangements. We invest heavily in training our Medidata Rave customers, their investigators and other third parties to configure clinical trials independently. We believe this knowledge transfer accelerates customer adoption of our solutions.

We use a number of metrics to evaluate and manage our business. These metrics include customer growth, customer retention rate, revenues from lost customers, geographic contribution, and next twelve month, or NTM, backlog.

Our customer base has grown from 19 at December 31, 2004 to 148 at September 30, 2008. Our relationships with some of these customers include multiple divisions and business units at various domestic and international locations. We generate revenues from sales to new customers as well as sales and renewals from our existing customers. Our global direct sales organization represents our primary source of sales, with an increasing number of sales generated through our CRO relationships. Our customer retention rate was 84.2%, 81.8%, 92.0% and 94.6%, in 2005, 2006, 2007 and the nine months ended September 30, 2008, respectively. We calculate customer retention based upon the number of customers that existed both at the beginning and end of the relevant period.

 

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Revenues from lost customers accounted for 0.8%, 2.8%, 0.8% and 1.4% of total prior year revenues in 2005, 2006, 2007 and the nine months ended September 30, 2008, respectively. To calculate the impact of customers lost during the year, we consider the revenues recognized from lost customers during the most recent prior fiscal year as a percentage of total company revenues from the same period. We believe revenue from lost customers coupled with customer retention rate gives the best sense of volume and scale of customer loss and retention. Our presentation of customer retention and revenues from lost customers may differ from other companies in our industry.

We manage our business as one reportable segment. Historically, we have generated most of our revenues from sales to customers located in the United States. However, revenues generated from customers located in Europe and Asia (including Australia) represent a significant and growing portion of overall revenues. Revenues generated from customers located in Europe represented 15.2%, 19.1%, 22.6% and 22.7% of total revenues in 2005, 2006, 2007 and the nine months ended September 30, 2008, respectively. Revenues generated from customers in Asia represented 0.7%, 11.2%, 11.3% and 10.8% of total revenues in 2005, 2006, 2007 and the nine months ended September 30, 2008, respectively. We expect sales from customers in Europe and Asia to continue to represent a significant portion of total sales as we continue to serve existing and new customers in these markets.

Our backlog is primarily associated with application services and represents the total future contract value of outstanding, multi-study and single-study arrangements, billed and unbilled, at a point in time. Thus, our backlog includes deferred revenue. Revenue for any given period is a function of revenue recognized from the beginning of period backlog, contract renewals, and new customer contracts. For this reason, backlog at the beginning of any period is not necessarily indicative of long-term future performance. We monitor as an annual metric the amount of revenues expected to be recognized from NTM backlog. As of January 1, 2008, we had NTM backlog of approximately $62.5 million. Our presentation of backlog may differ from other companies in our industry.

Acquisition of Fast Track Systems, Inc.

On March 17, 2008, we acquired Fast Track Systems, Inc., or Fast Track, a provider of clinical trial planning solutions. With this acquisition, we extended our ability to serve customers throughout the clinical research process with solutions that improve efficiencies in protocol development and trial planning, contracting and negotiation. We paid total consideration of approximately $18.1 million, which consisted of the issuance of 864,440 shares of common stock in exchange for all Fast Track’s existing preferred stock and common stock as well as 444 and 25,242 shares of common stock reserved for the exercise of outstanding warrants and vested employee stock options, respectively.

The results of operations or other discussions below for the year ended December 31, 2005, 2006 and 2007 do not give effect to the impact of this acquisition. The unaudited pro forma statements of operations provide the pro forma effect to the acquisition of Fast Track as if it had occurred on January 1, 2007.

Sources of Revenue

We derive revenues from application services and professional services. Application services consist of multi-study or single-study arrangements which give our customers the right to use our software solutions, hosting and site support. Professional services consist of assisting our customers and partners with the design, workflow, implementation and management of their clinical trials.

Our application services are principally provided for both multi-study arrangements, which grant customers the right to manage up to a predetermined number of clinical trials for a term generally ranging from three to five years, as well as single-study arrangements that allow customers to use application services on a short-term basis

 

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for a limited number of studies or to evaluate our application services prior to committing to multi-study arrangements. Many of our customers have migrated from single-study arrangements to multi-study arrangements. Since 2006, multi-study arrangements have approximated 70% of total application services revenues. We expect multi-study arrangements to continue to represent the majority of our application services revenues.

Our professional services provide our customers with reliable, repeatable and cost-effective implementation and training in the use of our application services. Professional services revenues have represented a significant portion of overall revenues to date. We expect professional services revenues to decline as a percentage of total revenues as our customers and partners become more adept at the management and configuration of their clinical trials as part of our knowledge transfer efforts.

Cost of Revenues

Cost of revenues consists primarily of costs related to hosting, maintaining and supporting our application suite and delivering our professional services and support. These costs include salaries, benefits, bonuses and stock-based compensation for our data center and professional services staff. Cost of revenues also includes outside service provider costs, data center and networking expenses and allocated overhead. We allocate overhead such as depreciation expense, rent and utilities to all departments based on relative headcount. As such, a portion of general overhead expenses are reflected in cost of revenues. The costs associated with providing professional services are significantly higher as a percentage of revenue than the costs associated with delivering our application services due to the labor costs associated with providing professional services. Over the long term, we believe that cost of revenues as a percentage of total revenues will decrease.

Operating Expenses

Research and Development. Research and development expenses consist primarily of personnel and related expenses for our research and development staff, including salaries, benefits, bonuses and stock-based compensation, the cost of certain third-party service providers and allocated overhead. We have focused our research and development efforts on expanding the functionality and ease of use of our applications. We expect research and development costs to increase in absolute dollars in the future as we intend to release new features and functionality designed to maximize the efficiency and effectiveness of the clinical development process for our customers. Over the long term, we believe that research and development expenses as a percentage of total revenues will remain relatively constant.

Sales and Marketing. Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, bonuses and stock-based compensation, commissions, travel costs, and marketing and promotional events, corporate communications, advertising, other brand building and product marketing expenses and allocated overhead. Our sales and marketing expenses have increased in absolute dollars primarily due to our ongoing substantial investments in customer acquisition, but have decreased as a percentage of revenue in 2005, 2006 and 2007. We expect sales and marketing expenses to increase in absolute dollars. Over the long term, we believe that sales and marketing expenses as a percentage of total revenues will decrease.

General and Administrative. General and administrative expenses consist primarily of personnel and related expenses for executive, legal, quality assurance, finance and human resources, including wages, benefits, bonuses and stock-based compensation, professional fees, insurance premiums, allocated overhead and other corporate expenses, including certain one-time costs associated with becoming a public company. During 2008, we strengthened our management and corporate infrastructure, particularly in our finance department, and implemented financial reporting, compliance and other infrastructure associated with being a public company. On an ongoing basis, we expect general and administrative expenses to increase in absolute dollars as we continue to add administrative personnel and incur additional professional fees and other expenses resulting

 

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from continued growth and the compliance requirements of operating as a public company. Over the long term, we believe that general and administrative expenses as a percentage of total revenues will decrease.

Internal Controls over Financial Reporting

In connection with the audit of our consolidated financial statements for the years ended December 31, 2006 and 2007, we, together with our independent registered public accounting firm, identified material weaknesses in our internal controls over financial reporting attributable to deficiencies in our revenue recognition and expense cut-off procedures. In response, we have formulated a plan to remediate these material weaknesses and to evaluate and strengthen our other internal controls over financial reporting. The actions we have taken to date include hiring a new director of revenue accounting and additional technical accounting personnel, designing a comprehensive revenue recognition policy, and establishing a methodology for accruing missing invoices and expense reports. We performed additional analyses and other procedures designed to ensure that our annual and interim consolidated financial statements included herein were prepared in accordance with Generally Accepted Accounting Principles. These measures included, among other things, accounting reviews by senior finance staff, certain manual procedures, including the centralized review of key contracts and transactions; and the utilization of outside professionals to supplement our staff in assisting us in meeting the objectives otherwise fulfilled by an effective control environment. As a result, we believe our annual and interim consolidated financial statements fairly present, in all material respects, our financial position, results of operations and cash flows for all periods presented. While we believe that our remediation plan will address the identified material weaknesses, we have not yet completed all of the steps required for remediation and our testing procedures have not yet been completed. Therefore, we cannot make any assurances as to the success of our remediation efforts. Elements of our remediation initiatives can only be accomplished over time, and there is no guarantee that they will result in an effective internal controls environment. Our board of directors, in coordination with our audit committee, will continually assess the progress and sufficiency of these initiatives and make adjustments as necessary.

See also “Risk Factors—Risks Related to Our Business—We currently have material weaknesses in our internal controls over financial reporting. If we fail to remedy our material weaknesses or otherwise maintain effective internal controls over financial reporting, the accuracy and timing of our financial reporting may be adversely affected.”

Critical Accounting Policies

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States. Our critical accounting policies, including the assumptions and judgments underlying them, require the application of significant judgment in the preparation of our financial statements, and as a result they are subject to a greater degree of uncertainty. In applying these policies, we use our judgment to determine the appropriate assumptions to be used in calculating estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Estimates and assumptions are based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Accordingly, actual results could differ from those estimates. Our critical accounting policies include the following:

Revenue Recognition

We derive our revenues from the sale of application services and the rendering of professional services. We recognize revenues when all of the following conditions are satisfied:

 

   

persuasive evidence of an arrangement exists;

 

   

service has been delivered to the customer;

 

   

amount of the fees to be paid by the customer is fixed or determinable; and

 

   

collection of the fees is reasonably assured or probable.

 

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We invoice our customers in accordance with the terms of our underlying contracts, usually in installments in advance of the related service period. Payment terms are typically net 30 to 45 days. Amounts that have been invoiced for application services arrangements are initially recorded in accounts receivable and deferred revenue. Our deferred revenue represents the net balance billed in advance of revenue recognition. Application services arrangements represent the majority of our deferred revenue. Professional services arrangements are typically invoiced monthly on a time and material basis and do not represent a significant portion of our deferred revenue.

Application Services

We typically enter into multi-study and single-study arrangements that include software licenses that provide our customer the “right to use” our software as well as hosting, and other support services to be provided over a specified term. We recognize revenues ratably over the term of the arrangement, which may include optional renewal periods, beginning with the commencement of the arrangement term, which correlates with the activation of hosting services, assuming all other revenue recognition criteria are met.

Professional Services

We also provide a range of professional services that our customers have the option to utilize on an as-needed basis. Professional services do not result in significant alterations to our underlying software and are evaluated separately to determine if such professional services are essential to the functionality of our application services. Professional services deemed not essential to the functionality of our application services are considered to have a stand-alone value to our customers and are recognized separately as they are rendered, on a time and materials basis.

We have established a range of vendor specific objective evidence, or VSOE, of fair value for certain of our professional service offerings. For multiple element arrangements, consideration is allocated to professional services based on VSOE of fair value utilizing the residual method to determine the portion of the arrangement consideration to allocate to other services. If the contracted professional services consideration is priced outside the VSOE range, our policy is to adjust the pricing for accounting purposes to the closest point within the VSOE range.

Professional services that are essential to the functionality of our application services or for which VSOE of fair value was not established, do not qualify for separate accounting and are recognized ratably over the term of the related arrangement and are recorded as a component of application services revenues.

Stock-Based Compensation

We adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, or SFAS No. 123(R), on January 1, 2006, and previously applied Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. According to SFAS No. 123(R), all forms of share-based payments to employees, including employee stock options and employee stock purchase plans, are treated the same as any other form of compensation by recognizing the related cost in the statement of operations.

Under SFAS No. 123(R), stock-based compensation expense is measured at the grant date based on the fair value of the award, and the expense is recognized ratably over the award’s vesting period. For all grants, we recognize compensation cost under the straight-line method.

We measure the fair value of stock options on the date of grant using the Black-Scholes pricing model which requires the use of several estimates, including:

 

   

the volatility of our stock price;

 

   

the expected life of the option;

 

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risk free interest rates; and

 

   

expected dividend yield.

The use of different assumptions in the Black-Scholes pricing model would result in different amounts of stock-based compensation expense. Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially impacted in the future.

Prior to the completion of this offering, we were not a publicly traded company and we had limited historical information on the price of our stock as well as employees’ stock option exercise behavior. As a result, we could not rely on historical experience alone to develop assumptions for stock price volatility and the expected life of options. As such, our stock price volatility was estimated with reference to a peer group of companies. Subsequent to the completion of this offering, we will utilize the closing prices of our publicly-traded stock to determine our volatility.

We estimate the expected life of options based on the likely date of exercise as opposed to the actual life of the options. We consider internal studies of historical experience and projected exercise behavior to determine such estimate. The risk-free interest rate is based on the United States Treasury yield curve with a maturity tied to the expected life of the option. We have not and do not expect to pay dividends on our common shares.

We recorded stock-based compensation of $0.4 million, $0.7 million and $1.3 million during 2005, 2006, and 2007, respectively, and $2.2 million during the nine months ended September 30, 2008. In future periods, stock-based compensation expense is expected to increase as a result of our existing unrecognized stock-based compensation and as we issue additional equity-based awards to continue to attract and retain employees and non-employee directors. As of September 30, 2008, we had $8.6 million of unrecognized stock-based compensation costs related to stock options granted under our 2000 Stock Option Plan. The unrecognized compensation cost is expected to be recognized over an average period of 1.52 years.

Significant Factors, Assumptions and Methodologies Used in Determining the Fair Value of our Capital Stock

Financial Strategies Consulting Group, LLC, or FSCG, an unrelated third-party valuation firm, has performed valuations of our common stock in order to assist our board of directors in determining the fair value of our common stock. These valuation reports valued our common stock as of December 31, 2005, February 28, 2006, September 30, 2006, December 31, 2006, April 30, 2007, December 31, 2007, March 31, 2008, June 30, 2008 and September 30, 2008.

In connection with the preparation of our consolidated financial statements in anticipation of a potential initial public offering and due to the increase in value between the April 30, 2007 and the December 31, 2007 valuations, we obtained a retrospective valuation of our common stock performed by FSCG as of September 30, 2007. The retrospective valuation used a risk-adjusted discount of 28%, a non-marketability discount of 21% and an estimated time to a liquidity event of greater than 12 months. The expected outcomes were still weighted more toward an initial public offering (55-60%) with lower weights for a sale (30-35%) and remaining a private company (5-15%), with no weight given to a liquidation scenario (0%), but the differences between the probability of an initial public offering increased and the probability of a sale decreased when compared with the probabilities used for the April 30, 2007 valuation. This retrospective valuation resulted in a reassessed fair value of $14.78 per share for our common stock as September 30, 2007. We considered this fair value when interpolating the value for the stock option grants made on October 2, 2007 and November 13, 2007 due to the proximity of the grant date to the September 30, 2007 retrospective valuation.

 

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During the twelve months ended September 30, 2008, we granted the following stock options with exercise prices as follows (excluding those options exchanged with Fast Track employees):

 

Grant Date

   Options Granted    Fair Value of
Common Stock
at Grant
   Exercise Price    Intrinsic Value

10/02/07

   221,000    $ 14.93    $ 12.08    $ 2.85

11/13/07

   223,500      18.02      12.08      5.94

12/27/07

   10,000      21.26      12.08      9.18

01/07/08

   30,000      21.37      12.08      9.29

02/19/08

   18,000      20.28      21.55      —  

03/14/08

   119,000      19.66      21.55      —  

05/14/08

   52,066      19.48      19.23      0.25

08/13/08

   99,960      20.15      19.75      0.40

The exercise price of certain granted stock options was less than the fair value of the common stock at grant. As these options vest, we will recognize a higher stock-based compensation expense due to the intrinsic value associated with these grants.

Goodwill and Intangibles

Goodwill, which consists of the excess of the purchase price over the fair value of identifiable net assets of businesses acquired, is evaluated for impairment using a two-step process that is performed at least annually on October 1 of each year, or whenever events or circumstances indicate that impairment may have occurred. The first step is a comparison of the fair value of an internal reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired and the second step is unnecessary. If the carrying value of the reporting unit exceeds its fair value, a second test is performed to measure the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied value of the goodwill. If the carrying amount of the goodwill is greater that the implied value, an impairment loss is recognized for the difference.

The implied value of goodwill is determined as of the test date by performing a purchase price allocation, as if the reporting unit had just been acquired, using currently estimated fair values of the individual assets and liabilities of the reporting unit, together with an estimate of the fair value of the reporting unit taken as a whole. The estimate of the fair value of the reporting unit is based upon information available regarding prices of similar groups of assets, or other valuation techniques including present value techniques based upon estimates of future cash flow.

Intangible assets, including technology, database, customer relationships, and customer contracts arising from the acquisition of Fast Track, are recorded at cost less accumulated amortization and are amortized using a method which reflects the pattern in which the economic benefit of the related intangible asset is utilized. For intangible assets subject to amortization, impairment is recognized if the carrying amount is not recoverable and the carrying amount exceeds the fair value of the intangible asset.

As of September 30, 2008, we had goodwill and intangible assets of $16.4 million. There are many assumptions and estimates used that directly impact the results of impairment testing, including an estimate of future expected revenues, earnings and cash flows, and discount rates applied to such expected cash flows in order to estimate fair value. We have the ability to influence the outcome and ultimate results based on the assumptions and estimates we choose for testing. To mitigate undue influence, we set criteria that are reviewed and approved by various levels of management. The determination of whether or not goodwill or acquired intangible assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the value of our reporting unit. Changes in our strategy or market conditions could significantly impact these judgments and require adjustments to recorded amounts of intangible assets.

 

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Income Taxes

We use the asset and liability method of accounting for income taxes, as prescribed by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

On January 1, 2007, we adopted Financial Accounting Standards Board, or FASB, Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, or FIN No. 48. FIN No. 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN No. 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The impact of the adoption of FIN No. 48 did not have a material effect on our consolidated financial position, results of operations or cash flows.

We had approximately $20.8 million of federal and $24.2 million of state net operating loss carryforwards as of December 31, 2006 and $17.2 million of federal and $20.8 million of state net operating loss carryforwards as of December 31, 2007 available to offset future taxable income, expiring from 2019 through 2027.

The future utilization of the net operating loss carryforwards may be subject to significant limitations under the Internal Revenue Code. Due to these limitations and the likelihood that our future taxable income may be insufficient to utilize these tax benefits, we provided a valuation allowance against the net deferred tax assets as their future utilization is uncertain at this time. We believe the net deferred tax assets of $0.2 million as of December 31, 2006 and 2007 are realizable as they were generated in foreign jurisdictions where we are taxpayers. The net change in the valuation allowance was an increase of $3.1 million in 2006 and an increase of $1.1 million in 2007.

In calculating the provision for income taxes on an interim basis, we follow FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods, an interpretation of APB Opinion No. 28, and have developed an estimate of the annual effective tax rate based upon the facts and circumstances known at the time. Our effective tax rate is based upon expected income, statutory rates and permanent differences applicable to us in the various jurisdictions in which we operate.

 

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Results of Operations

The following table sets forth our consolidated results of operations as a percentage of total revenues for the periods shown:

 

     Year ended December 31,     Nine months ended
September 30,
 
     2005     2006     2007       2007         2008    

Revenues:

          

Application services

   65.9 %   63.3 %   56.1 %   56.3 %   64.2 %

Professional services

   34.1 %   36.7 %   43.9 %   43.7 %   35.8 %
                              

Total revenues

   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %
                              

Cost of revenues:

          

Application services

   10.4 %   14.4 %   15.3 %   15.1 %   17.2 %

Professional services

   72.9 %   40.6 %   38.3 %   39.3 %   28.1 %
                              

Total cost of revenues

   83.3 %   55.0 %   53.6 %   54.4 %   45.3 %
                              

Gross profit

   16.7 %   45.0 %   46.4 %   45.6 %   54.7 %
                              

Operating expenses:

          

Research and development

   20.7 %   11.7 %   12.4 %   12.0 %   17.3 %

Sales and marketing

   39.0 %   26.5 %   19.1 %   19.1 %   21.3 %

General and administrative

   23.1 %   16.5 %   15.5 %   13.7 %   23.6 %
                              

Total operating expenses

   82.8 %   54.7 %   47.0 %   44.8 %   62.2 %
                              

(Loss) income from operations

   (66.1 )%   (9.7 )%   (0.6 )%   0.8 %   (7.5 )%

Nine months ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Revenues

 

     Nine months ended September 30,  
     2007     2008     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount    %  
     (Amounts in thousands)  

Revenues:

               

Application services

   $ 34,678    56.3 %   $ 54,446    64.2 %   $ 19,768    57.0 %

Professional services

     26,957    43.7 %     30,353    35.8 %     3,396    12.6 %
                                       

Total revenues

   $ 61,635    100.0 %   $ 84,799    100.0 %   $ 23,164    37.6 %
                                       

Total revenues. Total revenues increased $23.2 million, or 37.6%, from $61.6 million in 2007 to $84.8 million in 2008. The increase in revenues was primarily due to a $19.8 million, or 57.0%, increase in revenues from application services, and a $3.4 million, or 12.6%, increase in revenues from professional services. Revenues for the nine months ended September 30, 2008 includes Fast Track application and professional services revenues of $2.6 million from the date of acquisition (March 17, 2008) through September 30, 2008.

Application services revenues. Revenues from application services increased $19.8 million, or 57.0%, from $34.7 million in 2007 to $54.4 million in 2008. Our acquisition of Fast Track contributed $2.5 million of additional applications services revenues in 2008. Excluding the impact of Fast Track, application services revenues increased $17.3 million, or 49.9%, compared to the prior year. The majority of the increase in application services revenues was derived from increased activity in our existing customer base, primarily resulting from new studies and renewals. In addition to maintaining a high customer retention rate, we also benefited from providing nine months of services to those customers who began their multi-year arrangements in

 

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the prior year. Revenues from domestic customers grew 47.4%, whereas revenues from customers in Europe and Asia grew 78.2% and 20.1%, respectively. Excluding the impact of Fast Track, our customer base grew to 118 compared to 93 at the end of 2007, accounting for the remaining growth in applications services revenues. The acquisition of Fast Track expanded our customer base by approximately 30 customers.

Professional services revenues. Revenues from professional services increased $3.4 million, or 12.6%, from $27.0 million in 2007 to $30.4 million in 2008. Our acquisition of Fast Track contributed $0.1 million of additional professional services revenues. Excluding the impact of Fast Track, the increase in professional services revenues was due to a higher number of studies started in the period, derived from both existing customers and new customers added during the year.

Cost of Revenues

 

     Nine months ended September 30,  
     2007     2008     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount     %  
     (Amounts in thousands)  

Cost of revenues:

              

Application services

   $ 9,318    15.1 %   $ 14,590    17.2 %   $ 5,272     56.6 %

Professional services

     24,200    39.3 %     23,815    28.1 %     (385 )   (1.6 )%
                                        

Total cost of revenues

   $ 33,518    54.4 %   $ 38,405    45.3 %   $ 4,887     14.6 %
                                        

Total cost of revenues. Total cost of revenues increased $4.9 million, or 14.6%, from $33.5 million in 2007 to $38.4 million in 2008. The increase in total cost of revenues was primarily due to the increase in cost of application services revenues. Cost of revenues for the nine months ended September 30, 2008 included $1.7 million of cost of revenues incurred by Fast Track since the date of acquisition.

Cost of application services revenues. Cost of application services revenues increased $5.3 million, or 56.6%, from $9.3 million in 2007 to $14.6 million in 2008. The increase was due to $2.8 million in personnel related costs, depreciation of $2.0 million primarily associated with the build out and maintenance of our Houston data center, intangible asset amortization of $0.8 million associated with the acquisition of Fast Track and $0.5 million of other costs. This increase was partially offset by a decrease in consulting expenses of $0.8 million.

Cost of professional services revenues. Cost of professional services decreased $0.4 million, or 1.6%, from $24.2 million in 2007 to $23.8 million in 2008. The decrease was primarily due to a decrease in consulting costs of $3.0 million as we replaced outside consultants with employees, partially offset by an increase in personnel related costs of $2.6 million.

Operating Expenses

 

     Nine months ended September 30,  
     2007     2008     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount    %  
     (Amounts in thousands)  

Operating expenses:

               

Research and development

   $ 7,404    12.0 %   $ 14,632    17.3 %   $ 7,228    97.6 %

Sales and marketing

     11,785    19.1 %     18,095    21.3 %     6,310    53.5 %

General and administrative

     8,435    13.7 %     20,047    23.6 %     11,612    137.7 %
                                       

Total operating expenses

   $ 27,624    44.8 %   $ 52,774    62.2 %   $ 25,150    91.0 %
                                       

 

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Total operating expenses. Total operating expenses increased $25.2 million, or 91.0%, from $27.6 million in 2007 to $52.8 million in 2008. Costs increased in each department with the largest increase in general and administrative costs. Total operating expenses for the nine months ended September 30, 2008 included Fast Track operating expenses of $4.3 million from the date of acquisition through September 30, 2008.

Research and development expenses. Research and development expenses increased $7.2 million, or 97.6%, from $7.4 million in 2007 to $14.6 million in 2008. The increase was primarily due to an increase in personnel related costs of $4.6 million, professional and consulting fees of $1.0 million, and a $0.7 million write off of in-process research and development projects, which were acquired from Fast Track. The personnel increase was planned to support our development and investment in new products, including the integration of the Fast Track products. Our acquisition of Fast Track accounted for $0.5 million of the increase in personnel related costs. The write-off of certain in-process research and development projects was required as we determined that technological feasibility had not been established for these acquired projects. The write-off occurred in the first quarter of 2008. The remaining $0.9 million increase in research and development expenses related to higher rent, travel related costs and other miscellaneous costs.

Sales and marketing expenses. Sales and marketing expenses increased $6.3 million, or 53.5%, from $11.8 million in 2007 to $18.1 million in 2008. The increase was primarily attributable to higher personnel related costs of $4.6 million as we increased our staffing levels in both our sales team and marketing department, travel and conference related costs of $0.8 million and $0.5 million related to the increased professional and consulting fees. The remaining $0.4 million increase in sales and marketing costs related to other miscellaneous costs. $0.6 million of the increase in personnel related costs was attributable to our acquisition of Fast Track.

General and administrative expenses. General and administrative expenses increased $11.6 million, or 137.7%, from $8.4 million in 2007 to $20.0 million in 2008. The increase was primarily due to increases in personnel related costs of $6.4 million, professional and consulting fees of $3.0 million, facility related costs of $0.7 million primarily associated with a new office space and increased travel related expenses of $0.4 million. Our acquisition of Fast Track accounted for $1.3 million of the increase in personnel related costs. The remaining increase in personnel related costs was due to higher staffing levels, bonuses and stock based compensation as we expanded our back office support groups in anticipation of our initial public offering. The increase in professional and consulting fees includes certain non-recurring accounting related costs also incurred in connection with our preparation to becoming a public company. We expect that costs incurred during 2008 as we strengthened our management team and corporate infrastructure, particularly in the finance department, and implemented the financial reporting, compliance and other infrastructure associated with being a public company will not increase significantly in 2009. The remaining increase in general and administrative expenses was primarily due to other costs resulting from our acquisition of Fast Track and other miscellaneous expenses, including $0.3 million of foreign currency exchange loss.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Revenues

 

     Year ended December 31,  
     2006     2007     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount    %  
     (Amounts in thousands)  

Revenues:

               

Application services

   $ 31,953    63.3 %   $ 48,378    56.1 %   $ 16,425    51.4 %

Professional services

     18,508    36.7 %     37,896    43.9 %     19,388    104.8 %
                                       

Total revenues

   $ 50,461    100.0 %   $ 86,274    100.0 %   $ 35,813    71.0 %
                                       

 

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Total revenues. Total revenues increased $35.8 million, or 71.0%, from $50.5 million in 2006 to $86.3 million in 2007. The $35.8 million increase in revenues was primarily due to a $16.4 million, or 51.4%, increase in revenues from application services, and $19.4 million, or 104.8%, increase in revenues from professional services.

Application services revenues. Revenues from application services increased $16.4 million, or 51.4%, from $32.0 million in 2006 to $48.4 million in 2007. The increase in application services revenues was primarily the result of the increase in the number of customers. Our customer base increased 86.0% to 93 by the end of 2007 compared to 50 at the end of 2006. Application services revenues also benefited from the full year impact of the large multi-study arrangements we signed during the prior year. A significant portion of our revenue growth was generated from international customers. Revenues from international customers increased 97.4% and 102.8% in Europe and Asia, respectively. Revenues from domestic customers grew 34.7% compared to the prior year.

Professional services revenues. Revenues from professional services increased $19.4 million, or 104.8%, from $18.5 million in 2006 to $37.9 million in 2007. The increase was due to the large number of new customer contracts during the year as well as the full-year impact of the large multi-study arrangement customers added in 2006. The growth of professional services revenues relative to application services revenues was related to several large multi-study arrangements signed in 2006, and is not indicative of our expectation of relative growth going forward, as our customers become more adept at the management and configuration of their clinical trials as part of our knowledge transfer efforts.

Cost of Revenues

 

     Year ended December 31,  
     2006     2007     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount    %  
     (Amounts in thousands)  

Cost of revenues:

               

Application services

   $ 7,288    14.4 %   $ 13,170    15.3 %   $ 5,882    80.7 %

Professional services

     20,462    40.6 %     33,035    38.3 %     12,573    61.4 %
                                       

Total cost of revenues

   $ 27,750    55.0 %   $ 46,205    53.6 %   $ 18,455    66.5 %
                                       

Total cost of revenues. Total cost of revenues increased $18.5 million, or 66.5%, from $27.8 million in 2006 to $46.2 million in 2007. The increase in total cost of revenues was primarily due to the increase in cost of professional services revenues.

Cost of application services revenues. Cost of application services revenues increased $5.9 million, or 80.7%, from $7.3 million in 2006 to $13.2 million in 2007. The increase was primarily attributable to increased outside contractors costs of $3.3 million due to additional support needed for our Houston data center, depreciation of $1.9 million due to the full-year impact of the Houston data center as well as additional equipment purchased to support the business, personnel related costs of $1.3 million stemming from new employee hires in 2007, incremental computer related cost of $0.8 million and other applications services cost of $0.8 million, partially offset by a decrease in royalty costs due to the settlement of a royalty claim in 2006 for $2.2 million.

Cost of professional services. Cost of professional services increased $12.6 million, or 61.4%, from $20.5 million in 2006 to $33.0 million in 2007. The increase was due to increases in outside contractors cost of $5.3 million, personnel related costs of $5.2 million as personnel increased to keep pace with the large increase in customer volume, certain pass through expenses for reimbursable out of pocket costs and hardware provisioning of $0.6 million and depreciation of $0.5 million. The remaining $1.0 million increase consisted of professional fees and other costs.

 

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Operating Expenses

 

     Year ended December 31,  
     2006     2007     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount    %  
     (Amounts in thousands)  

Operating expenses:

               

Research and development

   $ 5,905    11.7 %   $ 10,716    12.4 %   $ 4,811    81.5 %

Sales and marketing

     13,379    26.5 %     16,485    19.1 %     3,106    23.2 %

General and administrative

     8,335    16.5 %     13,361    15.5 %     5,026    60.3 %
                                       

Total operating expenses

   $ 27,619    54.7 %   $ 40,562    47.0 %   $ 12,943    46.9 %
                                       

Total operating expenses. Total operating expenses increased $12.9 million, or 46.9%, from $27.6 million in 2006 to $40.6 million in 2007. The increase in operating expenses was primarily due to increased research and development expenses, sales and marketing, and general and administrative as discussed below.

Research and development expenses. Research and development expenses increased $4.8 million, or 81.5%, from $5.9 million in 2006 to $10.7 million in 2007. The increase was primarily due to an increase in personnel related expense of approximately $2.7 million as personnel increased by 80% year over year, consulting expense of $1.0 million and other research and development expenses of $1.1 million. Additional staffing was required to support our application development and investment in our new software applications.

Sales and marketing expenses. Sales and marketing expenses increased $3.1 million, or 23.2%, from $13.4 million in 2006 to $16.5 million in 2007. The increase was due to increases in personnel related costs of $1.3 million as a result of higher commission expense compared to the prior year and increases in our marketing staff, professional fees of $0.6 million and advertising and promotion related costs of $0.4 million. The remaining increase of $0.8 million consisted of recruiting, travel related, and other sales and marketing costs.

General and administrative expenses. General and administrative expenses increased $5.0 million, or 60.3%, from $8.3 million in 2006 to $13.4 million in 2007. The increase was primarily due to higher personnel related expenses and recruiting fees of $2.1 million and consulting and professional services fees of $1.1 million. The personnel related costs were the result of increased staffing, including several senior level positions. The increase in consulting and professional services fees primarily related to audit and accounting services. We also leased additional office space for certain corporate and professional services staff which resulted in an increase in rent, depreciation, and other office related costs of $0.8 million. The remaining increase of $1.0 million consisted of higher travel related costs, insurance and other general expenses.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Revenues

 

     Year ended December 31,  
     2005     2006     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount    %  
     (Amounts in thousands)  

Revenues:

               

Application services

   $ 13,069    65.9 %   $ 31,953    63.3 %   $ 18,884    144.5 %

Professional services

     6,759    34.1 %     18,508    36.7 %     11,749    173.8 %
                                       

Total revenues

   $ 19,828    100.0 %   $ 50,461    100.0 %   $ 30,633    154.5 %
                                       

 

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Total revenues. Total revenues increased $30.6 million, or 154.5%, from $19.8 million in 2005 to $50.5 million in 2006. The $30.6 million increase in revenues was due to a $18.9 million, or 144.5%, increase in revenues from application services and an $11.7 million, or 173.8%, increase in revenues from professional services.

Application services revenues. Revenues from application services increased $18.9 million, or 144.5%, from $13.1 million in 2005 to $32.0 million in 2006. The increase was due to an increase in our customer base from 33 at the end of 2005 to 50 at the end of 2006. We were able to secure several large multi-study arrangement customers in the first half of 2006. These customers, along with other new customers signed in 2006, contributed significantly to our year over year revenue growth and shifted composition of our customer revenue base from primarily single-study to multi-study arrangements. Revenues from domestic customers grew 116.6% compared to the prior year, accounting for $12.8 million of the total growth in application services revenues. Revenues from international customers also increased significantly compared to the prior year, but off a much smaller revenue base in 2005.

Professional services revenues. Revenues from professional services increased $11.7 million, or 173.8%, from $6.8 million in 2005 to $18.5 million in 2006. The increase was due to the number of large multi-study arrangement contracts in 2006 requiring our services. Professional services revenues also benefited from the increase in the number of customers, as compared to the prior year.

Cost of Revenues

 

     Year ended December 31,  
     2005     2006     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount    %  
     (Amounts in thousands)  

Cost of revenues:

               

Application services

   $ 2,059    10.4 %   $ 7,288    14.4 %   $ 5,229    254.0 %

Professional services

     14,459    72.9 %     20,462    40.6 %     6,003    41.5 %
                                       

Total cost of revenues

   $ 16,518    83.3 %   $ 27,750    55.0 %   $ 11,232    68.0 %
                                       

Total cost of revenues. Total cost of revenues increased $11.2 million, or 68.0%, from $16.5 million in 2005 to $27.8 million in 2006.

Cost of application services revenues. Cost of application services revenues increased $5.2 million, or 254%, from $2.1 million in 2005 to $7.3 million in 2006. The increase in costs was primarily the result of a $2.2 million non-recurring royalty settlement for the use of software in conjunction with our software offerings. In addition, we incurred $2.3 million of additional infrastructure and personnel related costs associated with the opening of our Houston data center. The remaining $0.7 million increase was related primarily to other departmental staffing increases and higher consulting fees.

Cost of professional services. Cost of professional services increased $6.0 million, or 41.5%, from $14.5 million in 2005 to $20.5 million in 2006. This increase was primarily due to increases in personnel related and consulting costs of $3.1 million and $1.4 million, respectively, as we increased staffing and support levels to meet the increased customer demand resulting from the large, multi-study arrangement customer wins in 2006. The remaining increase of $1.5 million related to higher reimbursed pass-through expenses, depreciation expense and other costs.

 

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Operating Expenses

 

     Year ended December 31,  
     2005     2006     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount    %  
     (Amounts in thousands)  

Operating expenses:

               

Research and development

   $ 4,104    20.7 %   $ 5,905    11.7 %   $ 1,801    43.9 %

Sales and marketing

     7,733    39.0 %     13,379    26.5 %     5,646    73.0 %

General and administrative

     4,574    23.1 %     8,335    16.5 %     3,761    82.2 %
                                       

Total operating expenses

   $ 16,411    82.8 %   $ 27,619    54.7 %   $ 11,208    68.3 %
                                       

Total operating expenses. Total operating expenses increased $11.2 million, or 68.3%, from $16.4 million in 2005 to $27.6 million in 2006. Total operating expenses increased in absolute dollars across all cost categories with the largest increase in sales and marketing, but grew at a slower rate than revenues.

Research and development expenses. Research and development expenses increased $1.8 million, or 43.9%, from $4.1 million in 2005 to $5.9 million in 2006. The increase was primarily due to higher personnel related costs of $1.7 million as we increased staffing by 28% and $0.4 million of other costs, including depreciation and travel related costs. This increase was partially offset by a reduction of $0.3 million in consulting costs.

Sales and marketing expenses. Sales and marketing expenses increased approximately $5.6 million, or 73.0%, from $7.7 million in 2005 to $13.4 million in 2006. The increase was due to a $5.2 million increase in personnel related costs, primarily associated with higher commissions and bonuses as our sales team exceeded their sales plan for the year. In addition, we increased staffing by 16% compared to the prior year. The remaining increase of $0.4 million related to higher marketing and advertising expenses.

General and administrative expenses. General and administrative expenses increased approximately $3.8 million, or 82.2%, from $4.6 million in 2005 to $8.3 million in 2006. The increase was primarily due to $1.9 million increase in personnel related costs resulting from staffing increases and higher bonuses, as well as higher consulting and professional fees of $1.0 million to support the growth of the business. The remaining increase related to other general and administrative expenses.

Unaudited Quarterly Consolidated Results of Operations Data

The following table presents our unaudited quarterly consolidated results of operations data for the year ended December 31, 2007 and the three quarters of 2008. This information is derived from our unaudited consolidated financial statements, and includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for the fair presentation of the results of operations for the quarters presented. Historical results are not necessarily indicative of the results to be expected in future periods. You should read this data together with our consolidated financial statements and the related notes to these financial statements included elsewhere in this prospectus.

 

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    Quarter Ended     Quarter Ended(1)  
    Mar 31,
2007
    Jun 30,
2007
    Sept 30,
2007
  Dec 31,
2007
    Mar 31,
2008
    Jun 30,
2008
    Sept 30,
2008
 

Revenues:

             

Application services

  $ 10,987     $ 11,172     $ 12,519   $ 13,700     $ 15,698     $ 18,930     $ 19,818  

Professional services

    7,458       9,661       9,838     10,939       9,199       11,519       9,635  
                                                     

Total revenues

    18,445       20,833       22,357     24,639       24,897       30,449       29,453  
                                                     

Cost of revenues:

             

Application services

    2,399       3,504       3,415     3,852       4,475       4,889       5,226  

Professional services

    7,656       8,379       8,165     8,835       8,194       8,257       7,364  
                                                     

Total cost of revenues

    10,055       11,883       11,580     12,687       12,669       13,146       12,590  
                                                     

Gross profit

    8,390       8,950       10,777     11,952       12,228       17,303       16,863  
                                                     

Operating costs and expenses:

             

Research and development(2)

    2,125       2,462       2,817     3,312       4,872       4,778       4,982  

Sales and marketing

    3,783       3,916       4,086     4,700       5,631       6,375       6,089  

General and administrative

    2,285       2,718       3,432     4,926       5,807       7,144       7,096  
                                                     

Total operating expenses

    8,193       9,096       10,335     12,938       16,310       18,297       18,167  
                                                     

(Loss) income from operations

    197       (146 )     442     (986 )     (4,082 )     (994 )     (1,304 )

Interest and other expenses (income), net

    (19 )     (2 )     44     341       563       247       372  
                                                     

(Loss) income before provision for income taxes

    216       (144 )     398     (1,327 )     (4,645 )     (1,241 )     (1,676 )

Provision for income taxes

    91       91       169     164       165       169       147  
                                                     

Net (loss) income

  $ 125     $ (235 )   $ 229   $ (1,491 )   $ (4,810 )   $ (1,410 )   $ (1,823 )
                                                     

Stock-based compensation expense included in cost of revenues and operating costs and expenses is as follows:

 

Stock-Based Compensation

             

Cost of revenues

  $ 34     $ 40     $ 51   $ 47     $ 57     $ 75     $ 78  

Research and development expenses

    24       36       54     69       71       118       145  

Sales and marketing

    99       108       122     119       138       163       169  

General and administrative expenses

    77       75       90     249       335       408       478  
                                                     

Total stock-based compensation

  $ 234     $ 259     $ 317   $ 484     $ 601     $ 764     $ 870  
                                                     

Depreciation and amortization of intangible assets included in cost of revenues and operating costs and expenses is as follows:

 

Depreciation

             

Cost of revenues

  $ 549     $ 747     $ 1,062   $ 1,247     $ 1,384     $ 1,496     $ 1,579  

Research and development expenses

    84       126       111     142       155       164       175  

Sales and marketing

    58       49       58     78       89       97       103  

General and administrative expenses

    75       66       73     91       98       111       139  
                                                     

Total depreciation

    766       988       1,304     1,558       1,726       1,868       1,996  
                                                     

Amortization of intangible assets

             

Cost of revenues

    —         —         —       —         64       381       381  

Sales and marketing

    —         —         —       —         4       25       25  
                                                     

Total amortization of intangible assets

    —         —         —       —         68       406       406  
                                                     

Total depreciation and amortization of intangible assets

  $ 766     $ 988     $ 1,304   $ 1,558     $ 1,794     $ 2,274     $ 2,402  
                                                     

 

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(1) On March 17, 2008, we acquired Fast Track Systems, Inc., a provider of clinical trial planning solutions. The consolidated statements of operations data beginning from the first quarter of 2008 include the impact of the acquisition and operations of Fast Track since the date of acquisition. The information set forth above should be read in conjunction with the consolidated financial statements and unaudited interim consolidated financial statements included elsewhere in this prospectus.

 

(2) We determined that technological feasibility had not been established for certain in-process research and development projects acquired from Fast Track. These projects were written off, resulting in a $0.7 million charge to research and development expense for the quarter ended March 31, 2008.

Liquidity and Capital Resources

At September 30, 2008, our principal sources of liquidity were cash and cash equivalents of $11.5 million. We have funded our growth primarily through the private sale of equity securities of approximately $12.6 million, long term debt of $15.0 million, working capital and equipment leases. In September 2008, we entered into a new senior secured credit facility that included a $15.0 million term loan and a $10.0 million revolving line of credit. The term loan was fully drawn at closing and was used to fully repay $11.0 million of existing term loans. We incurred $0.6 million in fees to secure this credit facility. The revolving credit line, all of which remains undrawn, is available for future borrowings. Due to the structure of the credit agreement, any future borrowings under the revolving credit line would be classified as a current liability. We believe that our cash flows from operations, our available cash as of September 30, 2008 and our existing revolving line of credit will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for at least the next 12 months. During 2009, we expect to make approximately $10.0 million in capital expenditures to support the expected growth of our business. Historically, approximately half of our capital expenditures have been made through capital lease obligations. Our future capital expenditures and other cash requirements could be higher than we currently expect as a result of various factors, including any expansion of our business that we may complete. See “Risk Factors.”

Cash Flows

Cash Flows Provided By Operating Activities

Cash flows provided by operating activities during the nine months ended September 30, 2008 were $8.0 million, which consisted of net loss of $8.0 million, offset by positive non-cash adjustments to net loss of $9.6 million and by a $6.5 million decrease in other operating activities. Positive non-cash adjustments to net loss consisted principally of $6.5 million of depreciation and amortization, $2.2 million of stock-based compensation and $0.7 million related to the write-off of in-process research and development projects acquired from Fast Track. The significant decrease in other operating activities includes the increase in deferred revenue of $9.7 million and accrued expenses of $3.5 million, partially offset by the increase in accounts receivable of $2.5 million and the decrease in our accounts payable of $4.4 million. Other operating activities were impacted by increased sales activity compared to the prior year and the timing of customer payments.

Cash flows provided by operating activities during the year ended 2007 were $6.0 million, which consisted of net loss of $1.4 million, plus $4.6 million of depreciation and amortization, $1.3 million of stock-based compensation $10.0 million increase in deferred revenue, offset by a $6.8 million increase in accounts receivable. The increase in deferred revenue and accounts receivable was primarily due to increased sales activity compared to the prior year.

 

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Cash Flows Used In Investing Activities

Cash flows used in investing activities during the nine months ended September 30, 2008 were $2.5 million, which consisted of purchase of furniture, fixtures and equipment of $2.9 million and costs incurred to acquire Fast Track of $0.6 million, partially offset by cash and cash equivalents acquired from acquisition of Fast Track of $1.0 million. We acquired $2.9 million of equipment through capital lease arrangements. All acquisitions of furniture, fixtures and equipment were required to support our business growth.

Cash flows used in investing activities during the year ended 2007 were $3.8 million, which consisted of purchases of furniture, fixtures and equipment of $3.7 million and an increase in our restricted cash. We acquired $9.1 million of equipment through capital lease arrangements.

Cash Flows Used In Financing Activities

Cash flows used in financing activities during the nine months ended September 30, 2008 were $1.7 million, which consisted of $3.1 million of capital lease principal payments and $2.2 million of costs associated with our initial public offering, partially offset by $3.5 million from the proceeds of borrowings under our new credit facility net of repayment of existing term loans. Non-cash financing activities included capital lease obligations of $2.9 million with repayment terms of 36 months. Please refer to the section “Contractual Obligations and Commitments” for additional information on future cash requirements.

Cash flows used in financing activities during the year ended 2007 were $1.5 million which consisted of $2.8 million of capital lease principal payments and $6.0 million relating to the acquisition of treasury stock, partially offset by $7.3 million of net proceeds from our borrowing activities. The net proceeds from our borrowings were principally used to acquire our treasury stock. Non-cash financing activities included capital lease obligations of $9.1 million.

Contractual Obligations and Commitments

The following table of our material contractual obligations as of September 30, 2008 summarizes the aggregate effect that these obligations are expected to have on our cash flows in the periods indicated:

 

     Payments Due by Period
      Total    1 year
or less
   2-3 years    4-5 years    More
than
5 years
      (Amounts in thousands)

Contractual Obligations:

              

Long-term debt

   $ 15,000    $ 1,125    $ 3,000    $ 10,875    $ —  

Estimated interest on long-term debt

     4,422      1,104      1,884      1,434      —  

Capital lease obligations

     8,903      4,922      3,981      —        —  

Operating lease obligations

     11,290      2,698      3,962      3,142      1,488

Letters of credit

     531      531      —        —        —  
                                  

Total

   $ 40,146    $ 10,380    $ 12,827    $ 15,451    $ 1,488
                                  

Long-Term Debt and Revolving Line of Credit

On September 10, 2008, we entered into a new senior secured credit facility that includes a $15.0 million term loan, which was fully drawn at closing, and a $10.0 million revolving credit line (including up to $10.0 million of letters of credit), all of which remains undrawn and available for future borrowings, subject to borrowing base limitations. Proceeds of the term loan were used to repay approximately $11.0 million of outstanding indebtedness and related fees and expenses under various term notes issued to one of our preferred shareholders in 2003, 2005 and 2007 and the remaining $4.0 million will be used for general corporate purposes.

 

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The term loan and revolving credit line will mature in September 2013 and the outstanding principal of the term loan will amortize in quarterly installments of $375,000 beginning on March 31, 2009 up through the date of maturity at which time a lump sum payment of any remaining unpaid balance will be due. In addition, the term loan also includes an excess cash flow recapture feature which may require us to make additional principal payments beginning in April 2010.

The term loan and revolving credit line bear interest at prime rate plus a 2.5% margin until March 31, 2009 and, thereafter, will bear interest at prime rate plus a 2.25% margin. “Prime rate” means the lender’s most recently announced prime rate or 4.5%, whichever is greater. However, if we can satisfy the minimum fixed charge coverage ratio covenant described below as of December 31, 2009 or March 31, 2010, the applicable margin thereafter will be reduced to 1.5%. At September 30, 2008, the effective interest rate on our long-term debt was 7.5%. In addition, any undrawn revolving credit line is subject to a quarterly unused fee at an annual rate of 0.5% of the average undrawn balance. We are entitled to prepay the term loan and revolving credit line at our option, subject to a payment of a premium on such prepayments during the first three years after closing, which decreases over the three-year period from 3% of the amount prepaid to 1%. The term loan and revolving credit line are also subject to mandatory prepayment under certain specified circumstances.

The term loan and revolving line of credit are secured by a first priority lien on all of our domestic assets and a pledge of 65% of the outstanding voting stock and 100% of the of non-voting stock of our foreign subsidiaries. The loan and security agreement relating to the term loan and revolving credit line contains customary representations and warranties, affirmative covenants and events of default for loans of this type. In addition, the loan and security agreement contains negative covenants that restrict our ability to sell, assign or otherwise dispose of our assets, change or dissolve our business or enter into certain change of control transactions, merge with or acquire any businesses or entities, incur indebtedness or liens, make investments, pay dividends or make other distributions or repay subordinated debt. The loan and security agreement requires us to deliver both annual audited and periodic unaudited financial statements by specified dates and also contains financial covenants requiring us to maintain a fixed charge coverage ratio of at least 1.25 to 1.00 for each trailing four-quarter period, minimum quarterly net income (loss) levels that increase over time from ($2.5 million) to $3.0 million, minimum liquidity of at least $5.0 million through December 31, 2009 (or, under certain circumstances, March 31, 2010) and maximum capital expenditures of $12.0 million for each trailing 12-month period.

Under the loan agreement, we can borrow from the revolving credit line an available amount as specified by the agreement up to a maximum of $10.0 million. The amount available to borrow under the revolving credit line is subject to the requirement that, at any time prior to December 31, 2009, the sum of our borrowings under the term loan and the revolving credit line may not exceed 80% of our consolidated revenues for the trailing three-month period, and at any time after December 31, 2009, if we are not in compliance with the fixed charge coverage ratio covenant described above, the sum of our outstanding borrowings may not exceed 80% of eligible accounts receivable. Due to the lock-box arrangement and the subjective acceleration clause contained in the loan agreement, borrowings, if any, under the revolving credit line will be classified as a current liability in accordance with EITF No. 95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box Arrangement.

After the closing of this offering we may either restructure our new credit facility to provide greater flexibility or replace it with new debt financing on more favorable terms. However, we cannot assure you that we will be able to restructure the credit facility or that more favorable alternative financing will be available. If we are unable to restructure or refinance our credit facility, we will prepay it using proceeds from this offering.

Letters of Credit

We had three outstanding standby letters of credit issued in connection with office leases as of December 31, 2007 in the total amount of $0.4 million and four outstanding standby letters of credit as of September 30, 2008 in the total amount of $0.5 million. These standby letters of credit are fully collateralized with restricted cash as of December 31, 2007 and September 30, 2008.

 

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Preferred Stock

We currently have outstanding 2,385,000 shares of Series A Convertible Preferred Stock, 1,335,807 shares of Series B Convertible Redeemable Preferred Stock, 180,689 shares of Series C Convertible Redeemable Preferred stock and 2,752,333 shares of Convertible Redeemable Series D Preferred Stock. Upon the closing of this offering, all of our preferred stock will automatically convert into our common stock. In addition, in connection with such automatic conversion, the holders of our senior preferred stock will be entitled to payment of all accumulated accrued dividends on such senior preferred stock in cash, or at the election of the holders of at least 66% of our outstanding Series D preferred stock, in shares of our common stock at the initial public offering price. Each of (a) the unaudited condensed consolidated balance sheet as of September 30, 2008, (b) the condensed consolidated statement of operations for the nine months ended September 30, 2008 and (c) the consolidated statement of operations for the year ended December 31, 2007 contain pro forma information, which reflects the payment of $1.9 million of accumulated accrued dividends (as of September 30, 2008) out of cash on hand and the conversion of all outstanding shares of convertible preferred stock into common stock at the applicable conversion ratio upon the completion of this offering, as if the conversion had occurred with respect to (i) the condensed consolidated balance sheet, on September 30, 2008, (ii) the basic and diluted net loss per share presented on the condensed consolidated statement of operations for the nine months ended September 30, 2008, on January 1, 2007 and (iii) the consolidated statement of operations for the year ended December 31, 2007, on January 1, 2007.

Tax Uncertainties

We believe that our income tax positions and deductions will be sustained on audit and we do not anticipate material obligations in connection with uncertainties related to tax matters.

Effects of Recently Issued Accounting Standards

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or SFAS No. 157, which enhances existing guidance for measuring assets and liabilities at fair value. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, except for the fair value measurement on nonfinancial assets and nonfinancial liabilities which has been delayed in accordance with FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157. Effective January 1, 2008, we adopted SFAS No. 157 and our adoption did not have an impact on our results of operations, financial position, and cash flows.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS No. 159, which permits entities to measure the value of certain financial assets and liabilities and report the unrealized gain or loss thereon at each subsequent reporting period. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We elected not to adopt the fair value option for those assets and liabilities which are eligible under this statement and therefore there was no impact on our results of operations, financial position, and cash flows.

On December 4, 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations, or SFAS No. 141(R), and Statement of Financial Accounting Standards No. 160, Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, or SFAS No. 160, an amendment of ARB No. 51. SFAS No. 141(R) is required to be adopted concurrently with SFAS No. 160 and is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. Application of SFAS No. 141(R) and SFAS No. 160 is required to be adopted prospectively, except for certain provisions of SFAS No. 160, which are required to be adopted retrospectively. Business combination transactions accounted for before adoption of SFAS No. 141(R) should be accounted for in accordance with SFAS No. 141, Business Combinations, and that accounting previously completed under SFAS No. 141 should not be modified as of or after the date of adoption of SFAS No.141(R). The adoption of SFAS No. 141(R) and SFAS No. 160 is not expected to have a material impact on our financial position or results of operations.

 

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Off-Balance Sheet Arrangements

As of December 31, 2006 and 2007 and September 30, 2008, we did not have any relationships with unconsolidated entities of financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Other than our operating leases for office space and computer equipment, we do not engage in off-balance sheet financing arrangements.

Quantitative and Qualitative Disclosure About Market Risk

The following discussion should be read in conjunction with our audited and unaudited consolidated financial statements appearing elsewhere in this prospectus.

Interest Rate Sensitivity

We had unrestricted cash and cash equivalents totaling $7.7 million at December 31, 2007 and $11.5 million at September 30, 2008. Our cash equivalents are invested primarily in money market funds and high quality liquid investments of a short duration and are not materially affected by fluctuations in interest rates. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future investment income.

As described above under “Liquidity and Capital Resources,” we have outstanding floating rate debt in connection with the term loan and revolving credit line under our senior secured credit facility. Accordingly, we are exposed to fluctuations in interest rates. Based on the current balance of our term loan and assuming the entire amount of our revolving credit line were drawn, each hundred basis point change in prime rate would result in a change in interest expense by an average of approximately $0.3 million annually. This exposure will be mitigated in future periods as we begin to repay the term loan in quarterly installments in 2009.

Exchange Rate Sensitivity

We have two separate exposures to currency fluctuation risk — subsidiaries outside the United States which use a foreign currency as their functional currency which are translated into U.S. dollars for consolidation and non-U.S. dollar invoiced revenues.

Changes in foreign exchange rates for our subsidiaries that use a foreign currency as their functional currency are translated into U.S. dollars and result in cumulative translation adjustments, which are included in accumulated other comprehensive income (loss). At December 31, 2007, we had translation exposure to various foreign currencies including the Euro, British Pound Sterling and Japanese Yen. The potential loss resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates, as of December 31, 2007 and September 30, 2008, amounts to $0.2 million and $0.3 million, respectively.

We generally invoice our customers in U.S. dollars. However, we invoice a portion of customers in Euro, British Pound Sterling and Japanese Yen currencies. As such, the fluctuations in such currencies could impact our operating results.

Impact of Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we might not be able to offset these higher costs fully through price increases. Our inability or failure to do so could harm our business, operating results and financial condition.

 

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Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107, Disclosure of Fair Value of Financial Instruments, requires disclosure about fair value of financial instruments. The carrying amounts of our financial instruments which consist of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. Amounts outstanding under long-term debt agreements are considered to be carried at their estimated fair values because they bear interest at rates which approximate market. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.

Related Party Transactions

We have engaged in a number of related party transactions. See “Certain Relationships and Related Transactions.”

 

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BUSINESS

Company Overview

We are a leading global provider of hosted clinical development solutions that enhance the efficiency of our customers’ clinical development processes and optimize their research and development investments. Our customers include pharmaceutical, biotechnology and medical device companies, academic institutions, contract research organizations, or CROs, and other organizations engaged in clinical trials to bring innovative medical products to market and explore new indications for existing medical products. Our solutions allow our customers to achieve clinical results more efficiently and effectively by streamlining the design, planning and management of key aspects of the clinical development process, including protocol development, CRO negotiation, investigator contracting, the capture and management of clinical trial data and the analysis and reporting of that data on a worldwide basis. Our customers rely on our solutions to safely accelerate the clinical development process and maximize the commercial life of their products.

Our principal offering, Medidata Rave, is a comprehensive platform that integrates electronic data capture, or EDC, with a clinical data management system, or CDMS, in a single solution that replaces traditional paper-based methods of capturing and managing clinical data. Medidata Rave offers a robust, flexible platform enabling sponsors to manage increasingly complex trials. Medidata Rave’s intuitive, user-friendly Internet-based technology facilitates rapid adoption by investigators, sponsors and CROs. In addition, our on-demand, hosted technology platform facilitates rapid and cost-effective deployment of our solutions on a global basis. We have designed our Medidata Rave software to scale reliably and cost-effectively for clinical trials of all sizes and phases, including those involving substantial numbers of clinical sites and patients worldwide.

We also offer applications that improve efficiencies in protocol development and trial planning, contracting and negotiation. Our Medidata Designer application, a clinical trial protocol authoring tool, enables customers to write trial protocols more effectively and automatically configure Medidata Rave. By eliminating the need to separately configure the EDC platform, Medidata Designer reduces overhead cost and shortens the planning phase of the development process. Our Medidata Grants Manager product enables our customers to increase the efficiency of trial budgeting and investigator contracting as well as improving compliance. Our Medidata CRO Contractor application facilitates CRO outsourcing, budgeting and contract negotiation.

We derive a majority of our revenues from Medidata Rave application services through multi-study arrangements for a pre-determined number of studies. We also offer our application services on a single-study basis that allows customers to use our solution for a limited number of studies or to evaluate it prior to committing to multi-study arrangements. We support our solutions with comprehensive service offerings, which include global consulting, implementation, technical support and training for customers and investigators. We invest heavily in training our customers, their investigators and other third parties to configure clinical trials independently. We believe this knowledge transfer accelerates customer adoption.

Our diverse and expanding customer base currently includes 21 of the top 25 global pharmaceutical companies measured by revenue and many middle-market life sciences companies, as well as CROs through our ASPire to Win program. In 2007, and in the nine months ended September 30, 2008, Johnson & Johnson, AstraZeneca, Amgen, Astellas Pharma and Takeda Pharmaceutical were our largest customers measured by revenue.

Our deep expertise derived from facilitating hundreds of studies across all development phases and therapeutic areas in more than 80 countries has positioned us as a leader in providing clinical trial solutions. For the fiscal year ended December 31, 2007, we generated $86.3 million in revenues, a 71.0% increase over 2006 revenues of $50.5 million. For the nine months ended September 30, 2008, we generated $84.8 million in revenues, a 37.6% increase over revenues of $61.6 million in the same period in 2007. On a pro forma basis, assuming we had completed our recent acquisition of Fast Track on January 1, 2007, our revenue for 2007 would have been $91.0 million and our revenue for the nine months ended September 30, 2008 would have been $86.2

 

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million. Our business model provides us with a recurring revenue stream that we believe delivers greater revenue visibility than perpetual software licensing models.

Industry Overview

The Clinical Development Market

Clinical development is sponsored by the pharmaceutical industry, medical device manufacturers, academic institutions, research foundations, government agencies and individual clinicians. The pharmaceutical industry, consisting of branded pharmaceutical firms, biotechnology companies and generic drug manufacturers, is the largest contributor to clinical development spending. According to IMS Health, the pharmaceutical industry is responsible for the development and marketing of drug therapies that generated approximately $712 billion in global pharmaceutical sales in 2007, representing a compound annual growth rate of approximately 6% over the previous five years.

Based on data from EvaluatePharma, we estimate that global research and development expenses in the pharmaceutical industry exceeded $120 billion in 2008. Clinical development has historically comprised one of the largest components of the pharmaceutical industry’s research and development expenditures. The average total capitalized cost to develop one new prescription drug in 2005 was estimated by The Tufts Center for the Study of Drug Development at $1.2 billion. One new drug approved by the U.S. Food and Drug Administration, or FDA, from an initial pool of 5,000 to 10,000 candidates, takes an average of 10 to 15 years for total development.

The clinical development of new drugs, therapies and medical devices is centered on clinical trials designed to test human safety and efficacy prior to product commercialization and includes three mandated phases of progressively larger numbers of investigators and patients for longer durations of time. Out of an aggregate $120 billion global research and development budget, approximately 2,000 pharmaceutical, biotechnology, medical device companies and academic research institutions conducted an estimated 10,000 clinical trials in 2007. Early in the development process a sponsor will apply for patents in relevant jurisdictions to secure exclusive rights to its intellectual property. After applying for patent protection, which is generally effective for a period of 20 years from the date an application is filed, sponsors will commence the clinical development process, which can range from six to seven years, depending on process efficiency and specific regulatory requirements. Delays in the clinical development process may not only increase the cost of drug development, but also reduce a company’s revenues by shortening the time for exclusive product sales afforded under patent protection.

Historically, companies generally realized an attractive return on investment following receipt of regulatory approval. In recent years, however, companies have faced increasing pressures to accelerate drug development, including:

 

   

the increasing number of drugs losing patent protection and greater competition by generic manufacturers;

 

   

large numbers of compound failures during the development cycle, resulting in the need for more drug candidates to enter the drug development pipeline and reach development milestones more quickly;

 

   

efforts by managed care companies and third-party payers, including Medicare and Medicaid, to reduce price and limit utilization of high-cost medicines;

 

   

the expanding scope and cost of post-approval studies, spurred by safety concerns regarding previously approved drugs; and

 

   

commercial incentives to expand approved treatment indications.

 

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The Clinical Development Process and Regulation

The clinical development process is subject to rigorous regulation by the U.S. federal government and related regulatory authorities, such as FDA, as well as by foreign governments and regulatory authorities if drugs, biological products or medical devices are tested or marketed abroad. As a result of increasing demands by these regulatory agencies to expand the number of patients tested and utilize improved safety and efficacy assessment procedures, the clinical development process has become more complex.

In the United States, before a company can market a new drug it must obtain approval of a New Drug Application, or NDA, or, in the case of a biologic, a Biologic License Application, or BLA, from FDA. FDA will approve an NDA or BLA based on its judgment that there has been substantial evidence presented to demonstrate the safety and effectiveness of the new drug or biologic. The evidence presented in an NDA or BLA generally consists of volumes of data and analysis that address all aspects of the drug development process, including the clinical trial protocol design, drug chemistry, toxicity levels, side-effect profile, efficacy results, manufacturing specifications, proposed product labeling and marketing claims. In some instances, FDA requests that a company conduct post-approval trials to monitor safety and to review efficacy issues. Traditionally, FDA reviewed these volumes of data and analysis using paper records, but increasingly accepts electronic data from sponsors that rely on computerized systems to manage electronic source data and documentation. The following table outlines the drug development process in the United States:

 

Stage of Drug
Development

  

Trial
Phase

  

Purpose of Stage

   Approximate
Time to
Complete
Phase
   Approximate
Number of
Trial
Participants
per Phase
Discovery / Preclinical Testing    —      Screen and select drug candidate for specific disease indications and conduct laboratory and animal studies to evaluate safety for human testing. Develop protocol outlining the study’s setup and requirements and submit for FDA approval.    12 to 72
months
   —  
Clinical Testing (humans)    Phase I    Determine drug’s safety profile, including how drug should be administered, dose levels and potential side effects by exposing volunteers to the drug.    6 to 12
months
   5 to 80
   Phase II    Further evaluate the safety of the drug, and assess clinical efficacy, side effects and dosing by exposing subjects with the disease or condition to the drug.    6 to 12
months
   15 to 300
   Phase III    Verify clinical efficacy of the drug and identify potential safety issues, including side effects in large target patient populations.    12 to 48
months
   50 to 5,000
FDA Review and Approval    —      After submission of an NDA, FDA evaluates the submission and makes a determination as to whether the drug should be approved based on substantial evidence that the drug is safe and effective. If the drug is approved, the drug can be commercially marketed throughout the United States.    6 to 24
months
   —  
Post-Approval    Phase IV    Monitor ongoing safety in various patient populations and identify additional indications of the drug for potential approval by FDA.    Ongoing
(following
FDA
approval)
   Varies

Medical devices typically require some form of premarket notification, regulatory clearance or pre-market approval by FDA before the device can be commercialized. In the device context, the equivalent to the NDA or

 

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BLA is the premarket approval application, or PMA. FDA reserves the PMA requirement for those medical devices deemed by FDA to pose the greatest risks, such as life-sustaining, life-supporting or implantable devices, or devices that have a new intended use, or technology that is not substantially equivalent to that of a legally marketed device. A PMA generally must be supported by the same type and volume of data and analysis that is required for an NDA or a BLA, including technical specifications, preclinical data, clinical trial results, manufacturing requirements and proposed labeling, to demonstrate to FDA’s satisfaction the safety and effectiveness of the device for its intended use. As with the NDA and BLA processes, PMA data sources and documentation increasingly are being presented to FDA electronically rather than via paper.

In addition to regulations in the United States, companies seeking to market a new drug, biologic or device outside the United States are subject to a variety of foreign regulations governing clinical trials, commercial sales and distribution. Whether or not a company obtains FDA approval for a product, that company must obtain approval by the comparable regulatory authorities of foreign countries before commencing clinical trials or marketing the product in those countries. The approval process varies from country to country and the time may be longer or shorter than that required for FDA approval. After regulatory approval, the clinical trial sponsor maintains responsibility for collecting and reporting the occurrence of new and unusual serious side effects to all such regulatory agencies.

The Opportunity for Clinical Trial Solutions

The traditional process of capturing and analyzing data in clinical trials relies on pre-printed, paper case report forms to submit data from the clinical trial sites to the clinical trial sponsor. Each case report form is manually checked for accuracy at the clinical site and subsequently entered into a computerized CDMS at the sponsor or CRO running the trial. Inconsistent, questionable, or missing data items are identified and must be addressed by facsimile, mail or hand-delivered document exchange. Each change in data requires documentation. These paper-based processes result in significant complexity and cost. Key limitations include:

 

   

Delay in clinical development process. Manual data collection can delay interim and final data analysis by months or years, leading to delayed regulatory submission, product approval and product revenues, as well as increased development costs. In addition, these delays may reduce the exclusive sales period available under patent protection.

 

   

Impaired data quality. Paper-based data collection and reporting are more susceptible to transcription and other errors, resulting in reduced accuracy and requiring a lengthy and costly correction process. In addition, poor data quality can cause increased scrutiny during regulatory review, which may further delay a product’s approval.

 

   

Limited data visibility to effect real-time decision making. With manual data collection, sponsors cannot evaluate trial status until relatively late in the process. Limited access to complete information precludes early termination of unsuccessful trials and reallocation of resources. Delayed access to data also prevents sponsors from quickly implementing measures to enhance patient safety.

Compared to traditional paper-based data collection, EDC technology provides substantial benefits at all stages of the clinical development process and has become widely accepted across the industry. However, we believe that most clinical trials are still conducted using the traditional paper-based format. We believe the total annual market opportunity for EDC solutions is in excess of $1.4 billion.

Despite the increased efficiency provided by EDC, early generation solutions have typically faced the following challenges:

 

   

Integration. EDC solutions have had difficulty integrating complex, diverse and large volumes of data across multiple applications.

 

   

Investigator site requirements. EDC installations can impose specific software and hardware requirements on trial sponsors and their investigator sites, causing delays in capturing data.

 

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Complex customization. EDC solutions often require custom programming to meet the requirements of diverse therapeutic areas across multiple phases.

 

   

Usability. The user interface of EDC solutions often does not accommodate the needs and preferences of the medical researchers who coordinate and administer clinical trials, which limits the pace of adoption.

 

   

Workflow and security limitations. EDC solutions often have limited ability to manage multiple languages, multiple workflows and blinded data.

 

   

Scalability. EDC solutions often lack the ability to scale against multiple studies in a single database, requiring increased effort and expense.

The Medidata Solution