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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-27058
PAREXEL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its Charter)
MASSACHUSETTS 04-2776269
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
195 WEST STREET
WALTHAM, MASSACHUSETTS 02451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 487-9900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 75 days. YES (X) NO ( ).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES (X) NO ( ).
The aggregate market value of Common Stock held by nonaffiliates as of December
31, 2003 was approximately $283,814,414, based on the closing price of the
registrant's Common Stock as reported on the NASDAQ National Market on December
31, 2003, the last business day of the registrant's most recently completed
second fiscal quarter.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
As of August 31, 2004 there were 25,936,067 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on December 16, 2004 are incorporated by reference into
Items 10, 11, 12, 13, and 14 of Part III of this report.
PAREXEL INTERNATIONAL CORPORATION
FORM 10-K ANNUAL REPORT
INDEX
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 21
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters, and Issuer Purchases of
Equity Securities 22
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 34
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 59
Item 9A. Controls and Procedures 59
Item 9B. Other Information 59
PART III
Item 10. Directors and Executive Officers of the Registrant 59
Item 11. Executive Compensation 59
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 59
Item 13. Certain Relationships and Related Transactions 60
PART IV
Item 14. Principal Accountant Fees and Services 60
Item 15. Exhibits, Financial Statement Schedule, and
Reports on Form 8-K 60
SIGNATURES 61
PART I
This annual report on Form 10-K includes forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended. For this purpose, any
statements contained herein regarding the Company's strategy, future operations,
financial position, future revenue, projected costs, prospects, plans and
objectives of management, other than statements of historical facts, are
forward-looking statements. The words "anticipates", "believes", "estimates",
"expects", "intends", "may", "plans", "projects", "will", "would", and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. The Company
cannot guarantee that they actually will achieve the plans, intentions or
expectations expressed or implied in its forward-looking statements. There are a
number of important factors that could cause actual results, levels of activity,
performance or events to differ materially from those expressed or implied in
the forward-looking statements the Company makes. These important factors
include the Company's "critical accounting estimates" and the risk factors set
forth below. Although the Company may elect to update forward-looking statements
in the future, it specifically disclaims any obligation to do so, even if its
estimates change, and readers should not rely on those forward-looking
statements as representing the Company's views as of any date subsequent to the
date of this annual report.
ITEM 1. BUSINESS
GENERAL
PAREXEL International Corporation ("PAREXEL" or the "Company") is a leading
bio/pharmaceutical services company, providing a broad range of expertise in
clinical research, medical marketing, consulting and informatics and advanced
technology products and services to the worldwide pharmaceutical, biotechnology,
and medical device industries. The Company's primary objective is to provide
solutions for managing the bio/pharmaceutical product lifecycle with the goal of
reducing the time, risk and cost associated with the development and
commercialization of new therapies. Since its founding in 1983, PAREXEL has
developed significant expertise in processes and technologies supporting this
strategy. The Company's product and service offerings include: clinical trials
management, data management, biostatistical analysis, medical marketing,
clinical pharmacology, patient recruitment, regulatory and medical consulting,
health policy and reimbursement, performance improvement, industry training and
publishing, medical imaging services, interactive voice response systems
("IVRS"), clinical trial management systems ("CTMS"), web-based portals, systems
integration, patient diary applications, and other drug development consulting
services. The Company believes that its comprehensive services, depth of
therapeutic area expertise, global footprint and related access to patients, and
sophisticated information technology, along with its experience in global drug
development and product launch services, represent key competitive strengths.
The Company's services complement the research and development ("R&D") and
marketing functions of pharmaceutical, biotechnology, and medical device
companies. Through its clinical research and product launch services, PAREXEL
seeks to help clients maximize the return on their significant investments in
research and development by reducing the time, risk, and cost of clinical
development and launch of new products. Outsourcing these types of services to
PAREXEL provides clients with a variable cost alternative to the fixed costs
associated with internal drug development. Clients no longer need to staff to
peak periods and can benefit from PAREXEL's technical resource pool, broad
therapeutic area expertise, global infrastructure designed to expedite parallel,
multi-country clinical trials, and other advisory services focused on
accelerating time-to-market. The Company's vision is to integrate and build
critical mass in the complementary businesses of clinical research, medical
marketing, drug development and process optimization consulting, and information
technology products and integration services. The Company's goal is to provide
significant benefits to sponsor clients from this strategy, namely, a faster and
less expensive development and launch process, as well as a clinical development
strategy that optimally supports the marketing strategy for the new medical
products.
The Company is one of the largest bio/pharmaceutical services company in the
world, based upon annual service revenue. Headquartered near Boston,
Massachusetts, the Company manages 51 locations and has approximately 4,875
employees throughout 35 countries around the world. The Company has operations
in the major health care markets around the world, including the United States
("U.S."), Canada, Japan, Germany, the United Kingdom ("U.K."), France, Italy,
Spain, Sweden, Australia, South Africa, Argentina, Brazil, Chile, Israel,
Norway, Belgium, The Netherlands, Denmark, Finland and Central and Eastern
Europe including Russia, Poland, the Czech Republic, Lithuania, Hungary,
Romania, and the Ukraine. During fiscal year 2004, PAREXEL derived 54.8% of its
service revenue from its international operations.
3
The Company was founded in 1983 as a regulatory affairs consulting firm and is a
Massachusetts corporation. Josef H. von Rickenbach, Chairman of the Board and
Chief Executive Officer of PAREXEL, was a co-founder. Since its inception, the
Company has executed a focused growth strategy embracing internal expansion as
well as strategic acquisitions to expand or enhance the Company's portfolio of
services, geographic presence, therapeutic area knowledge, information
technology capabilities, and client relationships. Acquisitions have been and
may continue to be an important component of PAREXEL's growth strategy. The
Company has completed nine acquisitions over the past five fiscal years.
DESCRIPTION OF BUSINESS
The Company provides a broad range of expertise in clinical research, medical
marketing, consulting and informatics and advanced technology services to the
worldwide pharmaceutical, biotechnology, and medical device industries. The
Company is managed through four business segments: Clinical Research Services
("CRS"), the PAREXEL Consulting Group ("PCG"), Medical Marketing Services
("MMS"), and Perceptive Informatics, Inc. ("Perceptive"), a majority owned
subsidiary of the Company. CRS constitutes the Company's core business and
includes clinical trials management and biostatistics and data management, as
well as related medical advisory and investigator site services. PCG provides
technical expertise in such disciplines as clinical pharmacology, regulatory
affairs, industry training, and management consulting. PCG consultants identify
alternatives and propose solutions to address clients' product development,
registration, and commercialization issues. MMS provides a full spectrum of
market development, product development, and targeted communications services in
support of product launch. MMS also provides health policy consulting and
strategic reimbursement services. Perceptive provides a variety of information
technology solutions designed to improve clients' product development processes.
Perceptive offers a portfolio of services that include medical imaging services,
IVRS, CTMS, web-based portals, systems integration, and patient diary
applications. As of June 30, 2004, the Company owned an approximate 97.9% of the
outstanding shares of common stock of Perceptive.
CLINICAL RESEARCH SERVICES
The Company's CRS business unit provides clinical trials management and
biostatistical and data management services. Revenue from these services
represented $309.3 million, or 56.5%, of the Company's consolidated service
revenue in fiscal year 2004, $312.8 million, or 59.9%, in fiscal year 2003, and
$261.7, or 58.0%, in fiscal year 2002.
The CRS business unit offers complete services for the design, initiation and
management of clinical trials programs, a critical element in obtaining
regulatory approval for bio/pharmaceutical products. The Company has performed
services in connection with trials in most therapeutic areas, including
Cardiology, Oncology, Infectious Diseases, Neurology, Allergy/Immunology,
Endocrinology/Metabolism, Gastroenterology, Obstetrics/Gynecology, Orthopedics,
Pediatrics, Psychiatry, and Transplantation. PAREXEL's multi-disciplinary
clinical trials group examines a product's existing preclinical and clinical
data to design clinical trials to provide evidence of the product's safety and
efficacy.
PAREXEL's CRS business unit can manage many aspects of clinical trials,
including study and protocol design, Case Report Forms ("CRFs") design, site and
investigator recruitment, patient enrollment, study monitoring and data
collection, data analysis, report writing and medical services. See "Government
Regulations" for additional information regarding processes involved in clinical
trials.
Clinical trials are monitored for and with strict adherence to good clinical
practice ("GCP"). The design of efficient CRFs, detailed operations manuals and
site monitoring by CRS's clinical research associates seek to ensure that
clinical investigators and their staff follow the established protocols of the
studies. The Company has adopted standard operating procedures ("SOPs"), which
are intended to satisfy regulatory requirements and serve as a tool for
controlling and enhancing the quality of PAREXEL's worldwide clinical services.
Clinical trials represent one of the most expensive and time-consuming parts of
the overall bio/pharmaceutical development process. The information generated
during these trials is critical for gaining marketing approval from the Food and
Drug Administration ("FDA") and other regulatory agencies and market acceptance
by clinicians and patients. CRS clinical trial management services involve many
phases of clinical trials, including Phases II, III, or IV clinical trials.
- - PHASE II - IV
The CRS business unit assists clients with one or more of the following aspects
of clinical trials as shown below. CRS performs both full-service and
single-/multi-service trials. PAREXEL's involvement may range from being
involved in just one aspect of a clinical trial to all aspects of a clinical
trial.
4
STUDY PROTOCOL DESIGN - The protocol defines the medical issues the study
seeks to examine and the statistical tests that will be conducted.
Accordingly, the protocol specifies the frequency and type of laboratory
and clinical measures that are to be tracked and analyzed, the number of
patients required to produce a statistically valid result, the period of
time over which they must be tracked and the frequency and dosage of drug
administration. The study's success depends on the protocol's ability to
predict correctly the requirements of the regulatory authorities.
CRF DESIGN - Once the study protocol has been finalized, the CRF must be
developed. The CRF is the critical source document for collecting the
necessary clinical data as dictated by the study protocol. The CRF may
change at different stages of a trial. CRFs for one patient in a given
study may consist of 100 or more pages.
SITE AND INVESTIGATOR RECRUITMENT - The product under investigation is
administered to patients by third-party physicians, serving as independent
contractors, referred to as investigators, at hospitals, clinics, or other
locations, referred to as sites. Medical devices are implemented or tested
by investigators in similar settings. Potential investigators may be
identified and solicited by the product sponsor. A significant portion of
a trial's success depends on the successful identification and recruitment
of experienced investigators with an adequate base of patients who satisfy
the requirements of the study protocol. The Company has access to several
thousand investigators who have conducted clinical trials for the Company.
The Company provides additional services at the clinical investigator site
to assist physicians and expedite the clinical research process.
PATIENT ENROLLMENT - The investigators, usually with the assistance of a
clinical research organization ("CRO"), find and enroll patients suitable
for the study. The speed with which trials can be completed is
significantly affected by the rate at which patients are enrolled.
Prospective patients are required to review information about the drug and
its possible side effects, and sign an informed consent form to record
their knowledge and acceptance of potential side effects. Patients also
undergo a medical examination to determine whether they meet the
requirements of the study protocol. Patients then receive the product and
are examined by the investigator as specified by the study protocol.
Investigators are responsible for administering the products to patients,
as well as examining patients and conducting necessary tests.
STUDY MONITORING AND DATA COLLECTION - As patients are examined and tests
are conducted in accordance with the study protocol, data are recorded on
CRFs. CRFs are collected from study sites by specially trained persons
known as monitors. Monitors visit sites regularly to ensure that the CRFs
are completed correctly and to verify that the study has been conducted in
compliance with the protocol and GCP. The monitors send completed CRFs to
the study coordination site, where the CRFs are reviewed for consistency
and accuracy before their data are entered into an electronic database.
The Company offers several remote data entry ("RDE") technologies, which
significantly enhance both the quality and timeliness of clinical data
collection while achieving significant efficiency savings. The Company's
study monitoring and data collection services are designed to comply with
the FDA's adverse events reporting guidelines.
DATA MANAGEMENT - PAREXEL's data management professionals provide a broad
array of services to support the accurate collection, organization,
validation and analysis of clinical data. For instance, they assist in the
design of CRFs and investigator training manuals to ensure that data are
collected in an organized and consistent format in compliance with the
study protocol. Databases are designed according to the analytical
specifications of the project and the particular needs of the client.
Prior to data entry, PAREXEL personnel screen the data to detect errors,
omissions and other deficiencies in completed CRFs. The use of scanning
and imaging of the CRFs and the use of RDE technologies to gather and
report clinical data expedites data exchange while minimizing data
collection errors as a result of more timely verification of data
integrity. After the data is entered, data management performs an array of
data abstraction, data review, medical coding, serious adverse event
reconciliation, loading of electronic data, such as laboratory data,
database verification and editing and resolution of data problems. The
data are then submitted to the sponsor in a customized format prescribed
by the sponsor.
The CRS business unit has extensive experience throughout the world in the
creation of scientific databases for all phases of the drug development
process, including the creation of customized databases to meet
client-specific formats, integrated databases to support new drug
application ("NDA") submissions and databases in strict accordance with
FDA, European and Asian regulatory specifications.
5
BIOSTATISTICS AND PROGRAMMING - PAREXEL's biostatistics professionals
assist clients with all phases of drug development, including
biostatistical consulting, database design, data analysis and statistical
reporting. These professionals develop and review protocols, design
appropriate analysis plans and design report formats to address the
objectives of the study protocol as well as the client's individual
objectives. Working with programming staff, biostatisticians perform
appropriate analyses and produce tables, graphs, listings and other
applicable displays of results according to an analysis plan. The CRS
business unit biostatisticians may also represent clients during panel
hearings at the FDA.
REPORT WRITING - A description of the study conduct, along with the
statistical analysis findings for data collected during the trial together
with other clinical data are presented and summarized in a final report
generated for inclusion in a regulatory document.
MEDICAL SERVICES - Throughout the course of a development program,
PAREXEL's physicians provide a wide range of medical research and
consulting services to improve the speed and quality of clinical research
and to monitor patient safety, including medical supervision of clinical
trials, medical monitoring of patient safety, review and reporting of
adverse events, medical writing and strategy and product development.
PROJECT MANAGEMENT - Throughout the entire spectrum of activities
described above CRS provides project management services. These services
entail providing overall leadership to the PAREXEL project team, acting as
the main client liaison, project planning, managing progress against study
goals and deliverables, budget management, progress and metrics reporting,
and issue resolution. These project management services are offered on all
types of trials - single-service, multi-service, or full-service.
PAREXEL CONSULTING GROUP
The PCG business unit offers a number of consulting and advisory services in
support of product development, regulatory and marketing processes. This group
brings together experts from relevant disciplines and focuses on designing
meaningful solutions and helping clients make the best business decisions with
respect to their product lifecycle strategies. This group also serves as a
valuable resource for the Company's internal operations. PCG includes four
business units, KMI/PAREXEL, Worldwide Regulatory Affairs ("WRA"), Clinical
Pharmacology, and Barnett International ("Barnett"). Service revenue from the
PCG business represented $113.1 million, or 20.7%, of consolidated service
revenue in fiscal year 2004, $100.8 million, or 19.3%, in fiscal year 2003, and
$94.5 million, or 20.9%, in fiscal year 2002.
- - KMI/PAREXEL
KMI/PAREXEL offers manufacturing and information technology related services to
the pharmaceutical, bio/pharmaceutical and medical device industries in the U.S
and Europe. Employing an experienced team of former FDA investigators and
experienced engineers, the Company uses its established methodologies and
innovative information systems to assist clients in satisfying regulatory
standards for manufacturing and quality systems processes throughout a product's
lifecycle. KMI/PAREXEL has a staff of senior consultants with extensive
experience and recognized expertise in good manufacturing practices ("GMP") and
other FDA requirements. KMI/PAREXEL can evaluate clients' existing systems, help
prepare for FDA inspections, conduct NDA integrity audits, and develop
regulatory correctional action plans.
KMI/PAREXEL also has the resources and experience to test processes, laboratory
systems, automated unit operations, utilities, distributed control systems, and
IS/IT management systems for manufacturing, laboratory and clinical and research
applications for compliance with regulatory standards.
- - WORLDWIDE REGULATORY AFFAIRS
Before a drug or medical device can be launched in a particular country, it must
be approved by the regulatory agency having jurisdiction in that country. WRA
provides comprehensive regulatory product registration services for
pharmaceutical and biotechnology products and medical devices in major
jurisdictions in North America, Europe, and Japan. These services include
regulatory strategy formulation, regulatory document preparation and review,
clinical quality assurance audits, regulatory training for client personnel, and
expert liaison with the FDA and other regulatory agencies.
WRA works closely with clients to devise regulatory strategies and comprehensive
registration programs. The Company's regulatory affairs experts review existing
published literature, evaluate the scientific background of a product, assess
the competitive and regulatory environment, identify deficiencies and define the
steps necessary to obtain regulatory authority approvals in the most expeditious
manner. Through these services, the Company helps its clients obtain regulatory
approval for particular products or product lines in certain specific markets
and participates fully in the product development process.
6
- - CLINICAL PHARMACOLOGY
Clinical pharmacology encompasses the early stages of clinical testing, when the
product is first evaluated to prove safety and efficacy. These tests vary from
"first in man" to "proof of concept studies" in Phases I and IIa of development.
See "Governmental Regulations" for additional information regarding the early
stages of clinical testing. PCG's Clinical Pharmacology group provides drug
development consulting, drug administration and monitoring, bioanalytical
services, and patient recruitment. PAREXEL's international network of clinical
pharmacology operations includes operations in Berlin (Germany), Baltimore,
Maryland (U.S.), Bloemfontein (South Africa) and Harrow (U.K.), and
bioanalytical laboratories in Bloemfontein and Poitiers (France). These
laboratories perform bioanalytical analyses according to Good Laboratory
Practices ("GLP") principles. With these locations, PCG's Clinical Pharmacology
group offers clinical pharmacology services (including bioanalytical services)
with a total of 343 dedicated beds (cooperating partners not included) on three
continents. The network also cooperates with a pharmageriatrics center in
Germany and a location, which specializes in renal and hepatic impairment, in
Poland, Hungary, and the Czech Republic.
- - BARNETT INTERNATIONAL
PCG's Barnett group offers a wide range of specialized clinical consulting,
training, and publication services for the health care industry. Barnett
provides management consulting in the clinical research area, offering a wide
range of solutions that help pharmaceutical and biotechnology companies improve
their own in-house clinical performance. These services include clinical process
optimization, benchmarking and performance management, outsourcing management,
design and development of SOPs, human performance assessment and management,
technological analysis and implementation, and clinical training.
MEDICAL MARKETING SERVICES
Various pressures on the pharmaceutical industry have resulted in a greater
focus on decreasing the time to peak sales in order to maximize revenue and
profits over limited patent lives. MMS's strategy is to assist clients in
achieving optimal market penetration for their products by providing customized,
integrated and expert product pre-launch and launch services in the U.S.,
Europe, and internationally. Service revenue from the MMS business represented
$88.8 million, or 16.2%, of consolidated service revenue in fiscal year 2004,
$83.9 million, or 16.1%, in fiscal year 2003, and $75.2 million, or 16.7%, in
fiscal year 2002.
The Company's experience indicates that clients need assistance in creating
awareness and understanding of their products in the marketplace and in
addressing their products' rapid acceptance by opinion leaders, physicians,
managed care organizations and patient groups leading to accelerated product
acceptance and market penetration. MMS provides an integrated communication
plan, which includes market and opinion leader development, market preparation,
and targeted communications support to clients. An integrated communications
plan can detail external and internal strategies, including communications
objectives, target audiences, communications priorities and timing, key
messages, key meetings and events, and target publications and media. Other
services include meetings and exhibitions planning, continuing medical education
("CME") programs to help keep medical professionals apprised of current medical
developments, patient recruitment programs, strategies for medical manufacturers
regarding reimbursement from insurance companies and managed care providers,
telecommunications and call center support for patient assistance programs and
Phase IV studies.
PERCEPTIVE INFORMATICS, INC.
Perceptive, a majority-owned (97.9% of outstanding shares of common stock as of
June 30, 2004) subsidiary of PAREXEL, was formed by the Company in fiscal year
2000. Perceptive is a developing business that provides a variety of information
technology solutions designed to improve clients' product development processes.
Service revenue from the Perceptive business represented $36.0 million, or 6.6%,
of consolidated service revenue in fiscal year 2004, $24.8 million, or 4.7%, in
fiscal year 2003, and $20.0 million, or 4.4%, in fiscal year 2002. PAREXEL
currently offers through Perceptive a portfolio of technology-based services and
software products that include medical imaging services, IVRS, CTMS, web-based
portals, systems integration, and patient diary applications.
Perceptive's medical imaging services coordinate the use of a variety of medical
imaging modalities (e.g., radiographs, ultrasound, computed tomography and,
magnetic resonance imaging) to evaluate product safety and efficacy.
The business unit's IVRS service utilizes an Application Service Provider model
under which the company designs, develops, deploys, hosts, and supports an
application for each trial. Participating investigators call a toll free number
to enroll patients in a trial, and are able to interact with the system in their
native language. The system confirms enrollment and assigns a drug kit for the
patient. The system is also capable of monitoring drug inventory at investigator
sites and triggering drug shipments as needed.
7
Perceptive's CTMS solutions are software packages that assist bio/pharmaceutical
companies in the complex process of planning and managing clinical trials and
they include IMPACT, INITIATOR, and INVESTIGATOR. IMPACT, the company's flagship
software product, is an enterprise-wide clinical trials management system used
to plan studies, track progress, support monitoring activities, track costs, and
track clinical supplies. The system is used by approximately 30
bio/pharmaceutical companies and by approximately 15,000 users worldwide. It is
primarily used for Phase II, III and IV studies. INITIATOR is a separate
software package offered by the Company to assist in the management and conduct
of Phase I trials. Perceptive also offers an investigator database tool,
INVESTIGATOR, to maintain up-to-date information concerning investigators and
their performance on prior trials. Sponsor companies use the tool to help select
the best investigators when initiating a new clinical trial.
Perceptive's web-based portal allows secure access to critical, real-time
information over the web. The portal supports clinical trials management,
communications, collaboration, and the viewing of metrics and clinical trial
data.
Through its Integration Services Group, Perceptive provides services in support
of its software packages including implementation, deployment, validation,
hosting, and integration.
Perceptive also offers solutions for the electronic collection of patient diary
information, often referred to by the industry as ePRO for electronic patient
reported outcomes. Perceptive offers clients solutions that include capturing
data from patients using handheld technology or over the telephone using the
company's IVRS technology.
Perceptive performs ongoing market surveillance to identify and support new
technologies that benefit clients as well as the Company's internal processes.
INFORMATION SYSTEMS
PAREXEL is committed to investing in information technology designed to help the
Company provide high quality services in a cost-effective manner and to better
manage its internal resources. The Company has built its information technology
network by developing a number of proprietary information systems that address
critical aspects of its business, such as project proposals/budget generation,
time information management, revenue and resource forecasting, clinical data
entry, data management, project management, and procurement/expense processing.
The Company maintains an internal Information Services group that is responsible
for technology planning and procurement, applications development, program
management, operations, and management of the Company's worldwide computer
network. The Company's information systems are designed to work in support of
and reinforce the Company's SOPs. The Company's information technology system is
open and flexible, allowing it to be adapted to the multiple needs of different
clients and regulatory systems. This system also enables the Company to respond
quickly to client inquiries regarding progress on projects and, in some cases,
to gain direct access to client data on client systems.
SALES AND MARKETING
PAREXEL has marketing personnel for the purpose of carrying out the Company's
global business development activities. In addition to significant selling
experience, most of these individuals have technical and/or scientific
backgrounds. The Company's senior executives and project team leaders also
participate in maintaining key client relationships and engaging in business
development activities.
Each of the Company's business segments has an independent business development
team that focuses on its particular market segment, and while all teams may work
with the same client companies, the individuals they work with within the
Company can vary. In many cases, however, the business segment selling teams
work together in order to provide clients with the most appropriate service
offering to meet their needs.
Each business development employee is generally responsible for a specific
client segment or group of clients and for developing a strategy to maintain and
strengthen an effective relationship with that client. Each individual is
responsible for developing his or her client base, responding to client requests
for information, developing and defending proposals and making presentations to
clients.
The business development group is supported by PAREXEL's global marketing
organization, which is primarily based at the Company's headquarters in Waltham,
Massachusetts. The Company's marketing activities consist primarily of brand
management, collateral development, participation in industry conferences,
advertising, public relations, e-marketing, publications, website development
and maintenance, market information development and analysis, and strategic
planning.
8
CLIENTS
The Company has in the past derived, and may in the future derive, a significant
portion of its service revenue from a core group of major projects or clients.
Concentrations of business in the bio/pharmaceutical services industry are not
uncommon and the Company expects to experience such concentration in future
years. In fiscal year 2004, the Company's five largest clients accounted for 30%
of its consolidated service revenue, although no client accounted for 10% or
more of consolidated service revenue. In fiscal year 2003, the Company's five
largest clients accounted for 32% of its consolidated service revenue and one
client, AstraZeneca PLC, accounted for 11% of consolidated service revenue. The
loss of business from a significant client could materially and adversely affect
the Company's service revenue and results of operations.
For fiscal year 2004, approximately 45.2% of the Company's service revenue was
attributed to operations in the U.S. and approximately 54.8% of the Company's
service revenue was attributed to operations outside the U.S. Financial data on
a geographic basis are included in Note 17 to the consolidated financial
statements in Item 8 of this annual report.
BACKLOG
Backlog represents anticipated service revenue from work not yet completed or
performed under signed contracts, letters of intent, and certain verbal
commitments. Once work commences, revenue is generally recognized over the life
of the contract as services are provided. Backlog at June 30, 2004 was $699.2
million, compared with $586.6 million at June 30, 2003. The Company anticipates
that approximately $312.8 million of the backlog as of June 30, 2004 will be
recognized as revenue after fiscal year 2005 concludes.
The Company believes that its backlog as of any date is not necessarily a
meaningful predictor of future results. Projects under contracts included in
backlog are subject to termination, revision, or delay. As detailed more fully
in the "Risk Factors" section of this annual report, clients terminate, delay,
or change the scope of projects for a variety of reasons including, among
others, the failure of products being tested to satisfy safety requirements,
unexpected or undesirable clinical results of the product, the clients' decision
to forego a particular study, insufficient patient enrollment or investigator
recruitment or production problems resulting in shortages of the drug.
Generally, the Company's contracts can be terminated upon thirty to sixty days'
notice by the client. The Company typically is entitled to receive certain fees
and, in some cases, a termination fee for winding down a delayed or terminated
project.
COMPETITION
The Company competes with other bio/pharmaceutical services companies and other
organizations that provide one or more of the services currently being offered
by the Company. Some of the larger bio/pharmaceutical services companies, such
as Quintiles Transnational Corporation, Covance Inc., and Pharmaceutical Product
Development Inc., offer services that compete directly with the Company's
services at many levels.
PAREXEL believes that the synergies arising from integrating the products and
services offered by its different business units, coupled with its global
infrastructure (and related access to patients), technological expertise, and
depth of experience differentiate it from its competitors. Although there are no
guarantees that the Company will continue to do so, the Company believes that it
competes favorably in all of its business areas. Increased competition could
adversely affect operating results.
CRS
The clinical outsourcing services industry is very fragmented, with several
hundred providers offering varying levels of service, skills and capabilities.
The Company's CRS group primarily competes against in-house departments of
pharmaceutical companies, other full service bio/pharmaceutical services
companies, small specialty CROs, and to a lesser extent, universities, teaching
hospitals, and other site organizations. The primary competitors for the CRS
business include Quintiles Transnational Corporation, Covance Inc.,
Pharmaceutical Product Development Inc., Inveresk Research Group Inc., Kendle
International Inc. and ICON PLC.
9
CRS generally competes on the basis of:
- - previous experience with a client or in a specific therapeutic area;
- - medical and scientific expertise in a specific therapeutic area;
- - quality of services;
- - breadth of services;
- - the ability to organize and manage large-scale clinical trials on a global
basis;
- - the ability to manage large and complex medical databases;
- - the ability to provide statistical and regulatory services;
- - the ability to recruit investigators and patients;
- - the ability to integrate information technology with systems to improve
the efficiency of clinical research;
- - an international presence with strategically located facilities;
- - financial strength and stability; and
- - price.
The Company believes CRS's key competitive strengths are its global footprint
and related access to patients, therapeutic knowledge, and its experience in
global drug development.
PCG
PCG competes with a large and diverse group of specialty service providers,
including major consulting firms with pharmaceutical industry practices, large
and small bio/pharmaceutical services companies, smaller companies with a
specific service focus, and individual consultants. The Company believes that no
other company in this area provides the particular combination of services that
PCG provides. Furthermore, there is limited overlap of competitors from one
service to the other because of the Company's varied service offerings. The
competition in this segment is generally based on expertise, experience,
reputation and price. The Company believes that PCG's key competitive strength
is its breadth and depth of expertise in regulatory strategy, submissions and
manufacturing compliance, and early stage drug development.
MMS
MMS competes with a large and fragmented group of companies including specialist
medical marketing companies, large international advertising companies that
offer medical education services, medical public relation firms, and small and
large bio/pharmaceutical services companies that offer medical marketing and
education services. The primary factors on which MMS competes include the
ability to understand the commercial, medical/scientific,
regulatory/reimbursement and communications issues involved in a successful
pharmaceutical product launch; the ability to develop global marketing and
communication strategies that accelerate product acceptance and market
penetration; and the ability to translate those strategies into actionable
activities and pricing. The Company believes that MMS's key competitive
strengths are the innovative marketing services that it provides and the breadth
of MMS's varied service offerings.
PERCEPTIVE
The Perceptive business competes primarily with bio/pharmaceutical services
companies, information technology companies and software companies. Companies in
this segment compete based on the strength and usability of their technology
offerings, their expertise and experience, and their understanding of the
clinical development process. Perceptive's key competitive strength is its
combination of technological expertise and knowledge of clinical development.
The Company believes that its strategy of collaborating with other technology
companies to implement certain tools, rather than developing its own, allows
Perceptive to adapt to new technologies more quickly than many of its
competitors. Perceptive's market position may be affected over time by
competitors' efforts to develop and market new information technology products
and services.
INTELLECTUAL PROPERTY
The Company's trademark "PAREXEL", is of material importance to the Company and
it has registered this and other trademarks in the U.S. and many foreign
countries. The duration of trademark registrations varies from country to
country. However, trademarks generally may be renewed indefinitely as long as
they are in use and/or their registrations are properly maintained, and as long
as they have not been found to become generic.
10
EMPLOYEES
As of June 30, 2004, the Company had 4,875 employees. Approximately 38% of the
employees are located in North America and 62% are located throughout Europe,
Asia/Pacific and South America. The Company believes that its relations with its
employees are good.
The success of the Company's business depends on its ability to attract and
retain a qualified professional, scientific and technical staff. The level of
competition among employers for skilled personnel, particularly those with
Ph.D., M.D. or equivalent degrees, is high. The Company believes that its
multinational presence, which allows for international transfers, is an
advantage in attracting employees. In addition, the Company believes that the
wide range of clinical trials in which it participates allows the Company to
offer a broad experience to clinical researchers. There is no assurance that the
Company will be able to attract and retain qualified staff in the future.
GOVERNMENT REGULATIONS
PAREXEL provides clinical trial and diverse consulting services for
pharmaceutical, biotechnology and medical device industries. Lack of success in
obtaining approval for the conduct of clinical trials can adversely affect
PAREXEL. Lack of success in obtaining marketing approval or clearance for a
product for which PAREXEL has provided clinical trial or other services can also
adversely affect the Company. PAREXEL makes no guarantees to its clients with
regard to successful outcomes of the regulatory process, including the success
of clinical trial applications or marketing applications.
Clinical research services provided by PAREXEL in the U.S. are subject to
ongoing FDA regulation. The Company is obligated to comply with FDA requirements
governing activities such as obtaining patient informed consents, verifying
qualifications of investigators, reporting patients' adverse reactions to
products, and maintaining thorough and accurate records. The Company is also
required to ensure that the computer systems it uses to process human data from
clinical trials are validated in accordance with the electronic records
regulations that apply to the pharmaceutical and CRO industries (21 CFR Part
11). The Company must maintain source documents for each study for specified
periods, and such documents may be reviewed according to GCP standards by the
study sponsor and the FDA during audits and inspections. Non-compliance with GCP
can result in the disqualification of data collected during a clinical trial and
in non-approval of a product application submitted to the FDA.
The clinical investigation of new drugs, biologics and medical devices is highly
regulated by government agencies. The standard for the conduct of clinical
research and development studies comprises GCP, which stipulates procedures
designed to ensure the quality and integrity of data obtained from clinical
testing and to protect the rights and safety of clinical trial participants. The
FDA and many other regulatory authorities require that study results submitted
to such authorities be based on studies conducted in accordance with GCP. The
European Union ("EU") established as of May 1, 2004 the Clinical Trials
Directive (the "Directive") in an attempt to harmonize the regulatory
requirements of the member states for the EU for the conduct of clinical trials
in its territory. The Directive requires sponsors of clinical trials to submit
formal applications to national ethics committees and regulatory authorities
prior to the initiation of clinical trials in any of the 25 member states of the
EU. Whereas some member states, prior to the implementation of the Directive,
had minimal requirements for clinical trial initiation, all member states are
now subject to the same stringent requirements of the Directive. As in the U.S.,
clinical trials in the E.U., are expected to be carried out in compliance with
detailed requirements for GCP. The foreign regulatory approval process includes
all of the risks and potential delays associated with the FDA approval process.
Because the FDA's regulatory requirements have served as the model for much of
the regulation of new drug development worldwide, regulatory requirements
similar to those of the FDA exist in the other countries in which the Company
operates. The Company's regulatory capabilities include knowledge of the
specific regulatory requirements in numerous countries. The Company has managed
simultaneous regulatory submissions in more than one country for a number of
drug sponsors for at least the past eight years. Beginning in 1991, the FDA and
corresponding regulatory agencies of the EU and Japan commenced discussions to
develop harmonized standards for preclinical and clinical studies and the format
and content of applications for new drug approvals through a process known as
ICH. Data from multinational studies adhering to GCP are now generally
acceptable to the FDA, Canadian, the EU and Japanese regulators. The ICH process
has sanctioned a single common format for drug and biologic marketing
applications, known as the Common Technical Document ("CTD") in the U.S.,
Europe, Japan and Canada. On July 1, 2003 the CTD format became mandatory in
Europe and Japan and highly recommended by the FDA in the U.S. and by the
Canadian regulatory authorities. The Company has developed the expertise to
prepare CTDs for its clients in both paper and electronic form.
11
REGULATION OF DRUGS AND BIOLOGICS
Before a new drug or biologic may be approved and marketed, the drug or biologic
must undergo extensive testing and regulatory review in order to determine that
the drug or biologic is safe and effective. It is not possible to estimate the
time in which preclinical, Phases I, II and III studies are completed with
respect to a given product, if at all, although the time period may last many
years. The stages of this development process are generally as follows:
PRECLINICAL RESEARCH (APPROXIMATELY 1 TO 3.5 YEARS) - In vitro ("test
tube") and animal studies in accordance with GLP to establish the relative
toxicity of the drug or biologic over a wide range of doses and to detect
any potential to cause a variety of adverse conditions and diseases,
including birth defects or cancer. If results warrant continuing
development of the drug or biologic, the results of the studies are
submitted to the FDA by the manufacturer as part of an Investigational New
Drug Application ("IND"), which must be reviewed by the FDA before
proposed clinical testing can begin. An IND must include, among other
things, preclinical data, chemistry, manufacturing and control
information, and an investigational plan, and must be activated by the FDA
before such trials may begin. There can be no assurance that submission of
an IND will result in the ability to commence clinical trials.
CLINICAL TRIALS (APPROXIMATELY 3.5 TO 6 YEARS)
- Phase I-Basic safety and pharmacology testing in approximately
20 to 80 human subjects, usually healthy volunteers, includes
studies to determine metabolic and pharmacologic action of the
product in humans, how the drug or biologic works, how it is
affected by other drugs, how it is tolerated and absorbed,
where it goes in the body, how long it remains active, and how
it is broken down and eliminated from the body.
- Phase II-Basic efficacy (effectiveness) and dose-range
testing, sometimes in 100 to 200 patients afflicted with a
specific disease or condition for which the product is
intended for use, to further test safety, begin evaluating
effectiveness, optimize dose level, determine dose schedules,
and determine routes of administration. If Phase II studies
yield satisfactory results and no hold is placed on further
studies by the FDA, Phase III studies can be commenced.
- Phase III-Larger scale, multi-center comparative clinical
trials conducted with patients afflicted by a target disease
in order to provide enough data for a valid statistical test
of safety and effectiveness required by the FDA and others and
to provide a basis for product labeling. When results from
Phase II or Phase III show special promise in the treatment of
a serious condition for which existing therapeutic options are
nonexistent, limited or of minimal value, the FDA may allow
the sponsor to make the new drug available to a larger number
of patients through the regulated mechanism of a Treatment
Investigational New Drug ("TIND"), which may span late Phase
II, Phase III, and FDA review. Although TINDs may enroll and
collect a substantial amount of data from tens of thousands of
patients, they are not granted in all cases.
The FDA receives reports on the progress of each phase of clinical testing
and may require the modification, suspension, or termination of clinical
trials if, among other things, an unreasonable risk is presented to
patients or if the design of the trial is insufficient to meet its stated
objective.
NDA OR BIOLOGIC LICENSE APPLICATION ("BLA") PREPARATION AND SUBMISSION -
Upon completion of Phase III trials, the sponsor assembles the
statistically analyzed data from all phases of development, along with the
chemistry and manufacturing and pre-clinical data and the proposed
labeling, among other things, into a single large document, the NDA or BLA
(in CTD format as of July 1, 2003), which today comprises, on average,
roughly 100,000 pages.
FDA REVIEW OF NDA OR BLA - The FDA carefully scrutinizes data from all
phases of development (including a TIND) to confirm that the manufacturer
has complied with regulations and that the drug or biologic is safe and
effective for the specific use (or "indication") under study. The FDA may
refuse to accept the NDA or BLA for filing and substantive review if
certain administrative and content criteria are not satisfied and even
after accepting the submission for review, the FDA may also require
additional testing or information before approval of an NDA or BLA. The
FDA must deny approval of an NDA or BLA if applicable regulatory
requirements are not ultimately satisfied.
12
POST-MARKETING SURVEILLANCE AND PHASE IV STUDIES - Federal regulation
requires the sponsor to collect and periodically report to the FDA
additional safety and efficacy data on the drug or biologic for as long as
the manufacturer markets the product (post-marketing surveillance). If the
product is marketed outside the U.S., these reports must include data from
all countries in which the product is sold. Additional studies (Phase IV)
may be undertaken after initial approval to find new uses for the product,
to test new dosage formulations, or to confirm selected non-clinical
benefits, e.g., increased cost-effectiveness or improved quality of life.
Product approval may be withdrawn if compliance with regulatory standards
is not maintained or if problems occur following initial marketing.
REGULATION OF MEDICAL DEVICES
Unless a medical device is exempted from pre-market submission and clearance,
FDA approval or clearance of the device is required before the product may be
marketed in the U.S. In order to obtain clearance for marketing, a manufacturer
must demonstrate substantial equivalence to a similar legally marketed product
by submitting a premarket notification, 510(k), to the agency. The FDA may
require preclinical and clinical data to support a substantial equivalence
determination, and there can be no assurance the FDA will find a device
substantially equivalent. Clinical trials can take extended periods of time to
complete. In addition, if the FDA requires an approved Investigational Device
Exemption ("IDE") before clinical device trials may commence, there can be no
guarantee that the agency will approve the IDE. An IDE approval process could
also result in significant delay.
After submission of a premarket notification containing, among other things, any
data collected, the FDA may find the device substantially equivalent and the
device may be marketed. If the FDA finds that a device is not substantially
equivalent, the manufacturer may request that the FDA make a risk-based
classification to place the device in Class I or Class II. However, if a timely
request for risk-based classification is not made, or if the FDA determines that
a Class III designation is appropriate, an approved pre-market approval
application ("PMA") will be required before the device may be marketed.
The PMA approval process is lengthy, expensive, and typically requires, among
other things, extensive data from preclinical testing and a well-controlled
clinical trial or trials that demonstrate a reasonable assurance of safety and
effectiveness. There can be no assurance that review will result in timely or
any PMA approval. There may also be significant conditions on approval,
including limitations on labeling and advertising claims and the imposition of
post-market testing, tracking, or surveillance requirements.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996
Laws protecting confidential medical information could impact the manner in
which the Company conducts certain components of its business. On August 14,
2002, the Department of Health and Human Services issued final modifications to
privacy regulations (the "Privacy Rule") under the Health Insurance Portability
and Accountability Act of 1996 ("HIPAA"). These regulations impose restrictions
governing the disclosure of confidential medical information in the U.S.
The failure on the part of the Company, its clients and/or the physician
investigators from whom the Company receives confidential medical information to
comply with the Privacy Rule could result in the termination of ongoing research
or the disqualification of data for submission to regulatory authorities.
Additionally, the issuance of a notice of finding by a governmental authority
against either the Company or its clients, based upon a material violation by
the Company of any applicable regulation, could materially and adversely affect
its business.
POTENTIAL LIABILITY AND INSURANCE
PAREXEL's clinical research services focuses on the testing of experimental
drugs and devices on human volunteers pursuant to study protocols. Clinical
research involves a risk of liability for personal injury or death to patients
due, among other reasons, to possible unforeseen adverse side effects or
improper administration of the new drug or medical device. PAREXEL does not
provide healthcare services directly to patients. Rather, PAREXEL physicians or
physician investigators are responsible for administering drugs and evaluating
patients. Many of these patients are already seriously ill and are at risk of
further illness or death.
The Company believes that the risk of liability to patients in clinical trials
is mitigated by various regulatory requirements, including the role of
institutional review boards ("IRBs") and the need to obtain each patient's
informed consent. The FDA requires each human clinical trial to be reviewed and
approved by the IRB at each study site. An IRB is an independent committee that
includes both medical and non-medical personnel and is obligated to protect the
interests of patients enrolled in the trial. The IRB monitors the protocol and
measures designed to protect patients, such as the requirement to obtain
informed consent.
13
To reduce its potential liability, PAREXEL is generally successful in
incorporating indemnity provisions into its contracts with clients and with
investigators hired by the Company on behalf of its clients. These indemnities
generally do not, however, protect PAREXEL against certain of its own actions,
such as those involving negligence. Moreover, these indemnities are contractual
arrangements that are subject to negotiation with individual clients, and the
terms and scope of such indemnities can vary from client to client and from
study to study. Finally, the financial performance of these indemnities is not
secured, so that the Company bears the risk that an indemnifying party may not
have the financial ability to fulfill its indemnification obligations. PAREXEL
could be materially and adversely affected if it were required to pay damages or
incur defense costs in connection with an uninsured claim that is outside the
scope of an indemnity or where the indemnity, although applicable, is not
performed in accordance with its terms.
The Company currently maintains an errors and omissions professional liability
insurance policy, subject to deductibles and coverage limits. There can be no
assurance that this insurance coverage will be adequate, or that insurance
coverage will continue to be available on terms acceptable to the Company.
AVAILABLE INFORMATION
The Company's Internet website is http://www.parexel.com. The Company makes
available through its website the Company's annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed pursuant to Sections 13(a) and 15(d) of the Securities
Exchange Act of 1934, as amended. The Company makes these reports available free
of charge through its website as soon as reasonably practicable after they have
been electronically filed with, or furnished to, the Securities and Exchange
Commission.
RISK FACTORS
In addition to other information in this report, the following risk factors
should be considered carefully in evaluating the Company and its business. These
risk factors could cause actual results to differ from those indicated by
forward-looking statements made in the section of this report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other forward-looking statements that the Company may make from
time to time. If any of the following risks occur, the Company's business,
financial condition, or results of operations would likely suffer.
LOSS, MODIFICATION, OR DELAY OF LARGE OR MULTIPLE CONTRACTS MAY NEGATIVELY
IMPACT THE COMPANY'S FINANCIAL PERFORMANCE
The Company's clients generally can terminate their contracts with the Company
upon 30 to 60 days notice or can delay execution of services. The loss or delay
of a large contract or the loss or delay of multiple contracts could adversely
affect its operating results, possibly materially. The Company has in the past
experienced contract cancellations, which have adversely affected its operating
results.
Clients terminate or delay their contracts for a variety of reasons, including,
but not limited to:
- merger or potential merger related activities;
- failure of products being tested to satisfy safety requirements;
- failure of products being tested to prove effective;
- products having unexpected or undesired clinical results;
- client decisions to forego a particular study, perhaps for economic
reasons;
- insufficient patient enrollment in a study;
- insufficient investigator recruitment;
- production problems which cause shortages of the product;
- product withdrawal following market launch; and
- manufacturing facility shut down.
In addition, the Company believes that companies regulated by the FDA may
proceed with fewer clinical trials or conduct them without the assistance of
bio/pharmaceutical services companies if they are trying to reduce costs as a
result of budgetary limits or changing priorities. These factors may cause such
companies to cancel contracts with bio/pharmaceutical services companies such as
the Company.
14
THE COMPANY FACES INTENSE COMPETITION IN MANY AREAS OF ITS BUSINESS; IF THE
COMPANY DOES NOT COMPETE EFFECTIVELY, ITS BUSINESS WILL BE HARMED
The bio/pharmaceutical services industry is highly competitive, and the Company
faces numerous competitors in many areas of its business. If the Company fails
to compete effectively, the Company may lose clients, which would cause its
business to suffer.
The Company primarily competes against in-house departments of pharmaceutical
companies, other full service CROs, small specialty CROs, and to a lesser
extent, universities, teaching hospitals, and other site organizations. Some of
the larger CROs against which the Company competes include Quintiles
Transnational Corporation, Covance, Inc. and Pharmaceutical Product Development
Inc. In addition, PAREXEL's PCG and MMS businesses also compete with a large and
fragmented group of specialty service providers, including
advertising/promotional companies, major consulting firms with pharmaceutical
industry groups and smaller companies with pharmaceutical industry focus.
Perceptive, a majority owned subsidiary of the Company, competes primarily with
CROs, information technology companies and other software companies. Some of
these competitors, including the in-house departments of pharmaceutical
companies, have greater capital, technical and other resources than the Company.
In addition, those of the Company's competitors that are smaller specialized
companies may compete effectively against the Company because of their
concentrated size and focus.
THE FIXED PRICE NATURE OF THE COMPANY'S CONTRACTS COULD HURT ITS OPERATING
RESULTS
Approximately 85.0% of the Company's contracts are at fixed prices. As a result,
the Company bears the risk of cost overruns. If the Company fails to adequately
price its contracts or if the Company experiences significant cost overruns, its
gross margins on the contract would be reduced and the Company could lose money
on contracts. In the past, the Company has had to commit unanticipated resources
to complete projects, resulting in lower gross margins on those projects. The
Company might experience similar situations in the future.
IF GOVERNMENTAL REGULATION OF THE DRUG, MEDICAL DEVICE AND BIOTECHNOLOGY
INDUSTRY CHANGES, THE NEED FOR THE COMPANY'S SERVICES COULD DECREASE
Governmental regulation of the drug, medical device and biotechnology product
development process is complicated, extensive, and demanding. A large part of
the Company's business involves assisting pharmaceutical and biotechnology
companies through the regulatory approval process. Changes in regulations, that,
for example, streamline procedures or relax approval standards, could eliminate
or reduce the need for the Company's services. If companies regulated by the FDA
or similar foreign regulatory authorities needed fewer of PAREXEL's services,
the Company would have fewer business opportunities and its revenues would
decrease, possibly materially.
In the U.S., the FDA and the Congress have attempted to streamline the
regulatory process by providing for industry user fees that fund additional
reviewer hires and better management of the regulatory review process. In
Europe, governmental authorities have approved common standards for clinical
testing of new drugs throughout the E.U. by adopting standards for GCP and by
making the clinical trial application and approval process more uniform across
member states starting in May 2004. . The FDA has had GCP in place as a
regulatory standard and requirement for new drug approval for many years and
Japan had adopted GCP since April 1998. The U.S., Europe and Japan have also
collaborated in the 14-year-long ICH, the purpose of which is to eliminate
duplicative or conflicting regulations in the three regions. The ICH partners
have agreed upon a common format (the Common Technical Document) for marketing
applications that eliminates the need to tailor the format to each region. Such
efforts and similar efforts in the future that streamline the regulatory process
may reduce the demand for the Company's services.
For example, parts of PAREXEL's PCG business advises clients on how to satisfy
regulatory standards for manufacturing processes and on other matters related to
the enforcement of government regulations by the FDA and other regulatory
bodies. Any reduction in levels of review of manufacturing processes or levels
of regulatory enforcement, generally, would result in fewer business
opportunities for the PCG business in this area. As a result of lower level of
FDA enforcement activities over the last two years, PCG has experienced a
decline in the group's GMP consulting business, which has adversely affected the
business unit.
15
IF THE COMPANY FAILS TO COMPLY WITH EXISTING REGULATIONS, ITS REPUTATION AND
OPERATING RESULTS WOULD BE HARMED
The Company's business is subject to numerous governmental regulations,
primarily relating to pharmaceutical product development and the conduct of
clinical trials. If the Company fails to comply with these governmental
regulations, it could result in the termination of the Company's ongoing
research, development or sales and marketing projects, or the disqualification
of data for submission to regulatory authorities. The Company also could be
barred from providing clinical trial services in the future or be subjected to
fines. Any of these consequences would harm the Company's reputation, its
prospects for future work and its operating results. In addition, the Company
may have to repeat research or redo trials. The Company may be contractually
required to take such action at no further cost to the customer, but at
substantial cost to the Company.
THE COMPANY MAY LOSE BUSINESS OPPORTUNITIES AS A RESULT OF HEALTH CARE REFORM
AND THE EXPANSION OF MANAGED CARE ORGANIZATIONS
Numerous governments, including the U.S. government and governments outside of
the U.S., have undertaken efforts to control growing health care costs through
legislation, regulation and voluntary agreements with medical care providers and
drug companies. If these efforts are successful, pharmaceutical, medical device
and biotechnology companies may react by spending less on research and
development. If this were to occur, the Company would have fewer business
opportunities and its revenues could decrease, possibly materially.
For instance, in the past, the U.S. Congress has entertained several
comprehensive health care reform proposals. The proposals were generally
intended to expand health care coverage for the uninsured and reduce the growth
of total health care expenditures. While the U.S. Congress has not yet adopted
any comprehensive reform proposals, members of Congress may raise similar
proposals in the future. The Company is unable to predict the likelihood that
health care reform proposals will be enacted into law. In addition to health
care reform proposals, the expansion of managed care organizations in the
healthcare market may result in reduced spending on research and development.
Managed care organizations' efforts to cut costs by limiting expenditures on
pharmaceuticals and medical devices could result in pharmaceutical,
biotechnology and medical device companies spending less on research and
development. If this were to occur, the Company would have fewer business
opportunities and its revenues could decrease, possibly materially.
NEW AND PROPOSED LAWS AND REGULATIONS REGARDING CONFIDENTIALITY OF PATIENT
INFORMATION COULD RESULT IN INCREASED RISKS OF LIABILITY OR INCREASED COSTS TO
THE COMPANY, OR COULD LIMIT THE COMPANY'S SERVICE OFFERINGS
The confidentiality and release of patient-specific information are subject to
government regulation. Under the Health Insurance Portability and Accountability
Act of 1996, or HIPAA, the U.S. Department of Health and Human Services has
issued regulations mandating heightened privacy and confidentiality protections.
The federal government and state governments have proposed or adopted additional
legislation governing the possession, use and dissemination of medical record
information and other personal health information. Proposals being considered by
state governments may contain privacy and security provisions that are more
burdensome than the federal regulations. In order to comply with these
regulations, the Company may need to implement new security measures, which may
require the Company to make substantial expenditures or cause the Company to
limit the products and services it offers. In addition, if the Company violates
applicable laws, regulations or duties relating to the use, privacy or security
of health information, it could be subject to civil or criminal liability.
IF THE COMPANY DOES NOT KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES, ITS PRODUCTS
AND SERVICES MAY BECOME LESS COMPETITIVE OR OBSOLETE, ESPECIALLY IN THE
COMPANY'S PERCEPTIVE INFORMATICS BUSINESS
The biotechnology, pharmaceutical and medical device industries generally, and
clinical research specifically, are subject to increasingly rapid technological
changes. The Company's competitors or others might develop technologies,
products or services that are more effective or commercially attractive than the
Company's current or future technologies, products or services, or render its
technologies, products or services less competitive or obsolete. If competitors
introduce superior technologies, products or services and the Company cannot
make enhancements to its technologies, products and services necessary to remain
competitive, its competitive position will be harmed. If the Company is unable
to compete successfully, it may lose customers or be unable to attract new
customers, which could lead to a decrease in revenue.
16
BECAUSE THE COMPANY DEPENDS ON A SMALL NUMBER OF INDUSTRIES AND CLIENTS FOR ALL
OF ITS BUSINESS, THE LOSS OF BUSINESS FROM A SIGNIFICANT CLIENT COULD HARM ITS
BUSINESS, REVENUE, AND FINANCIAL CONDITION
The loss of, or a material reduction in the business of, a significant client
could cause a substantial decrease in the Company's revenue and adversely affect
its business and financial condition, possibly materially. In the fiscal year
ended June 30, 2004, the Company's five largest clients accounted for 30% of its
consolidated service revenue, although no client accounted for 10% or more of
consolidated service revenue. In the fiscal year ended June 30, 2003, the
Company's five largest clients accounted for 32% of its consolidated service
revenue, and one client, AstraZeneca, accounted for 11% of consolidated service
revenue. The Company expects that a small number of clients will continue to
represent a significant part of its revenue. The Company's contracts with these
clients generally can be terminated on short notice. The Company has in the past
experienced contract cancellations with significant clients.
IF THE COMPANY'S PERCEPTIVE INFORMATICS BUSINESS IS UNABLE TO MAINTAIN
CONTINUOUS, EFFECTIVE, RELIABLE AND SECURE OPERATION OF ITS COMPUTER HARDWARE,
SOFTWARE AND INTERNET APPLICATIONS AND RELATED TOOLS AND FUNCTIONS, ITS BUSINESS
WILL BE HARMED
The Company's Perceptive Informatics business involves collecting, managing,
manipulating and analyzing large amounts of data, and communicating data via the
Internet. Perceptive depends on the continuous, effective, reliable and secure
operation of its computer hardware, software, networks, telecommunication
networks, Internet servers and related infrastructure. If Perceptive's hardware
or software malfunctions or access to Perceptive's data by internal research
personnel or customers through the Internet is interrupted, its business could
suffer. In addition, any sustained disruption in Internet access provided by
third parties could adversely impact Perceptive's business.
Although Perceptive's computer and communications hardware is protected through
physical and software safeguards, it is still vulnerable to fire, storm, flood,
power loss, earthquakes, telecommunications failures, physical or software
break-ins, and similar events. In addition, Perceptive's software products are
complex and sophisticated, and could contain data, design or software errors
that could be difficult to detect and correct. If Perceptive fails to maintain
and further develop the necessary computer capacity and data to support its
customers' needs, it could result in loss of or delay in revenue and market
acceptance.
IF THE COMPANY IS UNABLE TO ATTRACT SUITABLE WILLING VOLUNTEERS FOR THE CLINICAL
TRIALS OF ITS CLIENTS, ITS CLINICAL RESEARCH SERVICES BUSINESS MAY SUFFER
One of the factors on which the Company's CRS business competes is the ability
to recruit patients for the clinical studies the Company is managing. These
clinical trials rely upon the ready accessibility and willing participation of
volunteer subjects. These subjects generally include volunteers from the
communities in which the studies are conducted. Although to date these
communities have provided a substantial pool of potential subjects for research
studies, there may not be enough patients available with the traits necessary to
conduct the studies. For example, if the Company manages a study for a treatment
of a particular type of cancer, its ability to conduct the study may be limited
by the number of patients that it can recruit that have that form of cancer. If
multiple organizations are conducting similar studies and competing for
patients, it could also make the Company's recruitment efforts more difficult.
If the Company is unable to attract suitable and willing volunteers on a
consistent basis, it would have an adverse effect on the trials being managed by
its CRS business, which could have a material adverse effect on its CRS
business.
IF THE COMPANY'S HIGHLY QUALIFIED MANAGEMENT AND TECHNICAL PERSONNEL LEFT, ITS
BUSINESS WOULD BE HARMED
The Company relies on the expertise of its Chairman and Chief Executive Officer,
Josef H. von Rickenbach. If Mr. von Rickenbach left, it would be difficult and
expensive to find a qualified replacement with the level of specialized
knowledge of the Company's products and services and the bio/pharmaceutical
services industry. The Company is a party to an employment agreement with Mr.
von Rickenbach, which may be terminated by the Company or Mr. von Rickenbach
upon notice to the other party.
In addition, in order to compete effectively, the Company must attract and
maintain qualified sales, professional, scientific and technical operating
personnel. Competition for these skilled personnel, particularly those with a
medical degree, a Ph.D. or equivalent degrees, is intense. The Company may not
be successful in attracting or retaining key personnel.
17
THE COMPANY MAY HAVE SUBSTANTIAL EXPOSURE TO PAYMENT OF PERSONAL INJURY CLAIMS
AND MAY NOT HAVE ADEQUATE INSURANCE TO COVER SUCH CLAIMS
The Company's CRS business primarily involves the testing of experimental drugs
and medical devices on consenting human volunteers pursuant to a study protocol.
Clinical research involves a risk of liability for personal injury or death to
patients who participate in the study or who use a product approved by
regulatory authorities after the clinical research has concluded, due to, among
other reasons, possible unforeseen adverse side effects or improper
administration of the drug or device by physicians. In some cases, these
patients are already seriously ill and are at risk of further illness or death.
In order to mitigate the risk of liability, the Company seeks to include
indemnity provisions in its Clinical Research Services contracts with clients.
However, the Company is not able to include indemnity provisions in all of its
contracts. The indemnity provisions the Company includes in these contracts
would not cover its exposure if:
- the Company had to pay damages or incur defense costs in connection
with a claim that is outside the scope of an indemnity; or
- a client failed to indemnify the Company in accordance with the
terms of an indemnity agreement because it did not have the
financial ability to fulfill its indemnification obligation or for
any other reason.
The Company also carries insurance to cover its risk of liability. However, the
Company's insurance is subject to deductibles and coverage limits and may not be
adequate to cover claims. In addition, liability coverage is expensive. In the
future, the Company may not be able to maintain or obtain liability insurance on
reasonable terms, at a reasonable cost or in sufficient amounts to protect it
against losses due to claims.
THE COMPANY'S BUSINESS IS SUBJECT TO INTERNATIONAL ECONOMIC, POLITICAL AND OTHER
RISKS THAT COULD NEGATIVELY AFFECT ITS RESULTS OF OPERATIONS OR FINANCIAL
POSITION
The Company provides most of its services on a worldwide basis. The Company's
service revenue from non-U.S. operations represented approximately 54.8% of
total service revenue for the year ended June 30, 2004 and approximately 49.2%
of total service revenue for the year ended June 30, 2003. In addition, the
Company's service revenue from operations in the United Kingdom represented
approximately 18.3% of total service revenue for the year ended June 30, 2004
and approximately 18.4% of total service revenue for the year ended June 30,
2003. The Company anticipates that service revenue from international operations
may grow in the future. Accordingly, the Company's business is subject to risks
associated with doing business internationally, including:
- changes in a specific country's or region's political or economic
conditions, including Western Europe, in particular;
- potential negative consequences from changes in tax laws affecting
its ability to repatriate profits;
- difficulty in staffing and managing widespread operations;
- unfavorable labor regulations applicable to its European operations;
- changes in foreign currency exchange rates; and
- longer payment cycles of foreign customers and difficulty of
collecting receivables in foreign jurisdictions.
THE COMPANY'S OPERATING RESULTS HAVE FLUCTUATED BETWEEN QUARTERS AND YEARS AND
MAY CONTINUE TO FLUCTUATE IN THE FUTURE, WHICH COULD AFFECT THE PRICE OF ITS
COMMON STOCK
The Company's quarterly and annual operating results have varied and will
continue to vary in the future as a result of a variety of factors. For example,
the Company's income (loss) from operations was $7.8 million for the quarter
ended September 30, 2003, $8.2 million for the quarter ended December 31, 2003,
$(1.7) million for the quarter ended March 31, 2004, and $10.3 million for the
quarter ended June 30, 2004. Factors that cause these variations include:
- the level of new business authorizations in a particular quarter or
year;
- the timing of the initiation, progress, or cancellation of
significant project;
- exchange rate fluctuations between quarters or years;
- restructuring charges;
- the mix of services offered in a particular quarter or year;
- the timing of the opening of new offices;
- costs and the related financial impact of acquisitions;
- the timing of internal expansion;
- the timing and amount of costs associated with integrating
acquisitions; and
18
- the timing and amount of startup costs incurred in connection with
the introduction of new products, services or subsidiaries.
Many of these factors, such as the timing of cancellations of significant
projects and exchange rate fluctuations between quarters or years, are beyond
the Company's control.
Approximately 80-85% of the Company's operating costs are fixed in the short
term. In particular, a significant portion of the Company's operating costs
relate to personnel, which are estimated to have accounted for 65-70% of the
Company's total operating costs in fiscal year 2004. As a result, the effect on
the Company's revenues of the timing of the completion, delay or loss of
contracts, or the progress of client projects, could cause its operating results
to vary substantially between reporting periods.
If the Company's operating results do not match the expectations of securities
analysts and investors as a result of these factors, the trading price of its
common stock will likely decrease.
THE COMPANY'S REVENUE AND EARNINGS ARE EXPOSED TO EXCHANGE RATE FLUCTUATIONS
Approximately 54.8% of the Company's service revenue for the year ended June 30,
2004 and approximately 49.2% of the Company's service revenue for the year ended
June 30, 2003 were from non-U.S. operations. The Company's financial statements
are denominated in U.S. dollars. As a result, changes in foreign currency
exchange rate, could have a significant effect on its operating results.
Exchange rate fluctuations between local currencies and the U.S. dollar create
risk in several ways, including:
- Foreign Currency Translation Risk. The revenue and expenses of the
Company's foreign operations are generally denominated in local
currencies, primarily the British pound and the Euro, and then are
translated into U.S. dollars for financial reporting purposes. For
the year ended June 30, 2004, approximately 18.3% of total service
revenue was denominated in British pounds and approximately 32.2% of
total service revenue was denominated in Euros. For the year ended
June 30, 2003, approximately 18.4% of total service revenue was
denominated in British pounds and approximately 26.7% of total
service revenue was denominated in Euros.
- Foreign Currency Transaction Risk. The Company's service contracts
may be denominated in a currency other than the functional currency
in which it performs the service related to such contracts.
Although the Company tries to limit these risks through exchange rate
fluctuation provisions stated in its service contracts, or by hedging
transaction risk with foreign currency exchange contracts, it may still
experience fluctuations in financial results from its operations outside of the
U.S., and may not be able to favorably reduce the currency transaction risk
associated with its service contracts.
THE COMPANY'S BUSINESS HAS EXPERIENCED SUBSTANTIAL EXPANSION IN THE PAST AND
SUCH EXPANSION AND ANY FUTURE EXPANSION COULD STRAIN ITS RESOURCES IF NOT
PROPERLY MANAGED
The Company has expanded its business substantially in the past. Future rapid
expansion could strain the Company's operational, human and financial resources.
In order to manage expansion, the Company must:
- continue to improve operating, administrative and information
systems;
- accurately predict future personnel and resource needs to meet
client contract commitments;
- track the progress of ongoing client projects; and
- attract and retain qualified management, sales, professional,
scientific and technical operating personnel.
If the Company does not take these actions and is not able to manage the
expanded business, the expanded business may be less successful than
anticipated, and the Company may be required to allocate additional resources to
the expanded business, which it would have otherwise allocated to another part
of its business.
The Company may face additional risks in expanding its foreign operations.
Specifically, the Company may find it difficult to:
- assimilate differences in foreign business practices, exchange rates
and regulatory requirements;
- operate amid political and economic instability;
- hire and retain qualified personnel; and
- overcome language, tariff and other barriers.
19
THE COMPANY MAY MAKE ACQUISITIONS IN THE FUTURE, WHICH MAY LEAD TO DISRUPTIONS
TO ITS ONGOING BUSINESS
The Company has made a number of acquisitions and will continue to review new
acquisition opportunities. If the Company is unable to successfully integrate an
acquired company, the acquisition could lead to disruptions to the business. The
success of an acquisition will depend upon, among other things, the Company's
ability to:
- assimilate the operations and services or products of the acquired
company;
- integrate acquired personnel;
- retain and motivate key employees;
- retain customers; and
- minimize the diversion of management's attention from other business
concerns.
Acquisitions of foreign companies may also involve additional risks, including
assimilating differences in foreign business practices and overcoming language
and cultural barriers.
In the event that the operations of an acquired business do not meet the
Company's performance expectations, the Company may have to restructure the
acquired business or write-off the value of some or all of the assets of the
acquired business.
THE COMPANY'S CORPORATE GOVERNANCE STRUCTURE, INCLUDING PROVISIONS OF ITS
ARTICLES OF ORGANIZATION AND BY-LAWS AND ITS SHAREHOLDER RIGHTS PLAN, AND
MASSACHUSETTS LAW MAY DELAY OR PREVENT A CHANGE IN CONTROL OR MANAGEMENT THAT
STOCKHOLDERS MAY CONSIDER DESIRABLE
Provisions of the Company's articles of organization, by-laws and its
shareholder rights plan, as well as provisions of Massachusetts law, may enable
the Company's management to resist acquisition of the Company by a third party,
or may discourage a third party from acquiring the Company. These provisions
include the following:
- the Company has divided its board of directors into three classes
that serve staggered three-year terms;
- the Company is subject to Section 8.06 of the Massachusetts Business
Corporation Law which provides that directors may only be removed by
stockholders for cause, vacancies in the Company's board of
directors may only be filled by a vote of the Company's board of
directors and the number of directors may be fixed only by the
Company's board of directors;
- the Company is subject to Chapter 110F of the Massachusetts General
Laws which limits its ability to engage in business combinations
with certain interested stockholders;
- the Company's stockholders are limited in their ability to call or
introduce proposals at stockholder meetings; and
- the Company's shareholder rights plan would cause a proposed
acquirer of 20% or more of the Company's outstanding shares of
common stock to suffer significant dilution.
These provisions could have the effect of delaying, deferring, or preventing a
change in control of the Company or a change in the Company's management that
stockholders may consider favorable or beneficial. These provisions could also
discourage proxy contests and make it more difficult for stockholders to elect
directors and take other corporate actions. These provisions could also limit
the price that investors might be willing to pay in the future for shares of the
Company's stock. In addition, the Company's Board of Directors may issue
preferred stock in the future without stockholder approval. If the Company's
Board of Directors issues preferred stock, the holders of common stock would be
subordinate to the rights of the holders of preferred stock. The Company's Board
of Directors' ability to issue the preferred stock could make it more difficult
for a third party to acquire, or discourage a third party from acquiring, a
majority of the Company's stock.
THE COMPANY'S STOCK PRICE HAS BEEN AND MAY IN THE FUTURE BE VOLATILE, WHICH
COULD LEAD TO LOSSES BY INVESTORS
The market price of the Company's common stock has fluctuated widely in the past
and may continue to do so in the future. On August 30, 2004 the closing sale
price of the Company's common stock on the NASDAQ National Market was $20.23 per
share. During the period from July 1, 2002 to June 30, 2004, the closing sale
price of the Company's common stock ranged from a high of $20.96 per share to a
low of $8.05 per share. Investors in the Company's common stock must be willing
to bear the risk of such fluctuations in stock price and the risk that the value
of an investment in the Company's stock could decline.
20
The Company's stock price can be affected by quarter-to-quarter variations in:
- operating results;
- earnings estimates by analysts;
- market conditions in the industry;
- prospects of health care reform;
- changes in government regulations; and
- general economic conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may adversely affect the
market price of the Company's common stock. Since the Company's common stock has
traded in the past at a relatively high price-earnings multiple, due in part to
analysts' expectations of earnings growth, the price of the stock could quickly
and substantially decline as a result of even a relatively small shortfall in
earnings from, or a change in, analysts' expectations.
ITEM 2. PROPERTIES
As of June 30, 2004, the Company occupied approximately 1,400,000 square feet of
building space in 51 locations in 35 countries around the world. Except for
26,600 square feet of building space in Poitiers, France, the Company does not
own any properties, but leases space under various leases that expire between
2004 and 2022.
The Company's non-U.S. facilities account for approximately 750,000 square feet.
In particular, the Company occupies approximately 191,000 square feet in various
locations in the United Kingdom, 234,000 square feet in various locations in
Germany and 83,000 square feet in various locations in France.
The Company's principal facilities are set forth below:
Facility Space Use of Facility Lease Expiration
- -------- ----- --------------- ----------------
Headquarters in Waltham, MA 212,000 CRS, PCG, Perceptive and General &
Administrative ("G&A") 2009
Uxbridge, UK 87,000 CRS, PCG, MMS, and G&A 2022
Berlin, Germany 120,000 CRS, PCG, Perceptive and G&A 2013
The following table indicates the approximate square footage of property
attributable to each of the Company's operating segments:
Total Sq. Ft.
-------------
CRS................................. 624,500
PCG................................. 243,750
MMS................................. 162,650
Perceptive.......................... 82,000
General and Administrative.......... 289,500
See Note 15 to the consolidated financial statements included in Item 8 of this
annual report for further information regarding the Company's lease obligations.
ITEM 3. LEGAL PROCEEDINGS
The Company periodically becomes involved in various claims and lawsuits that
are incidental to its business. The Company believes, after consultation with
counsel, that no matters currently pending would, in the event of an adverse
outcome, have a material impact on its consolidated financial position, results
of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2004.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION AND HOLDERS
The Company's common stock is traded on the NASDAQ National Market under the
symbol "PRXL". The table below shows the high and low bid prices of the common
stock for each quarter of the fiscal years ended June 30, 2004 and 2003,
respectively, on the NASDAQ National Market. The prices in the table below
reflect inter-dealer prices without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
2004 2003
High Low High Low
------ ------ ------ ------
First Quarter $17.70 $13.35 $14.45 $ 8.47
Second Quarter $18.78 $15.28 $13.53 $ 8.05
Third Quarter $18.57 $15.80 $14.87 $10.17
Fourth Quarter $21.00 $17.23 $14.75 $11.80
As of August 30, 2004, there were approximately 71 stockholders of record of the
Company's common stock. The number does not include shareholders for which
shares were held in a "nominee" or "street" name.
DIVIDENDS
The Company has never declared or paid any cash dividends on its capital stock
and does not anticipate paying any cash dividend in the foreseeable future. The
Company intends to retain future earnings for the development and expansion of
its business.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table provides information about purchases of equity securities by
the Company and its affiliated purchasers during the quarter ended June 30,
2004:
Total Number of
Shares (or Units) Maximum Number (or
Total Number Purchased as Part of Appropriate Dollar Value) of
of Shares (or Average Publicly Announced Shares (or Units) that May
Units) Purchased Price Paid per Plans or Programs Yet Be Purchased Under the
Period (1) Share (or Unit) (2) Plans or Programs
04/01/04 - 04/30/04 137,900 $19.05 137,900 $4.8 million
06/01/04 - 06/30/04 48,600 $20.27 48,600 $3.8 million
------- -------
Total 186,500 $19.36 186,500
======= =======
(1) The Company purchased an aggregate of 186,500 shares of its common
stock pursuant to the repurchase plan that it publicly announced on
September 27, 1999 (the "Plan").
(2) The Company's Board of Directors approved the repurchase by the
Company of shares of its common stock having a value of up to $20.0
million in the aggregate pursuant to the Plan. Unless terminated
earlier by resolution of the Company's Board of Directors, the Plan
will expire when all shares authorized for repurchase have been
repurchased by the Company.
There were no repurchases made during the period of July 1, 2003 to December 31,
2003. Repurchases made during the quarter ended March 31, 2004 can be found
under Part II, Item 2 of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004.
In September 1999, the Board of Directors approved a stock repurchase program
authorizing the purchase of up to $20 million of the Company's common stock.
Repurchases are made in the open market subject to market conditions. As of June
30, 2004, the Company had acquired 1,306,100 shares at a total cost of $16.2
million. Subsequent to June 30, 2004, the Company used the remaining $3.8
million authorized under the plan to repurchase 200,500 shares of common stock.
In total, the Company acquired 1,506,600 shares at a total cost of $20.0
million.
22
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company for the five
years ended June 30, 2004 are derived from the consolidated financial statements
of the Company. The information set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included as Item 7 and the consolidated financial statements and
related footnotes included as Item 8 in this Form 10-K.
For the years ended June 30,
(in thousands, except per share data and number of employees)
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
OPERATIONS
Service revenue $ 547,216 $ 522,313 $ 451,461 $ 387,560 $ 378,150
Income (loss) from operations $ 24,606(1) $ 20,605 (2) $ 20,493 $ (6,860)(3) $ 2,983(4)
Net income (loss) $ 13,791 $ 10,662 $ 13,235 $ (825) $ 4,388
Basic earnings (loss) per share $ 0.53 $ 0.42 $ 0.53 $ (0.03) $ 0.18
Diluted earnings (loss) per share $ 0.51 $ 0.42 $ 0.52 $ (0.03) $ 0.17
FINANCIAL POSITION
Cash, cash equivalents and marketable securities $ 95,607 $ 82,724 $ 66,109 $ 60,949 $ 90,530
Working capital $ 145,408 $ 134,346 $ 138,020 $ 123,488 $ 123,680
Total assets $ 502,996 $ 464,237 $ 407,161 $ 361,534 $ 351,940
Long-term debt $ 471 $ 644 $ 432 $ 12 $ 104
Stockholders' equity $ 246,760 $ 227,100 $ 200,077 $ 177,822 $ 186,133
OTHER DATA
Purchase of property and equipment $ 27,824 $ 29,985 $ 23,808 $ 18,145 $ 19,089
Depreciation and amortization $ 25,762 $ 20,656 $ 17,893 $ 21,453 $ 21,934
Number of employees 4,875 5,095 4,930 4,640 4,200
Weighted average shares used in computing:
Basic earnings (loss) per share 26,010 25,371 24,928 24,637 24,981
Diluted earnings (loss) per share 26,795 25,683 25,582 24,637 25,140
(1) Income from operations for the year ended June 30, 2004 reflects
$10.8 million in restructuring charges recorded in the quarter ended
March 31, 2004, consisting of $3.9 million for severance expense
associated with the elimination of 157 managerial and staff
positions, $5.6 million related to seven newly-abandoned leased
facilities, and $1.3 million related to changes in assumptions for
leased facilities, which were abandoned in June 2001. See note 7 to
the consolidated financial statements included in Item 8 of this
annual report for further detail.
(2) Income from operations for the year ended June 30, 2003 reflects
$9.4 million in facilities-related restructuring charges related to
changes in assumptions for leased facilities, which were previously
abandoned in June 2001. The changes in assumptions were caused by
the deterioration in the commercial real estate market. See Note 7
to the consolidated financial statements included in Item 8 of this
annual report for further detail.
(3) Loss from operations for the year ended June 30, 2001, includes a
restructuring benefit of $0.7 million. This consisted of a $1.5
million reduction in previously accrued restructuring charges due to
changes in estimates related to the third quarter 2000
restructuring, offset by $0.8 million for exiting a business
location in the U.S. Also in the year ended June 30, 2001, the
Company recorded restructuring charges of $7.2 million. These
charges included $3.1 million of employee severance and related
costs for eliminating approximately 125 managerial and staff
positions worldwide (44% in the U.S. and 56% in Europe), $3.9
million related to consolidation and abandonment of certain
facilities (40% in the U.S. and 60% in Europe), and approximately
$0.2 million primarily related to miscellaneous costs associated
with the Company's fourth quarter restructuring plan. Additionally,
the Company recorded $1.0 million in accelerated depreciation
expense due to changes in the estimated useful lives of leasehold
improvements in abandoned leased facilities, $0.9 million of
one-time asset write-offs, as well as $0.6 million in expenses
associated with discontinued services.
23
(4) Income from operations for the year ended June 30, 2000 reflects
$13.1 million related to restructuring and other charges recorded in
the quarter ended March 31, 2000, consisting primarily of severance
and lease termination costs and $1.0 million related to accelerated
depreciation expense due to changes in the estimated useful lives of
leasehold improvements on abandoned leased facilities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a leading bio/pharmaceutical services company, providing a broad
range of expertise in clinical research, medical marketing, consulting and
informatics and advanced technology products and services to the worldwide
pharmaceutical, biotechnology, and medical device industries. The Company's
primary objective is to provide solutions for managing the bio/pharmaceutical
product lifecycle with the goal of reducing the time, risk and cost associated
with the development and commercialization of new therapies. Since its founding
in 1983, PAREXEL has developed significant expertise in processes and
technologies supporting this strategy. The Company's product and service
offerings include: clinical trials management, data management, biostatistical
analysis, medical marketing, clinical pharmacology, patient recruitment,
regulatory and medical consulting, health policy and reimbursement, performance
improvement, industry training and publishing, medical imaging services, IVRS,
CTMS, web-based portals, systems integration, patient diary application, and
other drug development consulting services. The Company believes that its
comprehensive services, depth of therapeutic area expertise, global footprint
and related access to patients, and sophisticated information technology, along
with its experience in global drug development and product launch services,
represent key competitive strengths.
The Company is managed through four business segments, namely, CRS, PCG, MMS and
Perceptive.
CRS constitutes the Company's core business and includes clinical trials
management and biostatistics and data management, as well as related medical
advisory and investigator site services.
PCG provides technical expertise in such disciplines as clinical pharmacology,
regulatory affairs, industry training, and management consulting. PCG
consultants identify alternatives and propose solutions to address clients'
product development, registration, and commercialization issues.
MMS provides a full spectrum of market development, product development, and
targeted communications services in support of product launch. MMS also provides
health policy consulting and strategic reimbursement services.
Perceptive provides information technology solutions designed to improve
clients' product development processes. Perceptive offers a portfolio of
services that include medical imaging services, IVRS, CTMS, web-based portals,
systems integration, and patient diary applications. Perceptive is a
majority-owned subsidiary of the Company. As of June 30, 2004, the Company owned
approximately 97.9% of the outstanding shares of common stock of Perceptive.
Effective July 1, 2004, the Company moved the Clinical Pharmacology unit of PCG
into the CRS business segment. As a result of this move, ongoing and historical
revenue and direct costs associated with this unit will be moved from PCG to
CRS. The Company is currently contemplating other changes directed at improving
the operational effectiveness of the Company.
The Company conducts a significant portion of its operations in foreign
countries. Approximately 54.8% and 49.2% of the Company's service revenue for
the fiscal years ended June 30, 2004 and 2003, respectively, were from non-U.S.
operations. Because the Company's financial statements are denominated in U.S.
dollars, changes in foreign currency exchange rates can have a significant
effect on its operating results. For the fiscal year ended June 30, 2004,
approximately 18.3% of total service revenue was denominated in British Pounds
and approximately 32.2% of total service revenue was denominated in Euros. For
the fiscal year ended June 30, 2003, approximately 18.4% of total service
revenue was denominated in British Pounds and approximately 26.7% of total
service revenue was denominated in Euros. As a result of the weakened U.S.
dollar against the British Pound and the Euro in fiscal year 2004, the Company's
revenues and the Company's costs increased in 2004 from the comparable 2003
period.
Approximately 85.0% of the Company's contracts are fixed price, with some
variable components, and range in duration from a few months to several years.
Cash flow from these contracts typically consists of a down payment required to
be paid at the time of contract execution with the balance due in installments
over the contract's duration, usually on a milestone achievement basis. Revenue
from these contracts is generally recognized as work is performed. As a result,
cash receipts do not necessarily correspond to costs incurred and revenue
recognized on contracts.
24
Generally, the Company's clients can terminate their contracts with the Company
upon thirty to sixty days' notice or can delay execution of services. Clients
may terminate or delay contracts for a variety of reasons, including, among
others: merger or potential merger related activities involving the client, the
failure of products being tested to satisfy safety requirements or efficacy
criteria, unexpected or undesired clinical results of the product, client cost
reductions as a result of budgetary limits or changing priorities, the client's
decision to forego a particular study, insufficient patient enrollment or
investigator recruitment, or production problems resulting in shortages of the
product.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company's financial condition and results of
operations are based on the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the U.S. The preparation of these financial statements requires the Company
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses, and other financial information. On an
ongoing basis, the Company evaluates its estimates and judgments. The Company
bases its estimates on historical experience and on various other factors that
it believes to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
The Company regards an accounting estimate underlying its financial statements
as a "critical accounting estimate" if the nature of the estimate or assumption
is material due to level of subjectivity and judgment involved or the
susceptibility of such matter to change and if the impact of the estimate or
assumption on financial condition or operating performance is material. The
Company believes that the following accounting policies are most critical to
aid in fully understanding and evaluating its reported financial results:
REVENUE RECOGNITION
Service revenue on fixed-price contracts is recognized as services are
performed. The Company measures progress for fixed-price contracts using the
concept of proportional performance based upon a unit based output method. This
method requires the Company to estimate total expected units, as well as, the
costs and revenue per unit. Generally, the assigned financial manager or
financial analyst reviews contract estimates on a monthly basis. Adjustments to
contract estimates are made in the periods in which the facts that require the
revisions become known. Historically, there have not been any significant
variations between contract estimates and the actual cost incurred, which were
not recovered from clients. In the event that future estimates are materially
incorrect, they could materially impact the Company's consolidated results of
operations and financial position.
BILLED ACCOUNTS RECEIVABLE, UNBILLED ACCOUNTS RECEIVABLE AND DEFERRED REVENUE
Billed accounts receivable represent amounts for which invoices have been sent
to clients. Unbilled accounts receivable represent amounts recognized as revenue
for which invoices have not yet been sent to clients. Deferred revenue
represents amounts billed or payments received for which revenue has not yet
been earned. The Company maintains an allowance for doubtful accounts based on
historic collectability and specific identification of potential problem
accounts. In the event the Company is unable to collect portions of its
outstanding billed or unbilled receivables, there may be a material impact to
the Company's consolidated results of operations and financial position.
INCOME TAXES
The Company's global provision for corporate income taxes is calculated using
the tax accounting rules established by SFAS No. 109. Income tax expense is
based on the distribution of profit before tax amongst the various taxing
jurisdictions in which the Company operates, adjusted as required by the tax
laws of each taxing jurisdiction. Changes in the distribution of profits and
losses between taxing jurisdictions may have a significant impact on the
Company's effective tax rate. The provision is a combination of current-year tax
liability and future tax liability/benefit that results from differences between
book and taxable income that will reverse in future periods. Deferred tax assets
and liabilities for these future tax effects are established on the Company's
balance sheet. A valuation allowance is established if it is more likely than
not that future tax benefits will not be realized. Monthly interim tax provision
calculations are prepared during the year. Differences between these interim
estimates and the final results for the year could materially impact the
Company's effective tax rate and its consolidated results of operations and
financial position.
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GOODWILL
Goodwill represents the excess of the cost of an acquired business over the fair
value of the related net assets at the date of acquisition. Under SFAS No. 142,
"Goodwill and Other Intangible Assets", goodwill is subject to annual impairment
testing or more frequent testing if an event occurs or circumstances change that
would more likely than not reduce the carrying va