Securities and Exchange Commission

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

QUINTILES TRANSNATIONAL CORP.

(919) 998-2000

N/A

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

The number of shares of Common Stock, $.01 par value, outstanding as of September 30, 2004 was 125,000,000.

Index

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Part I. Financial Information

Item 1.

Quintiles Transnational Corp. and Subsidiaries

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

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Quintiles Transnational Corp. and Subsidiaries

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

4

Quintiles Transnational Corp. and Subsidiaries

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

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Quintiles Transnational Corp. and Subsidiaries

September 30, 2004

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2003 of Quintiles Transnational Corp. (the “Company”).

The balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements of the Company. Certain amounts in the 2003 financial statements have been reclassified to conform with the 2004 financial statement presentation.

In August 2004, the Company completed the sale of certain assets related to its Bioglan Pharmaceuticals business (“Bioglan”) as further described in Note 10. Accordingly, the operating results and balance sheet items of Bioglan have been reflected separately in the accompanying financial statements as a discontinued operation.

On September 25, 2003, the Company completed its merger transaction with Pharma Services Holding, Inc. (“Pharma Services”) pursuant to which Pharma Services Acquisition Corp. (“Acquisition Corp.”) was merged with and into the Company, with the Company continuing as the surviving corporation and an indirect wholly owned subsidiary of Pharma Services (the “Transaction” or “Pharma Services Transaction”). As a result of the Transaction, the Company’s results of operations, financial position and cash flows prior to the date of the Transaction are presented as the “Predecessor.” The financial effects of the Transaction and the Company’s results of operations, financial position and cash flows as the surviving corporation following the Transaction are presented as the “Successor.” To clarify and emphasize that the Successor Company has been presented on an entirely new basis of accounting, the Company has separated Predecessor and Successor operations with a vertical black line, where appropriate.

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Quintiles Transnational Corp. and Subsidiaries

2. Employee Stock Compensation

Pharma Services granted options to purchase 492,500 shares of its common stock to certain of the Company’s employees during the nine months ended September 30, 2004, 280,000 of which were granted during the quarter ended September 30, 2004. As of September 30, 2004, there were options to acquire 3,805,000 shares of Pharma Services common stock outstanding.

In addition, Pharma Services issued restricted common stock to certain of the Company’s employees, other than executive officers, for full recourse notes with a fixed interest rate. As of September 30, 2004, there are approximately 4.2 million shares of such restricted stock outstanding.

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” during the third quarter of 2004 utilizing the modified prospective approach as described in SFAS No. 148. Under the modified prospective approach, the Company has restated its 2004 financial statements to reflect the effect of the adoption of SFAS No. 123 as of January 1, 2004. The stock compensation expense recognized as a result of the adoption was $43,000 for each of the first and second quarters of 2004, such that the net loss as restated for the adoption of SFAS No. 123 is $15,707 and $10,128 for the first and second quarters of 2004, respectively. The results for prior years have not been restated.

Information regarding net (loss) income is required by SFAS No. 123, as amended by SFAS No. 148, and has been determined as if the Company had accounted for the stock options granted and the restricted stock issued for recourse notes by its parent company, Pharma Services, to the Company’s employees under the fair value method of SFAS No. 123 for the periods not restated (i.e., periods prior to January 1, 2004).

There were no outstanding stock options or restricted stock for the period from September 26, 2003 through September 30, 2003.

The following table illustrates the effect on net (loss) income if the Company had adopted SFAS No. 123 as amended by SFAS No. 148 the first day of the periods presented (in thousands):

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Quintiles Transnational Corp. and Subsidiaries

3. Commercial Rights and Royalties

Commercial rights and royalties related assets are classified either as commercial rights and royalties, accounts receivable – unbilled, or advances to customers in the non-current asset section of the accompanying balance sheets. As of September 30, 2004, the amounts paid to Eli Lilly and Company (“LLY”) under the Cymbalta^TM contract have been classified as a commercial rights and royalties asset as a result of Cymbalta^TM receiving the United States Food and Drug Administration (“FDA”) approval during the third quarter of 2004. Below is a summary of the commercial rights and royalties related assets (in thousands):

Below is a brief description of these agreements:

In May 1999, the Company entered into an agreement with CV Therapeutics, Inc. (“CVTX”) to commercialize Ranexa™ for angina in the United States and Canada. In July 2003, CVTX and the Company entered into a new agreement that superseded the prior agreement. Under the terms of the July 2003 agreement, all rights to Ranexa^TM reverted back to CVTX, and CVTX will owe no royalty payments to the Company. Under the July 2003 agreement, the Company received a warrant to purchase 200,000 shares of CVTX common stock at $32.93 per share during the five-year term commencing July 9, 2003. CVTX also is obligated to purchase from the Company, within six months of the approval of Ranexa^TM, services of at least $10.0 million in aggregate value or to pay the Company a lump sum amount equal to 10% of any shortfall from $10.0 million in purchased services.

In December 1999, the Company obtained the distribution rights to market four pharmaceutical products in the Philippines from a large pharmaceutical customer in exchange for providing certain commercialization services amounting to approximately $5.1 million during the two-year period ended December 31, 2001. As of September 30, 2004, the Company has capitalized 251.8 million Philippine pesos (approximately $4.5 million) related to the cost of acquiring these commercial rights and is amortizing these costs over five years. Under the terms of the agreement, the customer has the option to reacquire the rights to the four products from the Company after seven years for a price to be determined at the exercise date.

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Quintiles Transnational Corp. and Subsidiaries

In June 2001, the Company entered into an agreement with Pilot Therapeutics, Inc. (“PLTT”) to commercialize a natural therapy for asthma, AIROZIN™, in the United States and Canada. Under the terms of the agreement, the Company will provide commercialization services for AIROZIN™ and a milestone-based $6.0 million line of credit which is convertible into PLTT’s common stock, of which $4.0 million has been funded by the Company. Further, based on achieving certain milestones, the Company committed to funding 50% of sales and marketing activities for AIROZIN™ over five years with a $6.0 million limit per year. Following product launch, the agreement provides for the Company to receive royalties based on the net sales of AIROZIN™. The royalty percentage will vary to allow the Company to a