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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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 0-27570
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1640186
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3151 Seventeenth Street Extension
Wilmington, North Carolina 28412
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (910) 251-0081
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 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 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $448,370,794 as of March 10, 1997, based upon the closing price
of the Common Stock on that date on the NASDAQ National Market System. Shares of
Common Stock held by each executive officer and director and by each person who
owns 10% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
may not be conclusive for other purposes.
The number of shares outstanding of the registrant's class of Common Stock, par
value $0.10 per share, was 22,185,842 as of March 10, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders (certain parts as indicated herein Part III).
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PART I
Statements in this Annual Report on Form 10-K that are not descriptions
of historical facts are forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those set forth herein and in
the Company's other SEC filings, and including, in particular, risks relating to
government regulation, dependence on certain industries, fixed price nature of
contracts, dependence on personnel, management of growth and competition.
ITEM 1. BUSINESS.
Company Overview
Pharmaceutical Product Development, Inc. ("PPD" or "the Company")
provides a broad range of research and consulting services in the life and
environmental sciences. The Company's life sciences subsidiaries include PPD
Pharmaco, Inc. and Clinix International Inc. PPD Pharmaco is a leading contract
research organization ("CRO") providing integrated product development services
on a global basis to complement the research and development activities of
companies in the pharmaceutical and biotechnology industries. Through its
environmental sciences subsidiary, APBI Environmental Sciences Group, Inc.,
operating under the trade name ENVIRON, the Company provides assessment and
management of chemical and environmental health risk.
In September 1996, a wholly-owned subsidiary of the Company was merged
with and into Applied Bioscience International Inc. ("APBI") pursuant to which
APBI became a wholly-owned subsidiary of the Company. Subsequent to the merger,
the Company believes it is the third largest CRO in the world. The Company's CRO
operations (formerly doing business as Pharmaceutical Product Development, Inc.,
or PPD) and APBI's CRO business (formerly doing business as Pharmaco
International) have been integrated and now operate under the trade name PPD
Pharmaco.
Life Sciences Group
The Company's Life Sciences Group provides services through PPD
Pharmaco, Inc. and its wholly-owned European, South American and South African
subsidiaries (collectively "PPD Pharmaco"), and through Clinix International
Inc. ("Clinix"), which currently operates through one division using the trade
name Chicago Center for Clinical Research ("CCCR").
PPD Pharmaco offers its clients high quality, value-added services
designed to reduce drug development time. Reduced development time allows the
client to get its products into the market faster and to maximize the period of
marketing exclusivity and the economic return for such products. In addition,
PPD Pharmaco's integrated services offer its clients a variable cost alternative
to the fixed costs associated with internal drug development. PPD Pharmaco's
professional CRO services include Phase I clinical testing, laboratory services,
Phase II-IV clinical trial management, clinical data management and
biostatistical analysis, treatment Investigational New Drug Applications,
medical writing and regulatory services, and healthcare economics and outcomes
research. The Company believes that it is one of a few CROs in the world capable
of providing such a broad range of clinical development services.
Clinix was established in 1995 as a wholly-owned subsidiary of APBI. In
August 1995, Clinix acquired the business and substantially all of the assets of
CCCR, a nationally recognized organization which conducts clinical trials in the
pharmaceutical and food and nutrition industries. The Company believes the
acquisition of CCCR is of strategic importance in enhancing and expanding the
range of clinical development services offered.
In addition to the acquisition of APBI, the Company furthered its
expansion outside of the U.S. in 1996 through the acquisition of Trilife
Gesellschaft Fur Medizinische Entwicklung Verwaltungs GmbH ("Trilife") in
Germany, Medisys S.L. ("Medisys") in Spain and Q&Q Suporte A Pesquisa Clinica
Ltda. ("Q&Q") in Brazil. The consideration for Trilife consisted of
approximately $567,000 paid at closing. In addition, the Company may pay up to
an additional $135,000 as additional purchase price, dependent upon the
performance of Trilife for a certain period after the acquisition. The
consideration for Medisys consisted of $400,000 paid at closing, plus an
additional $300,000 due on each of the first and second anniversaries of the
acquisition. The consideration for Q&Q consisted of $500,000 paid at closing,
plus an additional $100,000 due on each of the first three anniversaries of the
acquisition. In 1996, the Company also acquired Data Acquisition and Research
(DAR) Limited ("DAR"), located in Scotland, which allowed it to expand its
biostatistics and data analysis capabilities in Europe. The consideration for
DAR consisted of cash paid at closing of $992,000, plus an additional $348,000
to be paid in 10 installments between June 1997 and December 2001. Subsequent to
year end, the
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Company acquired Belmont Research, Inc. ("Belmont") in a transaction to be
accounted for as a pooling of interests. Belmont provides software development
and system integration services to the pharmaceutical industry. The
consideration for Belmont consisted of 502,384 shares of the Company's common
stock plus the issuance of approximately 115,000 options to acquire shares of
the Company's common stock.
In November 1995, APBI sold its toxicology laboratories, located in New
Jersey and Suffolk, England, to Huntingdon International Holdings plc
("Huntingdon"). The Company received as consideration net cash proceeds of $32.5
million and Huntingdon's Phase I clinical center located in Leicester, England,
at an agreed-upon value of $4.5 million.
Environmental Sciences Group
ENVIRON. The Company's Environmental Sciences Group provides services
through APBI Environmental Sciences Group, Inc., operating under the trade name
ENVIRON. ENVIRON is a multidisciplinary environmental and health sciences
consulting firm that provides a broad range of services relating to the presence
of hazardous substances in the environment, in drugs and medical devices, in
consumer products and in the workplace. Services provided by ENVIRON are
concentrated in the assessment and management of chemical risk and are
characterized by engagements supporting private sector clients with complex,
potentially high-liability concerns.
For the first time, the Company expanded its environmental services
business outside the U.S. with the acquisition of Environmental Assessment Group
Limited ("EAG"), located in the United Kingdom, in September 1996. The
consideration for EAG consisted of $1.9 million cash, a note for approximately
$350,000 and the potential to earn up to an additional $500,000, depending upon
the profits of EAG during the two years after the acquisition. Subsequent to
year end, the Company furthered its expansion in its Environmental Sciences
Group through the acquisition of Technical Assessment Systems, Inc. ("TAS") in
January 1997. The consideration for TAS consisted of cash of $490,000, a note
for $300,000 and the potential to pay an additional amount depending upon TAS'
profitability for a certain period after the acquisition.
Industry Overview
Life Sciences Group
The CRO industry provides independent product development services to
the pharmaceutical and biotechnology industries. In general, CROs derive
substantially all of their revenue from the research and development
expenditures of pharmaceutical and biotechnology companies. The CRO industry has
evolved from providing limited clinical services in the 1970s to a full-service
industry today that encompasses the clinical research process (including
pre-clinical evaluations), study design, clinical trial management, data
collection and biostatistical analysis and product registration support. All of
these services are provided in accordance with applicable government regulations
covering clinical trials and the drug approval process in the jurisdictions
where the services are provided, including the regulations of the Food and Drug
Administration ("FDA") in the United States and the European Medicines
Evaluation Agency ("EMEA").
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the pharmaceutical and biotechnology
industries. Implementation of government healthcare reform may adversely affect
research and development expenditures by pharmaceutical and biotechnology
companies which could decrease the business opportunities available to the
Company. The Company is unable to predict the likelihood of such or similar
legislation being enacted into law or the effects such legislation would have on
the Company.
As a general matter, the clinical CRO industry is not capital intensive
and the financial costs of entry into the industry are relatively low. The CRO
industry is highly fragmented, with several hundred small, limited-service
providers, several medium-sized CROs and a few full-services CROs with
international capabilities. Although there are few barriers to entry for small,
limited-service providers, the Company believes that there are significant
barriers to becoming a full-service CRO with international capabilities. Some of
these barriers include the cost and experience necessary to develop broad
therapeutic expertise, the ability to manage large, complex clinical trials, the
experience to prepare regulatory submissions and the infrastructure and
experience to respond to the international needs of clients.
Environmental Sciences Group
The environmental industry has long been dependent upon governmental
programs and regulations developed in response to concerns regarding the safety
of chemicals in the air, water, food, consumer products and land. Historically,
much of the growth experienced by environmental firms has come from assisting
private sector clients respond to the regulatory systems that have been put into
place at both the federal and state levels. In addition, litigation support on
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behalf of private sector clients involved in disputes with government agencies
or other private parties has been a significant source of market opportunity and
revenue.
For the next several years, the Company believes that the environmental
industry will find continued, but more limited, opportunities to grow.
Opportunities to provide litigation support are expected to increase. However,
the extent to which new or existing regulations provide a growing base of
business will depend largely on how the differences between the views of the
current and new Congressional Class of 1997 and the President are resolved. In
addition, after many years of dealing with problems created in the past, general
industry, especially the manufacturing, industrial and chemical concerns, is now
able to turn its attention to current operations and prevention of future
environmental issues. The industry's proactive approach will create new and
expanding opportunities for the environmental industry. For example, leaders in
industry are already developing programs to incorporate safety, health and
environmental considerations into their product and process design. A growing
area for the environmental industry to provide services is in assisting
companies to incorporate environmental and public health concerns into plans for
effective corporate strategic growth.
The Company believes that international opportunities for environmental
industry growth will continue to expand as the world moves toward a global
economy. Companies seeking to enter the world economy will need assistance in
developing environmental management systems and in monitoring these programs for
compliance with international standards. In addition, as world markets become
more developed, opportunities will increase for the environmental industry to
assist private firms in merger and acquisition planning and in general
evaluation and management of environmental and public health risks. The Company
believes that its acquisition of EAG will allow it to better pursue these
opportunities.
The Drug Development Process
Before a new drug is marketed, the drug must undergo extensive testing
and regulatory review in order to determine that it is safe and effective. The
development process consists of two stages: pre-clinical and clinical. The first
stage is the pre-clinical research, in which the new drug is tested in vitro
(test tube) and in animals, generally over a one-to three-year period, in order
to determine the basic biological activity and safety of the drug. The Company
does not provide animal-based services in this stage of development. If the drug
is perceived to be safe for human testing, the drug then undergoes a series of
clinical tests in humans. During the clinical stage, one of the most
time-consuming and expensive parts of the drug development process, the drug
undergoes a series of tests in humans, including healthy volunteers and patients
with the targeted disease or condition.
Prior to commencing human clinical trials in the United States, the
sponsor must file an Investigational New Drug ("IND") application with the FDA.
In order to receive IND status, the sponsor of the new drug must provide
available manufacturing data, pre-clinical data, information about any use of
the drug in humans in other countries or in the United States for other purposes
and a detailed plan for the conduct of the proposed clinical trials. The design
of these trials, also referred to as the study protocols, is essential to the
success of the drug development effort, because the protocols must correctly
anticipate the nature of the data to be generated and results that the FDA will
require before approving the drug. In the absence of any FDA comments within 30
days after the IND filing, human clinical trials may begin.
Although there is no statutory definition of the structure or design of
clinical trials, human trials usually start on a small scale to assess safety
and then expand to larger trials to test efficacy. These trials are usually
grouped into the following three phases, with multiple trials generally
conducted within each phase:
- Phase I. Phase I trials involve testing the drug on a limited
number of healthy individuals, typically 20 to 80 persons, to
determine the drug's basic safety data relating to tolerance,
absorption, metabolism and excretion as well as other
pharmacological indications and actions. This phase lasts an
average of six months to one year.
- Phase II. Phase II trials involve testing a small number of
volunteer patients, typically 100 to 200 persons who suffer
from the targeted disease or condition, to determine the
drug's effectiveness and dose response relationship. This
phase lasts an average of one to two years.
- Phase III. Phase III trials involve testing large numbers of
patients, typically several hundred to several thousand
persons, to verify efficacy on a large scale, as well as
long-term safety. These trials involve numerous sites and
generally last two to three years.
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After the successful completion of all three clinical phases, the
sponsor of a new drug in the United States submits a New Drug Application
("NDA") to the FDA requesting that the product be approved for marketing. The
NDA is a comprehensive, multi-volume filing that includes, among other things,
the results of all pre-clinical and clinical studies, information about the
drug's composition and the sponsor's plans for producing, packaging and
labeling the drug. In addition, while the FDA does not use price as a criterion
for approving a new drug, advisory panels of scientists that help the FDA
evaluate new types of therapies have started taking cost into consideration.
The FDA's review of an NDA can last from a few months, for drugs related to
life-threatening circumstances, to many years, with the average review lasting
two and one-half years. Drugs that successfully complete this review may be
marketed in the United States, subject to the conditions imposed by the FDA.
As a condition to its approval of a drug, the FDA may require that the
sponsor conduct additional clinical trials following receipt of NDA approval to
monitor long-term risks and benefits, study different dosage levels or evaluate
different safety and efficacy parameters in target patient populations. In
recent years, the FDA has increased its reliance on these trials, known as Phase
IV trials, which allow new drugs that show early promise to reach patients
without the delay associated with the conventional review process. Phase IV
trials usually involve thousands of patients.
Regulatory Environment
The market for the services offered by both the Company's CRO
operations and ENVIRON has developed as a result of significant laws and
regulations governing the development and testing of certain drugs and hazardous
substances and the impact of hazardous substances on the environment.
Many countries require safety testing prior to obtaining governmental
approval to market various substances, including pharmaceutical products,
industrial chemicals and agrochemicals. The most significant laws and
regulations concern the safety of pharmaceutical products. The results of
clinical tests conducted upon pharmaceutical products must be submitted to
appropriate government agencies, such as the FDA in the U.S., the EMEA and
national regulatory agencies in Europe and the Ministry of Health and Welfare in
Japan, as part of the relevant pre-market approval process in individual
countries.
Manufacturers of industrial chemicals and agrochemicals must also
comply with toxicological testing requirements in connection with the pre-market
approval process. In recent years, heightened concern over the presence of
potentially toxic substances in the environment has focused attention on the
need to evaluate the effects of existing and new chemical substances. As a
result, regulations have been enacted in many jurisdictions expanding the
regulatory process for industrial chemical and agrochemical products, including
the Toxic Substances Control Act ("TSCA") and the Federal Insecticide, Fungicide
& Rodenticide Act in the United States ("FIFRA"), and the council Directive
91/414/EEC in Europe.
The management and remediation of hazardous substances in the
environment are also subject to extensive federal legislation in the U.S.,
including the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA", commonly known as the "Superfund" legislation) and the
Superfund Amendment and Reauthorization Act of 1986 ("SARA"), which address
problems involving the remediation of past waste disposal practices; the
Resource Conservation and Recovery Act of 1976 ("RCRA") and the Hazardous Solid
Waste Amendments of 1984, which regulate the management of newly created wastes;
the Safe Drinking Water Act of 1974; the Clean Water Act; the Occupational
Safety and Health Act ("OSHA") and the 1990 Clean Air Act Amendments. In
addition, state authorities have enacted significant environmental legislation,
including California's Safe Drinking Water and Toxic Enforcement Act of 1986 and
New Jersey's Industrial Site Recovery Act.
Trends Affecting the CRO Industry
In 1996, worldwide expenditures on research and development by
pharmaceutical and biotechnology companies are estimated to have been $30
billion, of which the Company estimates $10-15 billion was spent on drug
development activities of the type offered by the CRO industry. The Company
believes that approximately $2.7 billion of such spending was outsourced to
CROs.
The Company believes that the outsourcing of drug development
activities by pharmaceutical and biotechnology companies has been increasing and
will continue to increase for the following reasons:
Cost Containment Pressures
Market forces and governmental initiatives have placed significant
pressure on pharmaceutical and biotechnology companies to reduce drug prices.
Pressures on profit margins have arisen from increased competition as a result
of patent expiration, market acceptance of generic drugs and governmental and
private efforts to reduce healthcare
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costs. In addition, private managed care organizations are beginning to limit
the selection of drugs from which affiliated physicians may prescribe, thereby
further increasing competition among pharmaceutical and biotechnology companies.
The Company believes that the pharmaceutical industry is responding to these
pressures by downsizing operations, decentralizing the internal research and
development process and converting the fixed costs of maintaining a research and
development infrastructure to variable costs by outsourcing drug development
activities to CROs. The downsizing of research and development activities also
creates demand for CROs as internal development bottlenecks arise when a large
number of compounds emerge from the research process and need to be pushed
through the development pipeline. In addition, increased pressure to
differentiate products and to generate support for product pricing serves as the
foundation for growth in the area of healthcare economics, both with respect to
drugs under development and to products already on the market.
Revenue Enhancement Through Faster Drug Development
Pharmaceutical and biotechnology companies face increased pressure to
bring innovative, patent-protected medicines to market in the shortest possible
time, while following good science practices and adhering to government
regulations. Pharmaceutical and biotechnology companies are attempting to
increase the speed of new product development, and thereby maximize the period
of marketing exclusivity and economic returns for their products, by outsourcing
development activities to CROs. The Company believes that CROs, by providing
specialized development services, are often able to perform the needed services
with a higher level of expertise or specialization, and more quickly, than a
pharmaceutical or biotechnology company could perform such services internally.
In addition, some pharmaceutical and biotechnology companies are beginning to
contract with large full-service CROs to conduct all phases of clinical trials
for new product programs lasting several years, rather than separately
contracting specific phases of drug development to several different CROs, an
approach which the Company believes may result in shorter overall development
times.
Biotechnology Industry Growth
The United States biotechnology industry has grown rapidly over the
last ten years and is developing significant numbers of new drug candidates that
will require regulatory approval. Many of these new drug candidates are now
moving into clinical development and many biotechnology companies do not have
the necessary staff, expertise or financial resources to conduct clinical trials
on their own. Accordingly, many of these companies have chosen to outsource the
product development process rather than expend significant time and resources to
develop an internal clinical development capability. Further, PPD Pharmaco's
experience suggests that biotechnology companies are increasingly turning to
CROs for their sophisticated regulatory expertise to provide assistance in the
generation of the ideal development plan. Moreover, the biotechnology industry
is expanding into and within Europe, providing growth opportunities for CROs
with international capabilities.
Need for International Support
Pharmaceutical and biotechnology companies are attempting simultaneous
filings of registration packages in several major jurisdictions rather than
following the past practice of sequential filings. The studies to support such
registration packages may include a combination of multinational and domestic
trials. Pharmaceutical and biotechnology companies may turn to CROs for
assistance with such trials, as well as collecting, analyzing, integrating and
reporting the data. The Company believes that CROs with an international
presence and management experience in the simultaneous filing of multiple
applications may benefit from these trends.
Consolidation in the CRO Industry
As a result of competitive pressures, the CRO industry is
consolidating. Mergers and acquisitions, including the Company's merger with
APBI, have resulted in the emergence of several large, full-service CROs that
have the capital, technical and financial resources to conduct all phases of
clinical trials on behalf of pharmaceutical and biotechnology companies. As
pharmaceutical and biotechnology companies increasingly outsource development,
they may turn to larger CROs that provide a broad range of clinical services,
while at the same time they may also limit the number of CROs they choose to
provide such services. The Company believes that this trend will further
concentrate market share among larger CROs with a track record of speed,
flexibility, responsiveness and overall development experience and expertise.
Company Strategy
The Company's fundamental strategy is to distinguish its services on
the basis of superior performance. The Company strives to deliver to its clients
efficient and innovative services that accelerate the rate of new product
development. The Company intends to expand the depth and breadth of its services
by (i) capitalizing on its managerial
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and operational strengths, (ii) focusing on hiring and training its staff, (iii)
focusing on its strategic marketing initiatives, (iv) developing its services in
healthcare economics and communications consulting, (v) pursuing strategic
acquisitions, (vi) expanding geographically and (vii) pursuing opportunities
provided by technological advances.
Management and Operational Strength
The Company is guided by senior management who have spent much of their
careers as development experts within major pharmaceutical companies and who
have a record of success before the United States FDA and the EMEA in Europe.
PPD Pharmaco concentrates on its core operational strengths in all phases of
clinical studies and other critical path studies such as treatment
Investigational New Drug Applications. Timely performance is based on parallel
drug development processes and leveraging the knowledge and experience of
management and investigators. Basic medical, scientific and regulatory services
continue to be integrated with, and streamlined through, advances in various
areas of technology, all directed toward a reduction in overall development
times. PPD Pharmaco emphasizes efficiencies in each phase of clinical trials,
data acquisition, data management and analysis, report writing and report
filing, in order to reduce the time and cost of obtaining regulatory approval
for its clients' products. As a means of differentiating itself from its
competitors, PPD Pharmaco emphasizes therapeutic area specialization, in
particular in the areas of virology/AIDS/infectious diseases,
gastroenterology/metabolic diseases, cardiovascular diseases, critical care,
pulmonary/allergy, central nervous systems, dermatology, food and nutrition,
oncology, rheumatology and women's health.
Hiring and Training
The Company believes that its success is based on the quality and
dedication of its employees. The Company strives to hire the best available
people in terms of ability, attitude, experience and fit with the Company's
performance philosophy. New employees are trained extensively, and the Company
believes that it is an industry leader in the thoroughness of its training
programs. In addition, employees are encouraged to continually upgrade and
broaden their skills through internal and external training. As new technologies
develop, employees are equipped with and trained to make use of such
technological innovations.
Strategic Marketing
PPD Pharmaco focuses its marketing and sales efforts with an emphasis
on high volume clients with needs in the service segments and therapeutic areas
in which the Company specializes. Direct salespeople concentrate on a group of
assigned clients, marketing across service segments. PPD Pharmaco's business
development personnel consult with potential clients early in the bidding stage
in order to determine their needs. The business development personnel and PPD
Pharmaco's project managers then invest significant time to determine the
optimal way to design and carry out the potential client's proposal. PPD
Pharmaco's recommendations to the potential client with respect to study design
and implementation are an integral part of PPD Pharmaco's bids and an important
aspect of the integrated services that PPD Pharmaco offers to its clients. PPD
Pharmaco believes that its extensive preliminary efforts relating to the
evaluation of a potential client's proposed clinical protocol and implementation
plan allows accelerated commencement of the clinical trial after the contract
has been awarded to PPD Pharmaco.
ENVIRON conducts separate marketing activities at each of its office
locations, and believes that its regional presence enables its professionals to
gain a greater knowledge of regional environmental issues, a better
understanding of regional laws and regulations and a more constructive working
relationship with regional governmental agency personnel. Because of the
technical nature of ENVIRON's business, most marketing activities at each of
ENVIRON's operating divisions are conducted by technical and scientific
personnel, with initial contacts frequently followed up by personal visits to
clients' offices.
The Company sponsors and encourages the participation by its personnel
in a variety of scientific endeavors, including the presentation of papers by
its professional staff at meetings of professional societies and major
conferences and the publication of scientific articles in respected journals.
The Company believes such activities enhance its reputation for professional
excellence. The Company's core marketing efforts are complemented by advertising
in trade journals and by exhibits at scientific conferences.
Healthcare Economics and Outcomes Research
The healthcare market in the United States is evolving from a
fragmented system of individual providers with little incentive to control costs
to a managed care system in which large organizations attempt to lower the cost
of healthcare through a number of means. The Company believes that such market
dynamics support the need for healthcare economics analysis and outcomes
research. PPD Pharmaco offers programs integrating such analysis in clinical
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development programs to support regulatory approval, as well as pricing,
marketing and reimbursement strategies. While PPD Pharmaco's current focus in
this area is on its traditional client base within the pharmaceutical and
biotechnology industries, both with respect to drugs under development and
products already on the market, PPD Pharmaco expects to extend such services to
payers and providers as well.
Acquisitions
The Company will continue to actively seek strategic acquisitions, both
within and outside current CRO service segments. Acquisition candidates must
provide opportunities for innovation, synergy and growth. The Company's criteria
for acquisitions may include complementary client lists, ability to increase
market share within and across clients, complementary therapeutic area and
service segment strengths, strategic geographic capabilities or particular
process expertise.
Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations and services of the acquired companies, the
expenses incurred in connection with the acquisition and subsequent assimilation
of operations and products, the diversion of management's attention from other
business concerns and the potential loss of key employees of the acquired
company. If the Company consummates any acquisitions in the future, there can be
no assurance that such acquisitions will be successfully integrated into the
Company's operations.
The Company's merger with APBI allowed the Company to become one of the
few full-service, multi-national CROs, capable of monitoring clinical trials
involving hundreds of investigative sites, conducted simultaneously in North
America and Europe.
Geographical Expansion
In addition to the merger with APBI, the Company's recent acquisitions
in Germany, Spain, Brazil, Scotland and England reflect its commitment to
strategic geographic expansion. Outside the United States, PPD Pharmaco
currently has operations in many locations in Europe, along with Australia,
Brazil, Canada and South Africa. PPD Pharmaco has identified certain strategic
areas of promise where CROs currently have limited or no presence and intends to
selectively pursue these and other strategic opportunities internationally.
With its recent acquisition of EAG in the United Kingdom, the Company's
Environmental Sciences Group has expanded outside the U.S. for the first time.
ENVIRON will continue to pursue other strategic opportunities, both within the
U.S. and internationally.
Technological Advances
PPD Pharmaco believes that optimizing the use of information technology
in conjunction with drug development experience can accelerate the drug
development process and yield valuable marketing information. PPD Pharmaco has
experience in the use of information technology in clinical trial management and
offers or is developing a wide range of technology-based services, including
initial market research and study design, remote monitoring and data
acquisition, ongoing study management, outcomes research, patient and disease
management and the filing of Computer Assisted New Drug Applications and Product
License Applications. The Company believes that the use of third-party systems
and selected internally developed software allows it to offer its clients the
best available technology for expediting the drug development process.
Services Offered
Life Sciences Group
PPD Pharmaco has designed its various services to be flexible and
integrated in order to assist its clients in optimizing their research and
development spending through the clinical stages of the drug development
process. PPD Pharmaco provides Phase I clinical testing, laboratory services,
Phase II-IV clinical trial management, clinical data management and
biostatistical analysis, treatment Investigational New Drug Applications,
medical writing and regulatory services and healthcare economics and outcomes
research for its clients. PPD Pharmaco's services can be provided individually
or as an integrated package of services to meet its client's needs. Through the
CCCR division of Clinix, the Life Sciences Group participates in and conducts
clinical trials in the pharmaceutical and food and nutrition industries. During
1996, $152.3 million, or 77.0%, of the Company's net revenue was generated by
the Life Sciences Group.
Phase I Clinical Testing
After an Investigational New Drug Application has been filed with the
FDA, human testing of a new drug can begin. The drug is typically first
administered to healthy volunteers to determine the drug's basic safety data
based on
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tolerance, absorption, metabolism, excretion and other pharmacological actions.
Later, special studies are conducted in volunteers and special patient
populations to further define the drug's overall pharmacological profile. PPD
Pharmaco is the largest Phase I provider, with clinical testing services
conducted in its 200-bed unit in Austin, Texas, its 66-bed unit located near
Research Triangle Park, North Carolina and its 52-bed unit in Leicester,
England. The Phase I's professional nursing staff administers general Phase I
safety tests, special population studies and bioavailability and bioequivalence
testing. Special population studies may involve the elderly, women or patients
with specific diagnoses such as renal failure or asymptomatic HIV disease.
The Company's clinical research studies 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, including the Phase I centers in Austin, Texas; Raleigh, North
Carolina and Leicester, England; which have provided a substantial pool of
potential subjects for research studies. The Company's business could be
adversely affected if the Company were unable to attract suitable and willing
volunteers.
Bioavailability and bioequivalence testing, generally conducted each
time the dosage, form or formulation of the drug is modified, involves
administration of the test compounds and obtaining biological fluids
sequentially over time to measure absorption, distribution, metabolization and
excretion of the drug.
PPD Pharmaco attempts to manage its Phase I services to maximize
scheduling flexibility and efficiency. The services also can be smoothly and
quickly integrated with PPD Pharmaco's other service segments such as
laboratory, pharmacokinetic and biostatistical services. PPD Pharmaco is one of
the few full-service CROs offering Phase I clinical testing in the United States
and Europe.
Laboratory Services
PPD Pharmaco provides bioanalytical and product analysis services
through its laboratories in Richmond, Virginia, and Madison, Wisconsin.
Biological fluid samples from clinical studies, such as those conducted by PPD
Pharmaco's Phase I units, must be transported to a laboratory such as PPD
Pharmaco's to be analyzed for drug and metabolite content and concentration. PPD
Pharmaco currently has approximately 275 non-proprietary validated assays
available for its clients' use in conducting laboratory analyses, thereby
qualifying PPD Pharmaco for a wide range of assignments. PPD Pharmaco's
laboratories also process fluid samples for pre-clinical studies.
Product analysis services include dissolution and stability studies
which are necessary to characterize a dosage form's release patterns and
stability under various environmental conditions in the intended package for
marketing. These studies must be carried out over the commercial life of
products, beginning at the clinical trial stage. New formulations require the
same set of studies as the original dosage form. Comprehensive measurement
services include Gas Chromatography/Mass Spectrometry, Liquid
Chromatography/Mass Spectrometry, High Performance Liquid Chromatography, Gas
Chromatography, Radioimmunoassay and Enzyme Linked Immunosorbent Assay. Support
services include HIV positive sample handling, sample/data management for
kinetic studies from multi-center trials and sample/data archiving.
PPD Pharmaco is one of a few full-service CROs able to offer its
clients the advantages of both bioanalytical and product analysis and Phase I
clinical testing.
Phase II-IV Clinical Trial Management
The core of PPD Pharmaco's business is a comprehensive package of
services for the conduct of Phase II-IV clinical trials, which, in concert with
its other analytical and Phase I testing services, allows PPD Pharmaco to offer
its clients an integrated package of clinical management services. The Company
has significant clinical trials experience in the areas of:
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AIDS Primary disease and treatment/prophylaxis of
opportunistic infections
Analgesia Acute and chronic pain modeling
Biotechnology Growth hormone, multiple sclerosis, sepsis,
wound healing
Cardiovascular disease Congestive heart failure, hypertension,
global survival trials
Central nervous system Schizophrenia, depression, anxiety,
disease obsessive-compulsive disorders, panic
disorders
Critical care Acute Respiratory Distress Syndrome,
disseminated fungal diseases, sepsis
Dermatology Wound healing, acne, hair loss
Food and Nutrition Fat substitutes, beta carotene,
oligofructose, fibers
Gastroenterology Duodenal ulcer, gastric ulcer,
gastro-esophageal reflux disease, H. pylori,
nonsteroidal anti-inflammatory drug-induced
ulcers
Infectious disease Acute and critical
Metabolic disease Diabetes, hormone replacement therapy
Oncology Ovarian, lung cancer
Pulmonary/Allergy Asthma, allergic rhinitis, community
acquired pneumonia
Rheumatology Rheumatoid and osteoarthritis
Virology AIDS, herpes simplex, chronic hepatitis B,
chronic hepatitis C
Women's health Hormone replacement, oral contraception
Clients' needs are served by conducting clinical trials through a
dedicated project team. A project manager supervises all aspects of the conduct
of the clinical trial, while PPD Pharmaco's clinical research associates are in
the field, monitoring the trial at the various investigational sites where it is
being conducted. Within this project-oriented structure, PPD Pharmaco can manage
every aspect of the clinical trials in Phases II through IV of the drug
development process, including protocol development, case report form ("CRF")
design, feasibility studies, investigator selection, recruitment and training,
site initiation and monitoring, accelerated patient enrollment, development of
training materials for investigators and training of clients' staff.
PPD Pharmaco monitors its clinical trials in strict adherence to
government regulations. PPD Pharmaco has adopted standard operating procedures
which are intended to satisfy regulatory requirements and serve as a tool for
controlling and enhancing the quality of its clinical trials. PPD Pharmaco's
procedures are written in accordance with the regulations and guidelines
appropriate to the region where they will be used, thus ensuring compliance with
Good Clinical Practice ("GCP") requirements. In North America, FDA regulations
and guidelines serve as a basis for PPD Pharmaco's procedures. The European
Community has agreed to conduct all studies in accordance with the International
Conference on Harmonization ("ICH")'s recommendations which set global clinical
study standards based on GCP. ICH guidelines have superseded the European
Community Note for Guidance, "Good Clinical Practice for Trials on Medicinal
Products in the European Community." The FDA is expected to adopt the ICH's
standards. Data generated during clinical trials are compiled, analyzed,
interpreted and submitted in report form to the FDA or other relevant regulatory
agencies for purposes of obtaining regulatory approval.
PPD Pharmaco provides its clients with one or more of the following
core Phase II-IV clinical trials management services using parallel processing
to accelerate the development process:
Study Design. PPD Pharmaco serves its clients in the critical
area of study design by applying its wide development experience in the
preparation of the study protocols and CRFs. The study protocol defines
the medical issues to be examined in evaluating the safety and efficacy
of the drug under study, the number of patients required to produce
statistically valid results, the clinical tests to be performed in the
study, the time period over which the study will be conducted, the
frequency and dosage of drug administration and the exact inclusion and
exclusion criteria to be met for the patients enrolled in the study.
The success of the study depends not only on the ability of the
protocol to correctly predict requirements of regulatory authorities,
but also on the ability of the protocol to fit coherently with the
other aspects of the development process and the ultimate marketing
strategy for the drug. This includes healthcare economic components to
support rational pricing and positioning.
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Once the study protocol has been finalized, CRFs must be
developed to record the desired information to be obtained from the
clinical studies. The various other disciplines involved in the drug
development process, including data management, must work closely with
the clinical trial management project team to assure that the right
data are acquired in a form which is most efficient for subsequent
data entry, management and reporting. Proper CRF design is critical
to allowing investigators and field monitors to conduct their
respective jobs quickly, accurately and effectively.
Investigator Recruitment. During the clinical trials,
administration of the drug to patients is supervised by physicians,
also referred to as investigators, at hospitals, clinics or other
locations, also referred to as investigational sites. The Life Sciences
Group solicits the participation in the study of investigators who
contract directly with either PPD Pharmaco, CCCR or its client. The
successful rapid identification and recruitment of investigators who
have the appropriate expertise and an adequate base of patients who
satisfy the requirements of the study protocol are critical to the
timely completion of the trial.
PPD Pharmaco maintains and constantly expands and refines its
computerized database of approximately 16,000 investigators.
Information regarding PPD Pharmaco's experience with these
investigators, including factors relevant to rapid study initiation,
are contained in the database. This information allows project managers
to choose the appropriate investigators for a particular study in an
efficient manner.
Study Monitoring. PPD Pharmaco provides study monitoring
services which include investigational site initiation, patient
enrollment assistance and data collection through subsequent site
visits. These visits also serve to assure that data are gathered
according to GCP, according to the requirements of the client and
applicable regulatory authorities and as specified in the study
protocol.
Project management and field monitoring services are the
operational heart of Phase II and III clinical studies. In most
instances a project will meet, exceed or fail to meet expected
timeliness for completion based on meeting deadlines during the first
few months of study initiation. Therefore, PPD Pharmaco focuses at an
early stage on identifying and quickly completing the critical
rate-limiting steps of screening and selecting investigators,
processing pre-study regulatory paperwork, obtaining investigative
review board approvals and scheduling investigational site initiation
visits. Drugs under study cannot be released to the investigational
sites, and thus the study cannot begin, until these activities have
been completed.
Following study initiation, PPD Pharmaco utilizes all
appropriate methods of accelerating patient recruitment. This may
involve PPD Pharmaco's integrated systems of telephone recruitment,
telefaxing and media advertising. As with Phase I clinical trials,
patient recruitment is critical to the Company's success.
Patient data must be obtained from the field efficiently,
quickly and accurately to speed subsequent data entry, management and
analysis and report writing. PPD Pharmaco acquires data via visits by
its field monitors to investigative sites and by electronic means.
Field monitors are equipped with laptop computers for the purpose of
data collection.
PPD Pharmaco has monitored many clinical trials, including a
number of very large studies. For example, PPD Pharmaco is in its
second five-year contract with the National Institutes of Health
("NIH") to monitor investigational sites for AIDS treatment related
trials sponsored by the NIH. This project involves approximately 200
investigational sites and total enrollment of approximately 58,000
patients.
Clinical Data Management and Biostatistical Analysis
PPD Pharmaco's data management and biostatistical analysis operations
are managed by professionals with extensive pharmaceutical and biotechnology
industry experience in the design and construction of local and multinational
clinical trial databases. PPD Pharmaco provides clients with assistance in such
areas as study design, sample size determination, CRF design and production, fax
based monitoring, database design and construction, New Drug Application
preparation and production, including electronic submission to the FDA, known as
Computer Assisted New Drug Applications and FDA presentations and defense.
Data management and biostatistical analysis services are offered as
discrete products and as part of an integrated drug development program. During
the design of development plans and protocols, PPD Pharmaco offers consulting
services relating to, and the determination of, sample size parameters for
patient enrollment, development of data analysis plans and randomization
schemes. During the conduct of clinical trials, PPD Pharmaco assists in the
rapid acquisition of clean and accurate data. Following completion of the
clinical trials, PPD Pharmaco assists in report preparation and FDA
presentations. PPD Pharmaco's biostatisticians may participate with clients in
meetings with the FDA to present and
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defend biostatistical analyses prepared by PPD Pharmaco. PPD Pharmaco has
expertise in electronically capturing and integrating geographically diverse
data. PPD Pharmaco employs SAS, Clintrace, Oracle and BBN Clintrial software, as
specified by clients, combined with customized programs developed by PPD
Pharmaco.
Drug development time is reduced by performing data management and
biostatistical analysis activities in parallel with other drug development
activities where possible. For example, data management personnel work with
clinical program managers and field monitors to continuously enter data, program
output tables and listings and validate the database so that there is a rapid
progression from data lock, to database freeze, to final tables and listing
preparation and to biostatistical analyses. Similarly, there is a close working
relationship with medical writing and regulatory services personnel.
Treatment Investigational New Drug Application
A treatment Investigational New Drug ("IND") Application is an
application by a pharmaceutical or biotechnology sponsor and the associated
procedure to allow patients to receive treatment with an investigational new
drug for a serious or immediate life-threatening disease, such as AIDS or
multiple sclerosis, for which no comparable or satisfactory therapy is
available. This treatment is provided during the clinical trial phase of
development, but outside the controlled clinical trial. For promising new drugs,
the treatment IND application has the advantage of getting the new drug into an
expanded patient base early, as well as allowing earlier publicity about the
potential success of the drug. PPD Pharmaco's involvement in a treatment IND
application may range from monitoring the treatment to an integrated service
project involving full investigational site management, data management and
biostatistical analysis and report writing.
Medical Writing and Regulatory Services
PPD Pharmaco provides report writing and regulatory services to its
clients in a manner designed to complement parallel development processes to
reduce overall development time. Strategic plan and protocol design services
provided at the beginning of a project, combined with clear, concise data
presentation, analysis and discussion at the completion of the project assist
the client in obtaining regulatory approvals. These services are fully
integrated with PPD Pharmaco's other services to assure maximum speed consistent
with good service and regulatory compliance.
PPD Pharmaco maintains a large internal compliance and quality
assurance department to provide in-process monitoring of GCP performance. PPD
Pharmaco also offers these services to clients to assess their own trials,
whether conducted by the client or another CRO.
Healthcare Economics and Outcomes Research
PPD Pharmaco is developing a number of services in the healthcare
economics area to be offered to pharmaceutical and biotechnology companies as
well as managed care payers and providers. These services include prospective
and retrospective clinicoeconomics analysis, quality of life and drug therapy
evaluation, large sample market research, clinical hypothesis testing for
product marketing, enhanced patient, investigator and managed care plan
recruiting, managed care consulting, patient therapeutic support systems and
disease management consulting.
Environmental Sciences Group
APBI Environmental Sciences Group currently provides health and
environmental sciences and engineering consulting services through its ENVIRON
division. During 1996, the Environmental Sciences Group generated 23.0% of the
Company's net revenue.
ENVIRON is a leading provider of multidisciplinary consulting services
in the chemical risk assessment and risk management field. ENVIRON provides
services primarily to private sector clients facing potentially high liability
as a result of the presence of hazardous substances in the environment, in drugs
and medical devices, in consumer products and in the workplace. ENVIRON's
engagements typically involve providing creative, multidisciplinary solutions to
complex problems.
ENVIRON provides services primarily in two areas: (1) health sciences
and (2) environmental sciences and engineering. ENVIRON's health sciences staff
includes professionals trained in toxicology, epidemiology, chemistry,
biochemistry, microbiology, industrial hygiene, risk assessment and allied
fields. Its environmental sciences and engineering staff includes professionals
trained in hydrogeology; geology; environmental chemistry; environmental,
chemical and civil engineering and ecotoxicology, ecology and natural resources.
Approximately 43% of ENVIRON's employees have advanced degrees at the master's
level or above. Of those with advanced degrees, approximately 35% have attained
their Ph.D.
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ENVIRON offers services in the following areas:
Chemical Risk Assessment and Risk Management
ENVIRON assesses the potential risk of injury to human health and the
environment associated with industrial chemicals during all stages of
manufacturing use and disposal. It also provides assistance in determining
exposures and the potential health impact of chemicals present in food, consumer
products, pharmaceuticals, medical devices and the workplace.
The chemical risk assessment services provided by ENVIRON typically
involve two components. ENVIRON analyzes toxicological and biological data to
assess the inherent hazard or toxicological properties of industrial chemicals
and other substances. In addition, ENVIRON assesses the physical-chemical
properties of industrial chemicals and other substances in the media in which
they are found to evaluate the fate and transport of such substances in the
environment and the potential for exposure. The assessments performed by ENVIRON
are generally used to evaluate the potential for public health risk and
ecological damage. ENVIRON also assists clients in developing workplace
standards for industrial chemicals and prepares assessments of risks resulting
from occupational exposure. In addition, ENVIRON conducts audits to determine
compliance with specific laws regulating chemical releases into air, water and
other environmental media and to obtain permits for manufacturing or processing
facilities.
ENVIRON provides such services in a variety of project areas, including
complex hazardous waste sites, current and former industrial manufacturing
facilities, leaking underground storage tanks, municipal and hazardous waste
disposal facilities, incinerators, abandoned mine sites, pesticide-contaminated
agricultural land and large-scale spills and releases. In performing
assessments, ENVIRON also analyzes the potential for exposure at the project
site and the surrounding environment.
Environmental Liability Assessments
ENVIRON performs environmental liability assessments of industrial
properties, commercial and residential developments, undeveloped parcels of land
and hazardous waste sites to identify practices that could result in significant
exposure or liability. These services include environmental audits to determine
compliance with current and anticipated federal, state and local regulations and
to estimate the present value of environmental liabilities. Such assessments
have been performed across a broad range of industries, including iron and
steel; pulp and paper; mining, oil and gas; textiles, lumber and wood; plastics,
leather and electronics.
Site Investigation and Remediation
ENVIRON assists clients in determining the nature and extent of
contamination at industrial and hazardous waste sites through the collection and
analysis of soil, water and sediment samples. ENVIRON's services in this area
also include the evaluation and analysis of the cost-effectiveness of various
alternative remediation strategies designed to protect human health and the
environment. ENVIRON also designs the selected remedial strategy, hires
subcontractors as appropriate and provides oversight of the implementation of
the strategy. Such services are often provided in connection with the
negotiation and resolution of disputes that relate to the apportionment of
liability arising under various federal, state and local statutes, or private
contracts.
Litigation Support
ENVIRON provides expert technical assistance and strategic support to
clients who are or who anticipate becoming involved in litigation relating to
environmental, occupational and product safety issues. These services cut across
substantially all of its practice areas. Services provided in this area include
reviewing environmental data and waste handling records, allocating liability
among multiple site owners, developing information on state-of-the-art waste
disposal practices, determining the timing of contaminant release events,
evaluating sampling programs and remedial measures developed for contaminated
sites, reviewing toxicological and epidemiological data associated with the use
of consumer products and establishing relationships between exposure and disease
or injury. ENVIRON's senior staff members have extensive experience providing
expert testimony in the areas of toxicology, risk assessment and contaminant
releases.
Product Safety Regulation
ENVIRON provides strategic scientific support and regulatory affairs
guidance in the pre-market approval process for and subsequent use of various
products, including drugs and pharmaceuticals, medical devices, food additives,
consumer products, agricultural chemicals and biotechnology products.
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Air Quality
ENVIRON offers a full spectrum of air quality services, including: air
emissions and dispersion modeling from industrial facilities and hazardous waste
sites, including siting studies and air toxics impact evaluations; air pollution
compliance assistance, including compliance auditing, regulatory analysis and
obtaining local and state permits, as well as federal Title V operating permits;
ambient and indoor monitoring program design and implementation; process
engineering; emergency release modeling and off-site consequence analysis;
analysis of the potential regional air quality impacts of alternative control
strategies, including advanced vehicles, alternative and reformulated fuels and
other mobile and stationary source control measures and leak detection and
repair services, including monitoring equipment recommendations, software/data
base management system design, program management consulting and field services.
Other Environmental Services
ENVIRON also provides a variety of other services that complement its
primary service areas. Such services include facility siting and permitting,
water quality assessments, waste management, emergency planning and development
and integration of environmental management systems. Although such other
services have historically represented a relatively small percentage of
ENVIRON's net revenue, the Company believes that it will have opportunities to
expand its business in these areas in the future.
Clients and Marketing
The Company's Life Sciences Group provides development services to
pharmaceutical and biotechnology companies. For the year ended December 31,
1996, approximately 83% of the Company's Life Sciences Group's net revenue was
attributable to clinical services and 17% to laboratory services. For the year
ended December 31, 1996, net revenue of the Life Sciences Group was derived
approximately as follows:
Percentage of
Source Net Revenue
------ -----------
Pharmaceutical 80.8%
Biotechnology 11.2
Government (NIH) 1.4
Other 6.6
The Company has provided services to 24 of the top 25 pharmaceutical
companies in the world as ranked by 1995 research and development spending.
The Company provides services to the pharmaceutical and biotechnology
industries and its revenue is highly dependent on expenditures on research and
development by clients in these industries. Accordingly, the Company's
operations could be materially and adversely affected by general economic
downturns in these industries, the current trend toward consolidation in these
industries or other factors resulting in a decrease in research and development
expenditures. Furthermore, the Company has benefited to date from the increasing
tendency of pharmaceutical and biotechnology companies to outsource large
clinical research projects. Should this trend be reversed, the revenue of the
Company could be materially and adversely affected. The Company believes that
concentration of business among certain large customers is not uncommon in the
CRO industry. The Company has experienced such concentration in the past and may
experience such concentration in the future. However, during 1995 and 1996, no
single client contributed more than 10% of the Company's total net revenue. In
1996, the Company's ten largest clients accounted for approximately 33% of the
Company's total net revenue and approximately 44% of the Company's total 1996
net revenue was derived from clients located outside the U.S., in particular in
Europe and Japan.
ENVIRON's clients come from a wide variety of industrial companies. A
significant portion of these engagements is initiated by lawyers whose clients
are engaged in merger, acquisition or real estate transactions, or who become
involved in or anticipate becoming involved in litigation. ENVIRON also provides
services to investment banks, lenders, insurance firms, trade associations, and
to a lesser extent, state and local government agencies.
Contractual Arrangements
Many of PPD Pharmaco's contracts are fixed price, with some variable
components, and range in duration from a few months to several years. In other
contracts, PPD Pharmaco is paid based on applying agreed upon hourly rates to
hours worked. Generally, for multi-year contracts involving clinical trials, a
portion of the contract fee is paid at the time the trial is initiated, with the
balance of the contract fee payable in installments over the trial duration. The
installment payments are typically performance-based, relating payment to
previously negotiated events, such as investigator recruitment, patient
enrollment or delivery of databases. For contracts which are fixed price, PPD
Pharmaco bears the risk
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of cost overruns, but benefits if costs are lower than anticipated.
Under-pricing of contracts or significant cost overruns could have a material
adverse effect on the Company. Most of PPD Pharmaco's contracts for the
provision of its services, including contracts with government agencies, are
terminable by the client upon 30- to 90-days' notice under certain
circumstances, including the client's unilateral decision to terminate the
development of the product or end the study. Contracts may be terminated for a
variety of reasons, including the failure of a product to satisfy safety
requirements, unexpected or undesired results of the product, the client's
decision to forego a particular study or insufficient patient enrollment or
investigator recruitment. Although the contracts typically require payment of
certain fees for winding down the study and, in some cases, a termination fee,
the loss of a large contract or the loss of multiple contracts could materially
and adversely affect the Company.
Backlog
Backlog consists of anticipated net revenue from letters of intent and
contracts that have not been completed. Net revenue is defined as professional
fee income (gross revenue) less reimbursed costs consisting principally of
investigator fees and travel. Once contracted work begins, net revenue is
recognized over the life of the contract. In certain cases, PPD Pharmaco begins
work for a client before a contract is signed. Backlog does not include
anticipated net revenue for which PPD Pharmaco has begun work but for which PPD
Pharmaco does not have a letter of intent or signed contract, or fee for service
contracts with no specified amount. The order backlog of the Life Sciences Group
for the services described above under written agreements, including signed
letters of intent, was $156.5 million in net revenue at December 31, 1996,
compared to $142.5 million in net revenue at December 31, 1995.
PPD Pharmaco believes that its backlog as of any date is not
necessarily a meaningful predicator of future results, because backlog can be
affected by a number of factors, including variable size and duration of
contracts, many of which are performed over several years. Additionally,
contracts generally are subject to early termination by the client or delay by
regulatory authorities for many reasons, including unexpected test results.
Moreover, the scope of a contract can change during the course of a study. There
can be no assurances that PPD Pharmaco will be able to fully realize all of its
backlog as net revenue.
ENVIRON's net revenue is not represented by an order backlog, as
ENVIRON's engagements are generally of an indefinite duration in which services
are performed on a time-and-expenses basis. Clients are billed at fixed hourly
rates for each staff member involved in an assignment, rather than on a project
basis.
Competition
The CRO industry consists of several hundred small, limited-service
providers, several medium-sized CROs and a few full-service global drug
development companies. The CRO industry is consolidating and, in recent years,
several large, full-service competitors have emerged. This trend of industry
consolidation will likely result in greater competition among the larger CROs
for clients and acquisition candidates. PPD Pharmaco's competitors include
ClinTrials Research Inc., Covance, Inc. (formerly Corning Pharmaceutical
Services, Inc.), IBAH, Inc., Parexel International Corporation and Quintiles
Transnational Corporation. PPD Pharmaco also competes against certain
medium-sized companies. Additionally, PPD Pharmaco competes against the in-house
research and development departments of pharmaceutical and biotechnology
companies, as well as universities and teaching hospitals. In addition, there
are few barriers to entry for small, limited-service entities considering
entering the CRO industry. These entities may compete against larger CROs for
clients. Furthermore, the CRO industry has attracted the attention of the
investment community, which could lead to increased competition by increasing
the availability of financial resources for CROs. Increased competition may lead
to price and other forms of competition that may adversely affect PPD Pharmaco's
operating results.
CROs compete on the basis of several things, including reputation for
on-time quality performance, expertise and experience in specific therapeutic
areas, scope of service offerings, strengths in various geographic markets,
technological expertise and systems, ability to acquire, process, analyze and
report data in a time-saving accurate manner, ability to manage large-scale
clinical trials both domestically and internationally, expertise and experience
in healthcare economics and communication. The Company believes that it competes
favorably in these areas.
CCCR is among the largest private clinical investigational sites,
capable of conducting over 70 trials simultaneously. CCCR's major competitors
are other large investigator sites, including reSearch for Health Inc. and
Collaborative Clinical Research, Inc.
ENVIRON competes with many firms, ranging from small local firms to
large national firms. ENVIRON competes principally on the basis of reputation,
scientific and technical expertise, experience and qualifications of
professional staff, quality of services, ability to handle complex problems and
its risk assessment orientation. A large percentage of ENVIRON's business is
generated by existing or former clients. ENVIRON believes that pricing is
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generally not the primary factor in attracting the types of engagements on which
it focuses, which typically involve providing creative, multidisciplinary
solutions and significant value-added services.
Potential Liability and Insurance
Clinical research services involve the testing of new drugs on human
volunteers pursuant to a study protocol. Such testing exposes the Company to the
risk of liability for personal injury or death to patients resulting from, among
other things, possible unforeseen adverse side effects or improper
administration of the new drug. Many of these patients are already seriously ill
and are at risk of further illness or death. The Company attempts to manage its
risk of liability for personal injury or death to patients from administration
of products under study through measures such as contractual indemnification
provisions with clients and through insurance maintained by clients. The
contractual indemnifications generally do not protect the Company against
certain of its own actions, such as negligence. The contractual arrangements are
subject to negotiation with clients and the terms and scope of such
indemnification vary from client to client and from trial to trial. Although
most of PPD Pharmaco's clients are large, well capitalized companies, the
financial performance of these indemnities is not secured. Therefore, the
Company bears the risk that the indemnifying party may not have the financial
ability to fulfill its indemnification obligations. The Company could be
materially and adversely affected if it were required to pay damages or incur
defense costs in connection with a claim that is beyond the scope of an
indemnity provision or beyond the scope or level of insurance coverage
maintained by the client or where the indemnifying party does not fulfill its
indemnification obligations. Until September 25, 1996, the Company did not
maintain liability insurance with respect to these risks. The Company currently
maintains liability insurance coverage of up to $5.0 million per claim, with an
annual aggregate policy limit of $5.0 million. However, there can be no
assurance that liability claims will not exceed the limits of such coverage or
that such insurance will continue to be available on commercially reasonable
terms or at all. Consequently, a product liability claim or other claim with
respect to uninsured liabilities or in excess of insured liabilities could have
a material adverse effect on the Company.
Government Regulation
The laboratory services performed by PPD Pharmaco are subject to various
regulatory requirements designed to ensure the quality and integrity of the
testing process. The industry standards for conducting laboratory testing are
embodied in the regulations for Good Laboratory Practice ("GLP") and Good
Manufacturing Practice ("GMP"). GLP and GMP have been adopted by the FDA, by the
Department of Health in the United Kingdom and by similar regulatory authorities
in other parts of the world. GLP and GMP stipulate requirements for facilities,
equipment and professional staff. The regulations require standardization
procedures for studies, for recording and reporting data and for retaining
appropriate records. To help ensure compliance, PPD Pharmaco has established
quality assurance controls at its laboratory facilities which monitor ongoing
compliance with GLP and GMP regulations by auditing test data and conducting
regular inspections of testing procedures.
The industry standard for the conduct of clinical research and development
studies is embodied in the ICH regulations for GCP. Although GCP has not been
formally adopted by the FDA nor, with certain exceptions, by similar regulatory
authorities in other countries, certain provisions of GCP have been included in
FDA regulations. As a matter of practice, the FDA and many other regulatory
authorities require that test results submitted to such authorities be based on
studies conducted in accordance with GCP. These regulations include (i)
complying with FDA regulations governing the selection of qualified
investigators, (ii) obtaining specific written commitments from the
investigators, (iii) verifying that patient informed consent is obtained, (iv)
monitoring the validity and accuracy of data, (v) verifying drug or device
accountability and (vi) instructing investigators to maintain records and
reports. PPD Pharmaco must also maintain reports for each study for specified
periods for inspection by the study sponsor and the FDA during audits.
Noncompliance with GCP can result in the disqualification of data collected
during the clinical trial.
PPD Pharmaco's standard operating procedures are written in accordance with
regulations and guidelines appropriate to the region where they will be used.
Within Europe, all work is carried out in accordance with the ICH's guidelines
which superseded the European Community Note for Guidance "Good Clinical
Practice for Trials on Medicinal Products in the European Community." In
addition, FDA regulations and guidelines serve as a basis for PPD Pharmaco's
North American standard operating procedures. From an international perspective
when applicable, PPD Pharmaco has implemented common standard operating
procedures across regions to assure consistency whenever it is feasible and
appropriate to do so.
PPD Pharmaco's business depends on the continued strict government
regulation of the drug development process, especially in the United States.
Changes in regulation, including a relaxation in regulatory requirements or the
introduction of simplified drug approval procedures, could materially and
adversely affect the demand for the services offered by the Company.
15
17
The failure on the part of PPD Pharmaco to comply with applicable
regulations could result in the termination of ongoing research or the
disqualification of data for submission to regulatory authorities. Furthermore,
the issuance of a notice of finding by the FDA to either PPD Pharmaco or its
clients based upon a material violation by the Company of GCP, GLP or GMP
requirements could materially and adversely affect the Company.
The consulting services provided by ENVIRON are not significantly
regulated by any governmental authority at this time. However, ENVIRON's
environmental risk management services derive in large part from the
significant federal and state environmental legislation that has been enacted
in the past decade. Recently, the environmental industry has experienced a
slowdown in the enforcement of such government regulation at the federal and
state level based upon a number of factors, including available funding.
Although the Company believes that the environmental industry will find
continued but more limited opportunities to grow if the trend towards decreased
actual enforcement of such regulations continues, the business of ENVIRON could
be adversely affected.
Intellectual Property
PPD Pharmaco has developed certain computer software and technically
derived procedures intended to maximize the quality and efficiency of its
services. Although the Company does not believe that its intellectual property
rights are as important to its results of operations as are such factors as the
technical expertise, knowledge, ability and experience of the Company's
professionals, the Company believes that its technological capabilities provide
significant benefits to its clients.
Employees
At December 31, 1996, the Company had approximately 2,264 full-time
equivalent employees, of whom 1,869 were employed in the Life Sciences Group,
375 were employed in the Environmental Sciences Group and the remainder were in
the Company's corporate headquarters. Of the Company's employees, approximately
99 hold Ph.D., M.D., Pharm.D. or D.V.M. degrees and approximately 250 hold other
masters or postgraduate degrees. None of the Company's employees is represented
by a labor union or is subject to a collective bargaining agreement. The Company
has never had a work stoppage and believes that its relations with its employees
are good.
The Company's performance depends on its ability to attract and retain
qualified professional, scientific and technical staff. The level of competition
among employers for such skilled personnel is high. The Company believes that
its employee benefit plans enhance employee morale, professional commitment and
work productivity and provide an incentive for employees to remain with the
Company. The Company, like many of its competitors, also relies on a number of
key executives. The loss of services of any of the Company's key executives
could have a material and adverse effect on the Company. While the Company has
not experienced any significant problems in attracting or retaining qualified
staff, there can be no assurance that the Company will be able to avoid such
problems in the future.
Foreign and Domestic Operations
Set forth in Note 18 of Notes to Consolidated Financial Statements for
each of fiscal years 1996, 1995 and 1994 are the Company's revenue, operating
profit or loss and assets attributable to each geographic area in which the
Company operates.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Wilmington,
North Carolina. In March 1996, the Company entered into a new 10-year
build-to-suit lease for approximately 70,000 square feet in Wilmington, which it
occupied in November 1996.
The Company owns and operates a 52-bed Phase I facility in Leicester,
England. The facility, which was acquired by the Company in November 1995, is a
modern, state-of-the-art building. The Company also owns a building in Kerswell,
Scotland, which it acquired when it purchased DAR in December 1996. All other
facilities are leased. The Company's operations occupy approximately 635,000
square feet of space worldwide, including over 70,000 square feet of space
located outside of the U.S. The Company believes that its facilities have
adequate capacity to handle significant additional business growth. The
locations of the Company's operating facilities as of December 31, 1996, were as
follows:
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18
Life Sciences Group
- -------------------
Wilmington, North Carolina Kerswell, Scotland
Austin, Texas (1) Sao Paolo, Brazil
Raleigh, North Carolina Brussels, Belgium
Triangle Township, North Carolina Prague, Czech Republic
Richmond, Virginia Paris, France
Madison, Wisconsin Karlsruhe, Germany
Chicago, Illinois Nuremberg, Germany
Columbia, Maryland Warsaw, Poland
Cambridge, England Johannesburg, South Africa
Chelmsford, England Barcelona, Spain
Leicester, England Madrid, Spain
Southampton, England Stockholm, Sweden
Environmental Sciences Group
- ----------------------------
Arlington, Virginia (2) Houston, Texas
Princeton, New Jersey London, England
Emeryville, California Liverpool, England
Irvine, California Edinburgh, Scotland
Novato, California
- --------------
(1) In November 1995, the Company entered into a sale-leaseback transaction
related to its Austin, Texas, facilities. See Note 10 of Notes to
Consolidated Financial Statements.
(2) ENVIRON has an option to lease additional space in this building in 1998.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of business, the Company is a party to various
claims and legal proceedings. Although the ultimate outcome of these matters is
presently not determined, management of the Company, after consultation with
legal counsel, does not believe that the resolution of these matters will have a
material effect upon the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.
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EXECUTIVE OFFICERS
The executive officers of the Company as of December 31, 1996, were as
follows:
Name Age Position
---- --- --------
Fredric N. Eshelman, Pharm.D. 48 Vice Chairman and Chief Executive Officer
Thomas D'Alonzo 53 President and Chief Operating Officer
Rudy C. Howard 39 Chief Financial Officer, Vice President of Finance, Treasurer
and Secretary
Joshua S. Baker 41 Senior Vice President, Operations, PPD Pharmaco, Inc.
Joseph H. Highland 52 Chief Executive Officer, APBI Environmental Sciences
Group, Inc.
Fred B. Davenport, Jr. 45 General Counsel
Fredric N. Eshelman, Pharm.D. has served as Chief Executive Officer and
as a director of the Company since July 1990. Dr. Eshelman founded the Company
in 1989. Prior to rejoining the Company in 1990, Dr. Eshelman served as Senior
Vice President, Development and as a director of Glaxo Inc., a subsidiary of
Glaxo Holdings plc.
Thomas D'Alonzo is President and Chief Operating Officer of the Company
and of its contract research organization subsidiary, PPD Pharmaco, Inc. Mr.
D'Alonzo served as General Counsel of Adria Laboratories, a pharmaceutical
company, from 1977 to 1983 and was employed from 1983 to 1993, in various
capacities, including as President, by Glaxo Inc., a subsidiary of Glaxo
Holdings plc. Mr. D'Alonzo was President of GenVec, Inc., a gene therapy
biotechnology company, from 1993 until his employment by the Company in October
1996.
Rudy C. Howard is Chief Financial Officer, Vice President Finance and
Treasurer of the Company. Prior to joining the Company in October 1995, Mr.
Howard worked with Coopers & Lybrand L.L.P., an accounting firm, since 1990 and
had been a Partner at Coopers & Lybrand L.L.P. since 1993.
Joshua S. Baker, Ph.D. is Senior Vice President, Operations of PPD
Pharmaco, Inc., the Company's contract research organization subsidiary. Prior
to holding this position, Dr. Baker served as Vice President, Biostatistics and
Data Management of the Company. Prior to joining the Company in May 1994, Dr.
Baker served as Director of Biostatistics of Glaxo Research Institute, the
research and development division of Glaxo Inc., a position he had held since
September 1987.
Joseph H. Highland co-founded ENVIRON in 1982. He is currently the
Chief Executive Officer of ENVIRON and has served as such since February 1992.
Dr. Highland also served as a director of APBI from 1990 to 1995. Dr. Highland,
who holds a Ph.D. in Biochemistry from the University of Minnesota's School of
Medicine, served as co-director for the Hazardous Waste Research Program at
Princeton University before joining ENVIRON.
Fred B. Davenport, Jr. is General Counsel, Vice President Legal Affairs
and Secretary of the Company. Prior to his employment by the Company in December
1996, Mr. Davenport was a Partner in the Wilmington, North Carolina law firm of
Murchison, Taylor, Kendrick and Gibson, L.L.P., which he joined in 1977. Mr.
Davenport was also a member of the faculty of the University of North Carolina
at Wilmington's Cameron School of Business Administration from 1982 to 1991.
18
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock of the Company, par value $0.10 per share (the "Common
Stock"), is traded under the symbol "PPDI" in the over-the-counter market and is
quoted on the National Market System of the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"). The following table sets forth
the high and low prices for shares of the Common Stock subsequent to the
Company's initial public offering, as reported by the National Association of
Securities Dealers, Inc.
1996
---------------------
High Low
---- ---
First Quarter (1) $37.25 $22.75
Second Quarter 47.75 33.25
Third Quarter 34.50 26.50
Fourth Quarter 27.50 14.50
- ----------
(1) From January 23, 1996, the effective date of PPD's initial public
offering
As of March 10, 1997, there were approximately 3,371 record holders
of the Company's Common Stock.
Since its conversion from an S corporation, the Company has not paid
any cash dividends on its Common Stock. The Company has no present plans to pay
cash dividends to its stockholders and, for the foreseeable future, intends to
retain all of its earnings for use in its business. The declaration of any
future dividends by the Company is within the discretion of its Board of
Directors and is dependent upon the earnings, financial condition and capital
requirements of the Company, as well as any other factors deemed relevant by the
Board of Directors.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data presented below for the year
ended December 31, 1996, have been derived from the audited consolidated
financial statements of the Company, which have been audited by Coopers &
Lybrand L.L.P., independent public accountants. The data presented below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with the Company's consolidated
financial statements and related notes thereto included elsewhere in this
Report.
On September 26, 1996, a wholly owned subsidiary of the Company was
merged with and into APBI, pursuant to which APBI became a wholly owned
subsidiary of the Company. The transaction was accounted for as a pooling of
interests. The Company's financial results for each of the years ended December
31, 1992 through December 31, 1995 have been restated to reflect the transaction
as if it had occurred at the beginning of the periods being presented. The
financial results of PPD for each of the years ended December 31, 1992 through
December 31, 1995 have been audited by Coopers & Lybrand L.L.P., independent
public accountants. The financial results of APBI for each of the years ended
December 31, 1992 through December 31, 1995 have been audited by Arthur Andersen
LLP, independent public accountants. The combination of the selected
consolidated financial data for each of the years ended December 31, 1992
through December 31, 1995, after restatement for the pooling of interests, has
been audited by Coopers & Lybrand L.L.P., independent public accountants.
The Company's consolidated financial data reflects certain of its
former Environmental Sciences Group divisions as discontinued operations. See
Note 4 of Notes to Consolidated Financial Statements.
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21
Year Ended December 31,
---------------------------------------------------------------------------------
1996 (4) 1995 (4) 1994 1993 1992 (4)
----------- ----------- ---------- ----------- -----------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenue (8) $ 197,796 $ 209,778 $ 192,105 $ 165,815 $ 162,330
--------- --------- --------- --------- ---------
Operating expenses 182,859 200,022 181,120 169,014 135,984
Loss on sale of business, special charges,
restructuring costs and merger costs 16,114 24,290 -- 9,365 7,623
--------- --------- --------- --------- ---------
198,973 224,312 181,120 178,379 143,607
--------- --------- --------- --------- ---------
Income (loss) from operations (1,177) (14,534) 10,985 (12,564) 18,723
Other income (expense), net 1,804 (2,616) (2,728) (1,183) (3,622)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before provision for income taxes 627 (17,150) 8,257 (13,747) 15,101
--------- --------- --------- ---------
Provision for income taxes 4,134
---------
Net loss (7) (3,507)
---------
Weighted average number of shares
outstanding 21,168
---------
Net loss per share $ (0.17)
---------
Pro Forma Data (1):
Income (loss) from continuing operations
before provision for income taxes (17,150) 8,257 (13,747) 15,101
Pro forma income tax expense (benefit) (14,359) 3,371 (2,001) 6,936
--------- --------- --------- ---------
Pro forma net income (loss) from
continuing operations (3)(5)(6) (2,791) 4,886 (11,746) 8,165
Discontinued operations (1,716) (12,873) (12,133) (521)
Extraordinary loss from early
extinguishment of debt (897) -- -- --
--------- --------- --------- ---------
Pro forma net income (loss) $ (5,404) $ (7,987) $ (23,879) $ 7,644
--------- --------- --------- ---------
Pro forma weighted average number of
shares outstanding (2) 18,815 18,671 18,409 18,919
--------- --------- --------- ---------
Pro forma net income (loss) per share:
Continuing $ (0.15) $ 0.26 $ (0.64) $ 0.43
Discontinued (0.09) (0.69) (0.66) (0.03)
Extraordinary (0.05) -- -- --
--------- --------- --------- ---------
Net income (loss) $ (0.29) $ (0.43) $ (1.30) $ 0.40
========= ========= ========= =========
As of December 31,
---------------------------------------------------------------------------------
1996 (4) 1995 (4) 1994 1993 1992 (3)(4)
----------- ----------- ---------- ----------- -----------
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 21,838 $ 13,565 $ 9,804 $ 14,854 $ 15,700
Marketable securities 14,210 242 203 -- --
Working capital 66,603 37,320 27,795 (565) 37,320
Total assets 181,457 142,661 202,773 195,492 198,801
Long-term debt 1,428 3,471 47,620 15,411 15,137
Long-term debt including current portion 5,649 5,672 51,170 19,943 15,888
Shareholders' equity 115,306 77,300 74,198 79,065 112,294
- ----------
(1) Following termination of its status as an S corporation prior to
completion of its initial public offering in January 1996, PPD became
subject to federal and state income taxes. The pro forma data reflect
the application of corporate income taxes to PPD's net income at the
statutory combined federal and state tax rate as if the termination of
PPD's S corporation status had occurred on January 1, 1992.
(2) Pro forma weighted average shares outstanding assumes the occurrence of
events pursuant to PPD's initial public offering and the issuance of
sufficient shares at $18.00 per share to provide net proceeds, after
aggregate offering expenses and underwriting discounts, to repay the
$5.5 million debt incurred by PPD in making the final S corporation
distribution.
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22
(3) The pro forma income from continuing operations for 1992 was affected
by (i) a charge against operating income of $7,623,000 in connection
with the restructuring of APBI's business following the acquisition of
Pharmaco, (ii) the incurrence of $4,296,000 of merger costs in
connection with the acquisition of Pharmaco, (iii) a gain of $338,000
constituting a discount for early payment of a mortgage, (iv) the
acquisition of certain assets of EDI in July 1992, which was accounted
for as a purchase transaction and (v) an increase in APBI's effective
tax rate as a result of the fact that certain merger costs incurred in
connection with the acquisition of Pharmaco were not deductible for tax
purposes.
(4) The acquisitions of Trilife, Medisys, Q&Q, DAR and EAG in 1996; Gabbay
and CCCR in 1995 and the acquisition by ETC of certain assets of
Southeastern Capital Corporation in June 1992 were accounted for as
purchase transactions.
(5) The pro forma loss from continuing operations for 1993 was affected by
(i) a charge against operating income of $9,365,000 in connection with
restructuring APBI's former toxicology services division and planned
improvements in APBI's corporate management information systems and
(ii) an increase in reserves for accounts receivable of $5,857,000.
(6) The pro forma loss from continuing operations for 1995 was affected by
(i) the sale of APBI's toxicology business which resulted in a pre-tax
loss of $19,308,000 charged against operating income, (ii) a special
charge against operating income of $4,982,000 primarily related to the
impairment of APBI's available for sale investment (see Note 1 of Notes
to Consolidated Financial Statements) and (iii) an increase in APBI's
tax benefit as a result of the reversal of certain tax liabilities
recorded in prior years for which APBI will not be liable for payment.
See Note 3 of Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(7) The net loss for 1996 was affected by the incurrence of $16,114,000 of
merger costs in connection with the acquisition of APBI. After
associated tax benefits, the impact on net income of such merger costs
was $13,568,000.
(8) Net of subcontractor costs.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Management's Discussion and Analysis that are not
descriptions of historical facts are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 reflecting
management's current view with respect to certain future events and financial
performance that are subject to risks and uncertainties. Actual results could
differ materially from those currently anticipated due to a number of factors,
including those set forth herein and in the Company's other SEC filings, and
including, in particular, risks relating to government regulation; dependence on
certain industries; fixed price nature of contracts; the commencement,
completion or cancellation of large contracts; progress of ongoing contracts;
potential liability associated with the Company's lines of business; dependence
on personnel; management of growth and competition. Since a large percentage of
the Company's operating costs are relatively fixed, variations in the timing and
progress of large contracts can materially affect results.
GENERAL
During 1996, the Company reported a net loss of $3.5 million, or $0.17
per share, compared to a pro forma net loss of $5.4 million, or $0.29 per share,
during 1995. The Company's loss in 1996 is attributable to the $16.1 million of
costs recorded that were associated with the Company's acquisition of APBI.
Excluding merger costs, the Company's net income of $10.1 million, or $0.48 per
share, was 102.6% higher than pro forma net income (before the impact of 1995
special charges and excluding the Company's former toxicology operations) last
year of $5.0 million.
In September 1996, a wholly-owned subsidiary of the Company was merged
with and into APBI in a pooling-of-interests transaction. As a result, APBI
became a wholly-owned subsidiary of the Company. Under the terms of the merger
agreement, APBI stockholders received 0.4054 of a share of the Company's Common
Stock for each APBI share, which resulted in the Company issuing 12,063,860
shares of its Common Stock in exchange for all of the outstanding shares of
Common Stock of APBI. The Company's financial results have been restated to
reflect the transaction as if it had occurred at the beginning of the periods
presented.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, amounts for
certain items in the Company's consolidated financial statements expressed as a
percentage of net revenue from continuing operations and the percentage changes
in dollar amounts of certain items compared with the prior period:
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23
PERCENTAGE OF NET REVENUE FROM CONTINUING OPERATIONS
For the Year Ended December 31,
1996 1995 1994
----------------------- ----------------------- -------------------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
(dollars in thousands)
Net revenue (4):
Life sciences $ 152,304 77.0% $ 160,495 76.5% $ 146,342 76.2%
Environmental sciences 45,492 23.0 49,283 23.5 45,763 23.8
--------- ----- --------- ----- --------- -----
197,796 100.0 209,778 100.0 192,105 100.0
Direct costs:
Life sciences 79,108 90,315 86,647
Environmental sciences 31,744 32,442 28,670
--------- --------- ---------
110,852 56.0 122,757 58.5 115,317 60.0
Selling, general, and
administrative expenses 61,571 31.1 64,014 30.5 55,428 28.9
Depreciation and amortization 10,436 5.3 13,251 6.3 10,375 5.4
Loss on sale of business -- -- 19,308 9.2 -- --
Merger costs and special charges 16,114 8.1 4,982 2.4 -- --
--------- ----- --------- ----- --------- -----
Operating income (loss) (2)(3) (1,177) (0.6) (14,534) (6.9) 10,985 5.7
--------- ----- --------- ----- --------- -----
Net loss $ (3,507) (1.8)%
--------- -----
Pro forma income (loss) from (1):
Continuing operations (2,791) (1.3) 4,886 2.5
Discontinued operations (1,716) (0.8) (12,873) (6.7)
Extraordinary loss (897) (0.4) -- --
--------- ----- --------- -----
Pro forma net loss $ (5,404) (2.6)% $ (7,987) (4.2)%
--------- ----- --------- -----
Percentage of Increase (Decrease)
For the Year Ended December 31,
-----------------------------------
1996 vs. 1995 (5) 1995 vs. 1994
----------------- -------------
Net revenue (4):
Life sciences (5.1)% 9.7%
Environmental sciences (7.7) 7.7
Direct costs:
Life sciences (12.4) 4.2
Environmental sciences (2.2) 13.2
Selling, general and administrative expenses (3.8) 15.5
Depreciation and amortization (21.2) 27.7
Operating income (loss) (6) N/A N/A
(1) Following termination of its status as an S corporation prior to
completion of its initial public offering in January 1996, PPD became
subject to federal and state income taxes. The pro forma data reflect
the application of corporate income taxes to PPD's net income at the
statutory combined federal and state tax rate as if the termination of
PPD's S corporation status had occurred on January 1, 1994.
(2) The operating loss for 1995 was affected by (i) the sale of APBI's
toxicology operations which resulted in a pre-tax loss of $19,308,000
and (ii) a special charge against operating income of $4,982,000
primarily related to the impairment of APBI's available for sale
investment. See Note 1 of Notes to Consolidated Financial Statements.
(3) The operating loss for 1996 was affected by the incurrence of
$16,114,000 of merger costs in connection with the acquisition of APBI.
(4) Net of subcontractor costs.
(5) The results from 1995 include the activity of APBI's toxicology
operations which were sold in November 1995. See Note 3 of Notes to
Consolidated Financial Statements.
(6) N/A - Change not meaningful.
22
24
Below is a comparison of 1996 and 1995 operating statements which
reflects only on-going operations and excludes 1996 merger costs and 1995
non-recurring charges.
STATEMENT OF OPERATIONS DATA
EXCLUDES APBI/PPDI MERGER COSTS IN 1996 AND
SPECIAL CHARGES, TOXICOLOGY OPERATIONS (SOLD 11/95), DISCONTINUED
OPERATIONS AND EXTRAORDINARY LOSS IN 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED PERCENTAGE CHANGE
DECEMBER 31, -----------------
1996 1995
---- ----
Net revenue:
Life sciences $152,304 $122,049 24.8%
Environmental sciences 45,492 49,283 (7.7)
-------- --------
Total net revenue 197,796 171,332 15.4
Direct costs:
Life sciences 79,108 62,839 25.9
Environmental sciences 31,744 32,442 2.1
-------- --------
Total direct costs 110,852 95,281 16.3
-------- --------
Gross margin 86,944 76,051 14.3
Selling, general and administrative expenses 61,571 56,391 9.2
Depreciation and amortization 10,436 8,768 19.0
-------- --------
Income from operations 14,937 10,892 37.1
Other income (expense), net 1,804 (2,616) N/A
-------- --------
Income before taxes 16,741 8,276 102.3
Income tax provision 6,680 3,310 101.8
-------- --------
Net income $ 10,061 $ 4,966 102.6%
======== ======== =======
Net income per share $ 0.48 $ 0.26
======== ========
Weighted average number of common shares outstanding 21,168 18,815
======== ========
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995
Net revenue decreased $12.0 million, or 5.7%, to $197.8 million in 1996
from $209.8 million last year. PPD Pharmaco's operations account for 77.0% of
the Company's net revenue for 1996. PPD Pharmaco generated net revenue of $152.3
million, down $8.2 million, or 5.1%, from last year. After elimination of the
net revenue from APBI's former toxicology operations, which were sold in
November 1995 ($38.4 million in 1995), net revenue increased 15.4% as compared
to 1995. Results of operations which exclude the results of the divested
businesses are considered the results of the Company's ongoing operations.
Net revenue for the year ended December 31, 1996, from the ongoing PPD
Pharmaco operations of $152.3 million reflects an increase of $30.2 million, or
24.8%, from 1995. The growth in ongoing PPD Pharmaco operations was
23
25
due in part to an incr