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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORT
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
(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, 2003
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: 0-24249
PDI, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2919486
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10 Mountainview Road
Upper Saddle River, NJ 07458-1937
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (201) 258-8450
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.01 par value
(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 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 in the Act.) Yes |X| No |_|
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 30, 2003 was approximately $88,875,889.
The number of shares outstanding of the registrant's common stock, $.01 par
value, as of March 1, 2004 was 14,456,735 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set
forth herein, is incorporated herein by reference from the registrant's
definitive proxy statement relating to the annual meeting of shareholders to be
held in 2004, which definitive proxy statement shall be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this Report relates.
PDI, INC.
Form 10-K Annual Report
TABLE OF CONTENTS
Page
----
PART I.................................................................................................3
Item 1. Business...................................................................................3
Item 2. Properties................................................................................19
Item 3. Legal Proceedings.........................................................................20
Item 4. Submission of Matters to a Vote of Security Holders.......................................21
PART II...............................................................................................22
Item 5. Market for our Common Equity and Related Stockholder Matters..............................22
Item 6. Selected Financial Data...................................................................22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.....24
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................41
Item 8. Financial Statements and Supplementary Data...............................................41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.....41
Item 9A. Controls and Procedures...................................................................42
PART III..............................................................................................43
Item 10. Directors and Executive Officers..........................................................43
Item 11. Executive Compensation....................................................................46
Item 12. Security Ownership of Certain Beneficial Owners and Management............................46
Item 13. Certain Relationship and Related Transactions.............................................46
Item 14. Principal Accounting Fees and Services....................................................47
PART IV...............................................................................................48
Item 15. Exhibits and Financial Statement Schedules................................................48
FORWARD LOOKING STATEMENT INFORMATION
Various statements made in this Annual Report on Form 10-K are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements. The
forward-looking statements included in this report are based on current
expectations that involve numerous risks and uncertainties. Our plans and
objectives are based, in part, on assumptions involving judgments about, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe that
our assumptions underlying the forward-looking statements are reasonable, any of
these assumptions could prove inaccurate and, therefore, we cannot assure you
that the forward-looking statements included in this report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included in this report, the inclusion of these
statements should not be interpreted by anyone that our objectives and plans
will be achieved. Factors that could cause actual results to differ materially
and adversely from those expressed or implied by forward-looking statements
include, but are not limited to, the factors, risks and uncertainties (i)
identified or discussed herein, (ii) set forth under the headings "Business" and
"Risk Factors" in Part I, Item 1; "Legal Proceedings" in Part I, Item 3; and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II, Item 7, of this Annual Report on Form 10-K, and (iii)
set forth in the Company's periodic reports on Forms 10-Q and 8-K as filed with
the Securities and Exchange Commission since January 1, 2003. We undertake no
obligation to revise or update publicly any forward-looking statements for any
reason.
2
PART 1
ITEM 1. BUSINESS
Summary of Business
We are a healthcare sales and marketing company serving the
biopharmaceutical and medical devices and diagnostics (MD&D) industries.
We create and execute sales and marketing campaigns intended to improve the
profitability of pharmaceutical and MD&D products. We do this by partnering with
companies who own the intellectual property rights to these products and
recognize our ability to commercialize these products and maximize their sales
performance. We have a variety of agreement types that we enter into with our
partner companies. In these agreements, we have leveraged our experience in:
o sales,
o brand management and product marketing,
o marketing research,
o medical education,
o medical affairs, and
o managed markets and to a limited extent, trade relations
to help our partners meet strategic and financial objectives and to provide
incremental value for product sales.
We have assembled our commercial capabilities through acquisition and
internal expansion and these capabilities can be applied on a stand-alone or
integrated basis. This flexibility enables us to provide a wide range of
marketing and promotional options that can benefit many different products
throughout the various stages of their life cycles. Our capabilities enable us
to take, where appropriate, total sales, marketing and distribution
responsibility for pharmaceutical and MD&D products.
It is important for us to form strong partnerships with companies within
the biopharmaceutical and MD&D industries. We assign an account executive to
each partner to ensure the partnership is working to the mutual benefit of both
parties. Our focus is to achieve operational excellence that delivers the
desired product sales results.
Reporting Segments and Operating Groups
We operate under three reporting segments: PDI Sales and Marketing Services
Group, PDI Pharmaceutical Products Group and PDI Medical Devices and Diagnostics
Group.
PDI Sales and Marketing Services Group (SMSG)
We are among the leaders in outsourced pharmaceutical sales and marketing
services in the U.S. We have designed and implemented programs for many of the
major pharmaceutical companies serving the U.S. market. Our clients include
AstraZeneca, GlaxoSmithKline, Novartis and Aventis as well as small
pharmaceutical companies and more than 20 other specialty pharmaceutical
companies. We have relationships built on consistent performance and program
results.
Our clients engage us on a contractual basis to design and implement
promotional programs for both prescription and over-the-counter products. The
programs in the PDI Sales and Marketing Services Group are designed to increase
product sales and are tailored to meet the specific needs of the product and the
client. These services are provided predominantly on a fee for service basis.
Occasionally, there is an opportunity for us to earn incentives if we meet or
exceed predetermined performance targets.
This segment, which includes contract sales, marketing research and medical
education and communications, represents 82.9% of consolidated revenue for 2003.
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o Contract Sales
Product detailing involves a representative meeting face-to-face with
targeted physicians and other healthcare decision makers to provide a technical
review of the product being promoted. Contract sales teams can be deployed on
either a dedicated or shared basis.
A dedicated contract sales team works exclusively on behalf of one client
and often carries the business cards of the client. The sales team is customized
to meet the specifications of our client with respect to representative profile,
physician targeting, product training, incentive compensation plans, integration
with clients' in-house sales forces, call reporting platform and data
integration. Without adding permanent personnel, the client gets a high quality,
industry-standard sales team comparable to its internal sales force.
Our shared sales teams sell multiple brands from different pharmaceutical
manufacturers. Through them, we make a face-to-face selling resource available
to those clients that want an alternative to a dedicated team. The PDI Shared
Sales teams are leading providers of these detailing programs in the U.S. Since
costs are shared among various companies, these programs may be less expensive
for the client than programs involving a dedicated sales force. With a shared
sales team, the client still gets targeted coverage of its physician audience
within the representatives' geographic territories.
o Marketing Research
Employing leading edge, in some instances proprietary, research
methodologies, we provide qualitative and quantitative marketing research to
pharmaceutical companies with respect to healthcare providers, patients and
managed care customers in the U.S. and globally. We offer a full range of
pharmaceutical marketing research services which includes studies to identify
the most impactful business strategy, profile, positioning, message, execution,
implementation, and post implementation for a product. Correctly implemented,
our marketing research model improves the knowledge clients obtain about how
physicians and other healthcare professionals will likely react to products.
We utilize a systematic approach to pharmaceutical marketing research.
Recognizing that every marketing need, and therefore every marketing research
solution, is unique, we have developed our marketing model to help identify the
work that needs to be done in order to identify critical paths to marketing
goals. At each step of the marketing model we can offer proven research
techniques, proprietary methodologies and customized study designs to address
specific product needs.
In addition to conducting marketing research, we have trained several
thousand industry professionals at our public seminars. Our professional
development seminars focus on key marketing processes and issues.
o Medical Education and Communications
Our medical education and communications group provides medical education
and promotional communications to the biopharmaceutical and MD&D industries.
Using an expert-driven, customized approach, we provide our clients with
integrated advocacy development, accredited continuing medical education (CME),
promotions, publication services and interactive sales initiatives to generate
incremental value for products.
We create custom designed programs focusing on optimizing the informed use
of our clients' products. Our services are executed through a customized,
integrated plan that can be leveraged across the product's entire life cycle. We
can meet a wide range of objectives, including advocacy during pre-launch,
communicating disease state awareness, supporting a product launch, helping an
under-performing brand, fending off new competition, and expanding market
leadership.
PDI Pharmaceutical Products Group (PPG)
The goal of our pharmaceutical products group is to source
biopharmaceutical products in the U.S. through licensing, copromotion,
acquisition or integrated commercialization services arrangements. This segment
represents
4
13.3% of consolidated revenue for 2003.
Licensing, copromotion and acquisition arrangements contain a greater level
of risk when compared to fee for service agreements, however, there is potential
for generating greater revenue at higher margins with longer-term visibility on
revenue. PPG's arrangements may be longer in duration and potentially less prone
to sudden termination than SMSG agreements.
o Licensing
Typically, under a licensing arrangement, we undertake the sales, marketing
and distribution responsibility for a product while another company maintains
ownership of the intellectual property and the patent on the product. The
company from which we license the product would typically retain responsibility
for manufacturing the product. In a licensing arrangement, we may make upfront
payments and/or royalty payments to our partner company.
We conduct the sales, marketing and distribution functions for the product
and we record the product sales in this reporting segment. Typically, we are
also responsible for medical affairs, certain clinical and regulatory affairs as
well as managed care and trade relations. Examples of the licensing agreements
that we have entered into are described in the Contracts section of this report.
o Copromotion
Copromotion arrangements, a frequently used strategy within the
biopharmaceutical industry, occur when two companies agree to mutually promote
the same product. Each party contributes expenses and resources toward the sales
and marketing effort, with the financial risks and rewards shared on a
predetermined basis.
Typically, our partner company will manufacture and distribute the product,
and be responsible for regulatory and medical affairs as well as managed care
and trade relations. We may exercise significant control over the sales and
marketing strategy for the product. Examples of the copromotion agreements that
we have entered into are described in the Contracts section of this report.
o Acquisition
To date we have not acquired any products; however, if we were to acquire a
product we would own the product outright and would most likely have total
commercial responsibility, inclusive of manufacturing, sales, marketing,
distribution, intellectual property defense and clinical and regulatory affairs.
o Integrated Commercialization Services
Given the broad array of our service offerings, we are able to provide
complete product commercialization capabilities (Integrated Commercialization
Services) to pharmaceutical companies on a fee for service basis. The execution
of these product sales, marketing and commercialization activities would be
substantially similar to those we perform in a copromotion, licensing or product
acquisition transaction; however, our fee structure and risk profile would be
markedly different.
We believe that Integrated Commercialization Services may be attractive to
pharmaceutical companies for products within their portfolio that they are no
longer actively promoting, but which our analysis indicates would respond to
promotion. Pharmaceutical companies may own products that are not being actively
promoted because resources are being focused on higher revenue generating
products, or because the product is nearing the end of its life cycle and the
company has decided to concentrate its promotional efforts on other products in
its portfolio. The decision not to promote a product often leads to reduced
demand and may also result in lower product revenue. Our Integrated
Commercialization Services enable our clients to continue to promote these
products and generate from them higher levels of revenue, while focusing their
limited internal resources on the higher growth products in their portfolios.
Our Integrated Commercialization Services can also be used by research
based biotechnology companies that own a product on the verge of coming to
market, or a product that has been on the market but is not performing up
5
to expectations. In this instance, we may be able to utilize our capabilities to
launch or relaunch the product with the objective of increasing the return that
the product delivers to our client. Research based biotechnology companies may
not have a well established sales and marketing infrastructure to deliver their
products to market and therefore may be attracted to our ability to provide such
infrastructure on a fee for service basis.
Medical Devices and Diagnostics (MD&D)
Our MD&D group provides an array of sales and marketing services to the
MD&D industry. Our core service is the provision of clinical sales teams. Our
clinical sales teams employ nurses, medical technologists, and other clinicians
who train and provide hands-on clinical education and after sales support to the
medical staff of hospitals and clinics that recently purchased our clients'
equipment. Our activities maximize product utilization and customer satisfaction
for the medical practitioners, while simultaneously enabling our clients' sales
forces to continue their selling activities instead of in-servicing the
equipment.
We also provide contract sales services within the MD&D market. We
leveraged our knowledge from years of providing sales forces to the
pharmaceutical industry and applied it to our MD&D business. As a result, we now
offer the provision of contract sales forces as one of the services that we
market to the MD&D industry to assist our clients in improving product sales.
In October 2002, we partnered with Xylos Corporation (Xylos) for the
exclusive U.S. commercialization rights to the Xylos XCell(TM) Cellulose Wound
Dressing (XCell) wound care products, by entering into an agreement pursuant to
which we became the exclusive commercialization partner for the sales, marketing
and distribution of the product line in the U.S. On January 2, 2004, we
exercised our contractual right to terminate the agreement on 135 days' notice
to Xylos since sales of XCell were not sufficient enough to sustain our
continued role as commercialization partner for the product. Our promotional
activities in support of the brand concluded in January 2004 and the agreement
will terminate effective May 16, 2004. We do not currently anticipate entering
into similar commercialization agreements in the MD&D market.
This segment represents 3.8% of consolidated revenue for 2003.
History
We commenced operations as a contract sales organization in 1987. From 1990
to 1995 contract sales became accepted in the pharmaceutical industry as a
tactical solution for a lower cost, high quality sales team. The representatives
were principally flextime. We were paid per call and there was little, if any,
risk sharing.
The expansion of pharmaceutical field forces in general and the acceptance
of contract sales by the industry were two main drivers that fueled our high
growth from 1996 to 2000. Our representatives were principally full-time
employees and we provided a compensation package that was competitive with those
of the major pharmaceutical companies in order to attract higher quality
personnel and become a better provider of contract sales services.
We completed our initial public offering in May 1998. In May 1999, we
acquired TVG, Inc. (TVG) which gave us one of the leading marketing research
groups in the U.S. and a scientifically focused medical education capability.
The addition of TVG provided us with incremental growth potential as a result of
the additional capabilities available to support our service offerings.
In August 1999, we added a shared sales capability through the acquisition
of ProtoCall, Inc. (ProtoCall), now PDI Shared Sales. This addition provided us
with a lower cost product offering and increased business opportunities with
existing and new clients. This offering also supplemented our dedicated sales
force capacity.
In September 2001, we acquired InServe Support Solutions (InServe) which
provides clinical sales support to the MD&D industry. InServe employs nurses,
medical technologists, and other clinicians who train healthcare practitioners
with respect to medical equipment. InServe informs and supports the end users of
medical equipment, with the objective of increasing satisfaction and utilization
of the equipment. The client benefits by reducing the time its sales
representatives spend on training and service, increasing the time available for
sales activity.
6
In June 2000, we established LifeCycle Ventures, Inc. (LCV) to support our
agreements that require marketing and other commercial capabilities. Our initial
strategy, in response to the market dynamics at the time, was to identify
under-promoted brands within pharmaceutical companies' product portfolios and
put a focused promotional effort behind them, increasing product performance.
This was the case in October 2000, when we entered into a sales, marketing and
distribution agreement with GlaxoSmithKline (GSK) in support of Ceftin(R). The
Ceftin agreement enabled us to add capabilities that we did not then have, such
as distribution, medical affairs, regulatory affairs and managed care and trade
relations.
The Ceftin agreement was terminated earlier than anticipated because of the
unexpected introduction of a generic equivalent into the market in February
2002. Notwithstanding this event, the Ceftin agreement successfully facilitated
our growth from a pure service provider to a commercial partner with expanded
capabilities and service offerings for the pharmaceutical industry.
From 2001 through 2003, we continued to identify other late stage
pharmaceutical products that could benefit from focused sales and marketing
efforts. Many companies had products within their portfolios that were
under-promoted and that could potentially benefit from focused sales and
marketing efforts. As the dynamics within the industry changed, affected by
mergers and acquisitions, a slowdown in the approval of new products, and
increased generic availability of once large brands, the willingness of
pharmaceutical companies to relinquish commercial control of products decreased.
During this period, we entered into a number of copromotion agreements,
including our agreements with Novartis Pharmaceuticals Corporation (Novartis).
Our copromotion agreement with Eli Lilly and Company (Eli Lilly) resulted in
significant operating losses. While copromotion agreements remain a viable
business arrangement with pharmaceutical companies, we now have a more stringent
set of parameters that must be met in order for us to consider an opportunity
favorably.
In the fourth quarter of 2002, we entered into two licensing arrangements,
one with Xylos and one with Cellegy Corporation (Cellegy). The Xylos arrangement
was for the sales, marketing and distribution rights for the XCell wound care
products. This product line achieved only modest sales during 2003, considerably
below expectations, and on January 2, 2004, we gave Xylos notice of termination
of the Xylos agreement effective May 16, 2004. The Cellegy agreement was for
exclusive North American rights for Fortigel(TM), a testosterone gel product. In
July 2003, Cellegy was notified by the U.S. Food and Drug Administration (FDA)
that Fortigel was not approved. On December 12, 2003, we instituted an action
against Cellegy in the U.S. District Court for the Southern District of New York
seeking to rescind the Cellegy license agreement on the grounds that it was
procured by fraud.
We believe that there are opportunities for us:
o to partner with companies that lack the necessary infrastructure
to commercialize their brands; and
o to take over the promotion of products that are no longer
receiving sales and marketing support .
Corporate Strategy
Our strategy is to source biopharmaceutical and MD&D products that we can
sell, market or commercialize. We do this by entering into agreements with
companies that own the rights to the product(s) and require our expertise in
generating product sales. We are compensated either through a fee for service or
by sharing in the product sales we generate. Also, we intend to focus on growing
our existing teams business and to seek acquisition opportunities within SMSG.
Contracts
Given the customized nature of our business, we utilize a variety of
contract structures.
Contracts within the sales and marketing services group are almost
exclusively fee for service. These contracts for dedicated teams, shared teams
and marketing research and medical education, contain specific activities that
we provide in return for a fee. They may contain operational benchmarks, such as
a minimum amount of activity or delivery within a specified amount of time.
These contracts can include incentive payments should our activities
7
generate results that meet or exceed predetermined performance targets.
The majority of our revenue in the sales and marketing services segment is
generated by contracts for dedicated sales teams. These contracts are generally
for terms of one to three years and may be renewed or extended. The majority of
these contracts, however, are terminable by the client for any reason upon 30 to
90 days' notice. These contracts typically, but not always, provide for
termination payments by the client upon termination without cause. While such
termination may result in the imposition of penalties on the client, these
penalties may not act as an adequate deterrent to the termination of any
contract. In addition, these penalties may not offset the revenue we could have
earned under the contract or the costs we may incur as a result of its
termination. The loss or termination of a large contract or the loss of multiple
contracts could have a material adverse effect on our business, financial
condition and results of operations. Contracts may also be terminated for cause
or we may incur specific penalties if we fail to meet stated performance
benchmarks.
Our marketing research and consulting and medical education and
communications contracts generally are for projects lasting from three to six
months. The contracts are terminable by the client and typically provide for
termination payments in the event they are terminated by the client without
cause. Termination payments include payment for all work completed to date, plus
the cost of any nonrefundable commitments made on behalf of the client. Due to
the typical size of these contracts, it is unlikely the loss or termination of
any individual contract would have a material adverse effect on our business,
financial condition or results of operations.
The contracts within the pharmaceutical products group can be either
performance based or fee for service and may require sales, marketing and
distribution of product. In performance based contracts, we provide and finance
a portion, if not all, of the commercial activities in support of a brand in
return for a percentage of product sales. An important performance parameter is
normally the level of sales or prescriptions attained by the product during the
period of our marketing or promotional responsibility, and in some cases, for
periods after our promotional activities have ended.
In the fourth quarter of 2000, we entered into a performance based contract
with GSK. Our agreement with GSK was in support of Ceftin and was an exclusive
sales, marketing and distribution contract. The agreement had a five-year term,
but was cancelable by either party without cause on 120 days' notice. The
agreement was terminated by mutual consent, effective February 28, 2002, due to
the unexpected entry of a competitive generic product.
In May 2001, we entered into a copromotion agreement with Novartis for the
U.S. sales, marketing and promotion rights for Lotensin(R), Lotensin HCT(R) and
Lotrel(R). That agreement ran through December 31, 2003. On May 20, 2002, that
agreement was replaced by two separate agreements: one for Lotensin and another
one for Lotrel, Diovan(R) and Diovan HCT(R). Both agreements ran through
December 31, 2003; however, the Lotrel-Diovan agreement was renewed on December
24, 2003 for an additional one year period. In February 2004, we were notified
by Novartis of its intent to terminate the Lotrel-Diovan contract without cause,
effective March 16, 2004. We will continue to be compensated under the terms of
the agreement through the effective termination date. The Lotensin agreement
called for us to provide promotion, selling, marketing and brand management for
Lotensin. In exchange, we were entitled to receive a percentage of product
revenue based on certain total prescription (TRx) objectives above specified
contractual baselines. Even though the Lotensin agreement ended December 31,
2003, we are still entitled to receive royalty payments on the sales of Lotensin
through December 31, 2004.
In October 2001, we entered into an agreement with Eli Lilly to copromote
Evista(R) in the U.S. Under this agreement, we were entitled to be compensated
based upon net sales achieved above a predetermined level. In the event these
predetermined net sales levels were not achieved, we would not receive any
revenue to offset expenses incurred. During 2002, it became apparent that the
net sales levels likely to be achieved would not be sufficient to recoup our
expenses. In November 2002, we agreed with Eli Lilly to terminate the Evista
copromotion agreement effective December 31, 2002.
In October 2002, we entered into an agreement with Xylos for the exclusive
U.S. commercialization rights to the XCell wound care products. On January 2,
2004, we exercised our contractual right to terminate the agreement on 135 days'
notice to Xylos, since sales of XCell were not sufficient to sustain our role as
commercialization partner for the product. Our promotional activities in support
of the brand concluded in January 2004, and the agreement will terminate
effective May 16, 2004.
8
On December 31, 2002, we entered into an exclusive licensing agreement with
Cellegy for the exclusive North American rights for the testosterone gel
product, Fortigel. The agreement is in effect for the commercial life of the
product. Cellegy submitted a New Drug Application (NDA) for the hypogonadism
indication to the FDA in June 2002. In July 2003, Cellegy received a letter from
the FDA rejecting its NDA for Fortigel. Cellegy has told us that it is in
discussions with the FDA to determine the appropriate course of action needed to
meet deficiencies cited by the FDA in its determination. We cannot predict with
any certainty that the FDA will ultimately approve Fortigel for sale in the U.S.
Under the terms of the agreement, we paid Cellegy a $15.0 million initial
licensing fee on December 31, 2002. This payment was made prior to FDA approval
and since there is no alternative future use of the licensed rights, we expensed
the $15.0 million payment in December 2002, when incurred. This amount was
recorded in other selling, general and administrative expenses in the December
31, 2002 consolidated statements of operations. Pursuant to the terms of the
licensing agreement, we will be required to pay Cellegy a $10.0 million
incremental license fee milestone payment upon Fortigel's receipt of all
approvals required by the FDA (if such approvals are obtained) to promote, sell
and distribute the product in the U.S. This incremental milestone license fee,
if incurred, will be recorded as an intangible asset and amortized over its
estimated useful life, as then determined, which is not expected to exceed the
life of the patent. Royalty payments to Cellegy over the term of the commercial
life of the product will range from 20% to 30% of net sales.
On December 12, 2003, we instituted an action against Cellegy in the U.S.
District Court for the Southern District of New York seeking to rescind the
license agreement on the grounds that it was procured by fraud. We are seeking
return of the $15.0 million license fee we paid plus additional damages caused
by Cellegy's conduct. See Item 3 - "Legal Proceedings" for additional
information.
Significant Customers
Our significant customers are discussed in Note 12 to the consolidated
financial statements included elsewhere in this report.
Marketing
Our marketing efforts target the biopharmaceutical and MD&D industries.
Companies with large product portfolios have been the most likely customers for
the services and solutions we provide, but we have also partnered with smaller,
emerging companies. Our marketing efforts are designed to reach the senior
sales, marketing and business development personnel within these companies, with
the goal of informing them of our full range of services and our reputation as a
high quality sales and marketing organization. Our tactical plan includes
advertising in trade publications, direct mail campaigns, presence at industry
seminars and a direct selling effort. We have a dedicated team of business
development specialists who work across the organization to identify needs
within the biopharmaceutical and MD&D industries which we can address. A
multi-disciplinary team of senior managers reviews possible business
opportunities as identified by the business development team and determines
strategies and negotiation positions to contract for the most attractive
business opportunities.
Competition
There are relatively few barriers to entry into the businesses in which we
operate and, as the industry continues to evolve, new competitors are likely to
emerge. We compete on the basis of such factors as reputation, service quality,
management experience, performance record, customer satisfaction, ability to
respond to specific client needs, integration skills and price. We believe we
compete effectively with respect to each of these factors. Increased competition
may lead to price and other forms of competition that could have a material
adverse effect on our business, financial condition and results of operations.
For our service offerings, the competition includes in-house sales and
marketing departments of biopharmaceutical and MD&D companies, emerging
companies within these segments and other contract sales organizations (CSOs).
Companies that compete with us from the perspective of having diversified
service offerings include Innovex (a subsidiary of Quintiles Transnational),
Ventiv Health, Nelson Professional Sales (a division of Publicis) and Cardinal
Health, Inc.
9
The competition for sourcing products into our PPG is primarily other
companies seeking to sell and market pharmaceutical products. Competing to
copromote, license and/or acquire brands involves risks in identifying,
assessing and contracting effectively for products in addition to the marketing
and distribution risks of the products we obtain.
Government and Industry Regulation
The healthcare sector is heavily regulated by both government and industry.
Various laws, regulations and guidelines established by government, industry and
professional bodies affect, among other matters, the approval, provision,
licensing, labeling, marketing, promotion, price, sale and reimbursement of
healthcare services and products, including pharmaceutical and MD&D products.
The federal government has extensive enforcement powers over the activities of
pharmaceutical manufacturers, including authority to withdraw product approvals,
commence actions to seize and prohibit the sale of unapproved or non-complying
products, to halt manufacturing operations that are not in compliance with good
manufacturing practices, and to impose or seek injunctions, voluntary recalls,
and civil monetary and criminal penalties. These restrictions or prohibitions on
sales or withdrawal of approval of products marketed by us could have a material
adverse effect on our business, financial condition and results of operations.
The Food, Drug and Cosmetic Act, as supplemented by various other statutes,
regulates, among other matters, the approval, labeling, advertising, promotion,
sale and distribution of drugs, including the practice of providing product
samples to physicians. Under this statute, the FDA regulates all promotional
activities involving prescription drugs. The distribution of pharmaceutical
products is also governed by the Prescription Drug Marketing Act (PDMA), which
regulates these activities at both the federal and state level. The PDMA imposes
extensive licensing, personnel record keeping, packaging, quantity, labeling,
product handling and facility storage and security requirements intended to
prevent the sale of pharmaceutical product samples or other diversions. Under
the PDMA and its implementing regulations, states are permitted to require
registration of manufacturers and distributors who provide pharmaceutical
products even if such manufacturers or distributors have no place of business
within the state. States are also permitted to adopt regulations limiting the
distribution of product samples to licensed practitioners and require extensive
record keeping and labeling of such samples for tracing purposes. The sale or
distribution of pharmaceutical products is also governed by the Federal Trade
Commission Act.
Some of the services that we currently perform or that we may provide in
the future may also be affected by various guidelines established by industry
and professional organizations. For example, ethical guidelines established by
the American Medical Association (AMA) govern, among other matters, the receipt
by physicians of gifts from health-related entities. These guidelines govern
honoraria and other items of economic value which AMA member physicians may
receive, directly or indirectly, from pharmaceutical companies. Similar
guidelines and policies have been adopted by other professional and industry
organizations, such as Pharmaceutical Research and Manufacturers of America, an
industry trade group.
There are also numerous federal and state laws pertaining to healthcare
fraud and abuse. In particular, certain federal and state laws prohibit
manufacturers, suppliers and providers from offering, giving or receiving
kickbacks or other remuneration in connection with ordering or recommending the
purchase or rental of healthcare items and services. The federal anti-kickback
statute imposes both civil and criminal penalties for, among other things,
offering or paying any remuneration to induce someone to refer patients to, or
to purchase, lease or order (or arrange for or recommend the purchase, lease or
order of) any item or service for which payment may be made by Medicare or other
federally-funded state healthcare programs (e.g., Medicaid). This statute also
prohibits soliciting or receiving any remuneration in exchange for engaging in
any of these activities. The prohibition applies whether the remuneration is
provided directly or indirectly, overtly or covertly, in cash or in kind.
Violations of the statute can result in numerous sanctions, including criminal
fines, imprisonment and exclusion from participation in the Medicare and
Medicaid programs.
Several states also have referral, fee splitting and other similar laws
that may restrict the payment or receipt of remuneration in connection with the
purchase or rental of medical equipment and supplies. State laws vary in scope
and have been infrequently interpreted by courts and regulatory agencies, but
may apply to all healthcare items or services, regardless of whether Medicare or
Medicaid funds are involved.
10
The FDA regulates the drug development process in the U.S. This impacts
products we may develop, license or acquire, including, for example, the Cellegy
licensed product. These regulations affect all aspects of the research programs
conducted on unapproved products in the U.S., including manufacturing of the
drug substance and drug product, preliminary pharmacology and toxicology
evaluation, and all exposure of human subjects or patients. This human testing
is performed under an Investigational New Drug Exemption (IND). When sufficient
evidence of efficacy and safety is available to enable unrestricted commercial
distribution, an NDA is submitted under the regulations. The NDA is a
comprehensive filing that includes, among other things, the results of all
Chemistry, Manufacturing and Controls (CMC) preclinical and clinical studies.
The FDA's review of this application results in a decision on the approval or
non-approval of the drug. Approved drugs may be marketed in the U.S.
post-approval, however, the NDA regulations require continuing monitoring and
reporting on the safety of the approved product in the general patient
population.
We cannot determine what effect changes in regulations or statutes or legal
interpretations, when and if established or enacted, may have on our business in
the future. Changes could require, among other things, changes to manufacturing
methods, expanded or different labeling, the recall, replacement or
discontinuance of certain products, additional record keeping or expanded
documentation of the properties of certain products and scientific
substantiation. Further, we may experience delays in the regulatory approval of
products we license or acquire. Such changes, or new legislation, or delays
could have a material adverse effect on our business, financial condition and
results of operations. Our failure, or the failure of our clients and/or the
partners, to comply with, or any change in, the applicable regulatory
requirements or professional organization or industry guidelines or regulatory
delays could, among other things, limit or prohibit us or our clients from
conducting business activities as presently conducted or proposed to be
conducted, result in adverse publicity, increase the costs of regulatory
compliance or result in monetary fines or other penalties. Any of these
occurrences could have a material adverse effect on our business, financial
condition and results of operations.
RISK FACTORS
In addition to the other information provided in our reports, you should
carefully consider the following factors in evaluating our business, operations
and financial condition. Additional risks and uncertainties not presently known
to us, that we currently deem immaterial or that are similar to those faced by
other companies in our industry or business in general, such as competitive
conditions, may also impair our business operations. The occurrence of any of
the following risks could have a material adverse effect on our business,
financial condition and results of operations.
We continue to look for opportunities to develop the pharmaceutical
products group segment of our business, which may include copromotion and
exclusive distribution arrangements, as well as licensing and brand ownership of
products, and most recently, Integrated Commercialization Services (ICS). We
cannot assure you that we can successfully develop this business.
Notwithstanding the fact that we had no product revenue from the
pharmaceutical products group segment of our business in 2003, we believe that
one area for our future growth is potentially to acquire copromotion and
distribution rights to pharmaceutical products and potentially to license or
acquire these products. These types of arrangements can significantly increase
our operating expenditures in the short-term. Typically, these agreements
require significant "upfront" payments, minimum purchase requirements, minimum
royalty payments, payments to third parties for production, inventory
maintenance and control, distribution services and accounts receivable
administration, as well as sales and marketing expenditures. In addition,
particularly where we license or acquire products before they are approved for
commercial use, we may be required to incur significant expense to gain the
required regulatory approvals. As a result, our working capital balance and cash
flow position could be materially and adversely affected until the products in
question become commercially viable, if ever. The risks that we face in
developing the pharmaceutical product segment of our business may increase in
proportion with:
o the number and types of products covered by these types of
agreements;
o the applicable stage of the drug regulatory process of the
products at the time we enter into these agreements; and
o our control over the manufacturing, distribution and marketing
processes.
11
In December 2002, we acquired from Cellegy the exclusive right to market
and sell Fortigel, a transdermal testosterone gel for the treatment of male
hypogonadism in the U.S., Puerto Rico, Mexico and Canada. While we have entered
into copromotion and exclusive distribution arrangements in the past, the
Cellegy agreement is our first licensing arrangement. We paid an initial $15.0
million license fee and another $10.0 million incremental license fee milestone
payment is due after the product has all FDA approvals (if such approvals are
obtained) required to promote, sell and distribute the product in the U.S. If
the drug is approved, in addition to paying Cellegy a royalty based on net
sales, all of the costs associated with manufacturing the drug, distributing it,
as well as sales and marketing expenditures would be our obligation. If
additional testing is required after the drug is approved for sale in the U.S.,
the costs associated with those tests are our obligation as well. Furthermore,
if we want to sell the drug in Mexico and Canada, we must fund the regulatory
process in those countries.
In July 2003, Cellegy received a letter from the FDA rejecting its NDA for
Fortigel. In December 2003, we filed a lawsuit against Cellegy for fraudulently
inducing us to enter the Cellegy License Agreement and for breaching certain
obligations under the License Agreement. (See Item 3 - Legal Proceedings, Note
19 - Commitments and Contingencies, and the Risk Factor describing the Cellegy
litigation in this section, below.) Since we filed the lawsuit, Cellegy is no
longer in regular contact with us regarding Fortigel. Thus, for example, we are
unaware of the FDA status regarding Fortigel (as of December 31, 2003, it had
not been approved) and are unaware of what steps Cellegy is taking to develop
Fortigel, to obtain FDA approval for Fortigel, and/or to arrange for a party to
manufacture Fortigel. We have requested this information from Cellegy but have
not received it. Accordingly, we may not possess the most current and reliable
information concerning the current status of, or future prospects relating to,
Fortigel. The issuance of the non-approvable letter by the FDA concerning
Fortigel, however, casts significant doubt upon Fortigel's prospects and whether
it will ever be approved. There can thus be no assurances that we will recover
the $15.0 million license fee or that we will ever receive any revenue in
connection with the Cellegy license agreement.
We are involved in lawsuits with Cellegy concerning the Cellegy License
Agreement.
On December 12, 2003, we filed a complaint against Cellegy in the United
States District Court for the Southern District of New York. The complaint
alleges that Cellegy fraudulently induced us to enter into the Cellegy license
agreement. The complaint also sets forth claims for misrepresentation and breach
of contract related to the license agreement. In the complaint, we seek, among
other remedies, rescission of the license agreement and return of the $15.0
million license fee we paid Cellegy. After we filed this lawsuit, also on
December 12, 2003, Cellegy filed a complaint against us in the United States
District Court for the Northern District of California. Cellegy's complaint
seeks a declaration that Cellegy did not fraudulently induce us to enter into
the license agreement and that Cellegy has not breached its obligations under
the agreement. Cellegy has sought to stay, dismiss or transfer our suit in favor
of its action in the California courts. We have sought to stay, transfer or
dismiss Cellegy's lawsuit in favor of its action in the New York courts. We are
unable to predict the ultimate outcome of these lawsuits.
We rely on third parties to manufacture all of our products and supply raw
materials. Our dependence on these third parties may result in unforeseen delays
or other problems beyond our control, which could have a material adverse effect
on our business, financial condition and results of operations and our
reputation.
We do not manufacture any products and expect to continue to depend on
third parties to provide us with sufficient quantities of products to meet
demand. As a result, we cannot assure you that we will always have a sufficient
supply of products on hand to satisfy demand or that the products we do have
will meet our specifications. This risk is more acute in those situations where
we have no control over the manufacturers. For example, our agreement with
Cellegy obligates us to purchase all quantities of the product from PanGeo
Pharma Inc. (PanGeo), a third-party manufacturer with which we have no
contractual relationship and to which Cellegy has granted exclusive
manufacturing rights. If there are any problems with this contract manufacturer,
the supply of product could be temporarily halted until either PanGeo is able to
get their facilities back on-line or we are able to source another supplier for
the product. Since we filed a lawsuit against Cellegy as described above,
Cellegy is no longer in regular contact with us regarding its manufacturing
capabilities to produce Fortigel. Accordingly, we may not possess the most
current and reliable information concerning PanGeo or other manufacturing
arrangements for Fortigel that may have been established by Cellegy. This
manufacturing shutdown could have a material impact on the future demand for the
product and thus could have a material adverse effect on our business, financial
condition and results of operations. Even if third-party manufacturers comply
with the terms of their supply arrangements, we cannot be
12
certain that supply interruptions will not occur or that our inventory will
always be adequate. Numerous factors could cause interruptions in the supply of
our finished products, including shortages in raw materials, strikes and
transportation difficulties. Any disruption in the supply of raw materials or an
increase in the cost of raw materials to our supplier could have a significant
effect on its ability to supply us with products.
In addition, manufacturers of products requiring FDA approval are required
to comply with FDA mandated standards, referred to as good manufacturing
practices, relating not only to the manufacturing process but to record-keeping
and quality control activities as well. Furthermore, they must pass a
pre-approval inspection of manufacturing facilities by the FDA and foreign
authorities before obtaining marketing approval, and are subject to periodic
inspection by the FDA and corresponding foreign regulatory authorities under
reciprocal agreements with the FDA. These inspections may result in compliance
issues that could prevent or delay marketing approval or require significant
expenditures on corrective measures.
If for any reason we are unable to obtain or retain our relationships with
third-party manufacturers on commercially acceptable terms, or if we encounter
delays or difficulties with contract manufacturers in producing or packaging our
products, the distribution, marketing and subsequent sales of these products
would be adversely affected, and we may have to seek alternative sources of
supply. We cannot assure you that we will be able to maintain our existing
manufacturing relationships or enter into new ones on commercially acceptable
terms, if at all.
Our license agreements may require us to make minimum payments to the licensor,
regardless of the revenue derived under the license, which could further strain
our working capital and cash flow position. In addition, these agreements may be
nonexclusive or may condition exclusivity on minimum sales levels.
Under our license agreement with Cellegy, we are required to make certain
minimum royalty payments to Cellegy once the product is approved, assuming such
an approval occurs. If the Cellegy product fails to gain market acceptance, we
would still be required to make these minimum royalty payments. This would
likely have a material adverse effect on our business, financial condition and
results of operations. In addition, the Cellegy License Agreement requires us to
satisfy certain minimum net sales requirements. If we fail to satisfy these
minimum net sales requirements, under certain circumstances Cellegy may, at its
option, convert our exclusive license to a nonexclusive license. This could mean
that we would face increased competition from third parties with respect to the
marketing and sale of the product.
The regulatory approval process is expensive, time consuming and uncertain and
may prevent us from obtaining required approvals for the commercialization of
drugs and products that we license or acquire.
In those potential situations where we license or acquire ownership of
drugs or other medical or diagnostic equipment, the product in question may not
yet be approved for sale to the public, in which case we may have the obligation
to obtain the required regulatory approvals. The research, testing,
manufacturing and marketing of drugs and other medical and diagnostic devices is
heavily regulated in the U.S. and other countries. The regulatory clearance
process typically takes many years and is extremely expensive. Despite the time
and expense expended, regulatory clearance is never guaranteed. The FDA can
delay, limit or deny approval of a drug for many reasons, including:
o safety or efficacy;
o inconsistent or inconclusive data or test results;
o failure to demonstrate compliance with the FDA's good
manufacturing practices; or
o changes in the approval process or new regulations.
The FDA continues to regulate the sale and marketing of drugs and medical and
diagnostic devices even after they have been approved for sale to the public.
Complying with these regulations may be costly and our failure to comply could
limit our ability to continue marketing and distributing these products.
Even after drugs have been approved for sale, the FDA continues to regulate
their sale. These post-approval regulatory requirements may require further
testing and/or clinical studies, and may limit our ability to market and
distribute the product or may limit the use of the product. Under our agreement
with Cellegy, we are responsible for
13
all post-approval regulatory compliance. If we fail to comply with the
regulatory requirements of the FDA, we may be subject to one or more of the
following administrative or judicially imposed sanctions:
o warning letters;
o civil penalties;
o criminal penalties;
o injunctions;
o product seizure or detention;
o product recalls;
o total or partial suspension of production; and
o FDA refusal to approve pending NDAs, or supplements to approved
NDAs.
FDA approval does not guarantee commercial success. If we fail to successfully
commercialize our products, our business, financial condition and results of
operations could be materially and adversely affected.
Even if a product is approved for sale to the general public, its
commercial success will depend on our marketing efforts and acceptance by the
general public. The commercial success of any drug or medical or diagnostic
device depends on a number of factors, including:
o demonstration of clinical efficacy and safety;
o cost;
o reimbursement policies of large third-party payors;
o competitive products;
o convenience and ease of administration;
o potential advantages over alternative treatment methods;
o marketing and distribution support; and
o successfully creating and sustaining demand.
We cannot assure you that any of our products will achieve commercial
success, regardless of how effective they may be.
Failure to obtain adequate reimbursement could limit our ability to market
products.
Our ability to commercialize products, including licensed or acquired
products, will depend in part on the reimbursements, if any, obtained from
third-party payors such as government health administration authorities, private
health insurers, managed care programs and other organizations. Third-party
payors are increasingly attempting to contain healthcare costs by limiting both
coverage and the level of reimbursement for pharmaceutical products and medical
devices. Cost control initiatives could decrease the price that we would receive
for products and affect our ability to commercialize any product. Third-party
payors also tend to discourage use of branded products when generic substitutes
are available. As a result, reimbursement may not be available to enable us to
maintain price levels sufficient to realize an appropriate return on our
investment in product acquisition and development. If adequate reimbursement
levels for either newly approved or branded products are not provided, our
business, financial condition and results of operations could be materially and
adversely affected.
We may require additional funds in order to implement our evolving business
model.
We may require additional funds in order to:
o license or acquire additional pharmaceutical or medical device
products or technologies;
o pursue regulatory approvals;
o develop incremental marketing and sales capabilities;
o pursue other business opportunities or meet future operating
requirements; and
o acquire other services businesses.
14
We may seek additional funding through public or private equity or debt
financing or other arrangements with collaborative partners. If we raise
additional funds by issuing equity securities, further dilution to existing
stockholders may result. In addition, as a condition to providing us with
additional funds, future investors may demand, and may be granted, rights
superior to those of existing stockholders. We cannot be sure, however, that
additional financing will be available from any of these sources or, if
available, will be available on acceptable or affordable terms. If adequate
additional funds are not available, we may be required to delay, reduce the
scope of, or eliminate one or more of our growth strategies.
Our contract sales business depends on expenditures by companies in the life
sciences industries.
Our service revenues depend on promotional, marketing and sales
expenditures by companies in the life sciences industries, including the
pharmaceutical, MD&D and biotechnology industries. Promotional, marketing and
sales expenditures by pharmaceutical manufacturers have in the past been, and
could in the future be, negatively impacted by, among other things, governmental
reform or private market initiatives intended to reduce the cost of
pharmaceutical products or by governmental, medical association or
pharmaceutical industry initiatives designed to regulate the manner in which
pharmaceutical manufacturers promote their products. Furthermore, the trend in
the life sciences industries toward consolidation may result in a reduction in
overall sales and marketing expenditures and, potentially, a reduction in the
use of contract sales and marketing services providers.
Changes in outsourcing trends in the pharmaceutical and biotechnology industries
could materially adversely affect our business, financial condition, results of
operations and growth rate.
Our business and growth depend in large part on demand from the
pharmaceutical and life sciences industries for outsourced marketing and sales
services. The practice of many companies in these industries has been to hire
outside organizations like us to conduct large sales and marketing projects.
However, companies may elect to perform these services internally for a variety
of reasons, including the rate of new product development and FDA approval of
those products, number of sales representatives employed internally in relation
to demand for or the need to promote new and existing products, and competition
from other suppliers. If these industries reduce their tendency to outsource
these projects, our business, financial condition, results of operations and
growth rate could be materially adversely affected.
Product liability claims could harm our business.
We could face substantial product liability claims in the event users of
any of the pharmaceutical and medical device products we market now or in the
future are alleged to cause negative reactions or adverse side effects or in the
event any of these products causes injury, is alleged to be unsuitable for its
intended purpose or is alleged to be otherwise defective. For example, we have
been named in numerous lawsuits as a result of our detailing of Baycol(R) on
behalf of Bayer Corporation (Bayer). Product liability claims, regardless of
their merits, could be costly and divert management's attention, or adversely
affect our reputation and the demand for our products. Although we currently
have product liability insurance in the aggregate amount of $10.0 million, we
cannot assure you that our insurance will be sufficient to cover fully all
potential claims. Also, adequate insurance coverage might not be available in
the future at acceptable costs, if at all.
We may be unable to secure or enforce adequate intellectual property rights to
protect the products or technologies we acquire, license or develop.
Our ability to successfully commercialize newly branded products or
technologies depends on our ability to secure and enforce intellectual property
rights, generally patents, and we may be unable to do so. To obtain patent
protection, we must be able to successfully persuade the U.S. Patent and
Trademark Office and its foreign counterparts to issue patents on a timely basis
and possibly in the face of third-party challenges. Even if we are granted a
patent, our rights may later be challenged or circumvented by third parties.
Likewise, a third-party may challenge our trademarks or, alternatively, use a
confusingly similar trademark. The issuance of a patent is not conclusive as to
its validity or enforceability and the patent life is limited. In addition, from
time to time, we might receive notices from third parties regarding patent
claims against us. These type claims, with or without merit, could be
time-consuming to defend, result in costly litigation, divert management's
attention and resources, and cause us to incur significant expenses. As a result
of litigation over intellectual property rights, we may be required to stop
15
selling a product, obtain a license from the owner to sell the product in
question or use the relevant intellectual property, which we may not be able to
obtain on favorable terms, if at all, or modify a product to avoid using the
relevant intellectual property. A successful claim of infringement against us
could have a material adverse effect on our business, financial condition and
results of operations.
If we do not meet performance goals set in our incentive-based and revenue
sharing arrangements, our profits could suffer.
We have the opportunity to analyze and sometimes enter into incentive-based
and revenue sharing arrangements with pharmaceutical companies. Under
incentive-based arrangements, we are typically paid a fixed fee and, in
addition, have an opportunity to increase our earnings based on the market
performance of the products being detailed in relation to targeted sales
volumes, sales force performance metrics or a combination thereof. Under revenue
sharing arrangements, our compensation is based on the market performance of the
products being detailed, usually expressed as a percentage of product sales.
These types of arrangements transfer some market risk from our clients to us. In
addition, these arrangements can result in variability in revenue and earnings
due to seasonality of product usage, changes in market share, new product
introductions, overall promotional efforts and other market related factors. As
an example, in October 2001, we entered into an agreement with Eli Lilly to
copromote Evista in the U.S. under which we were to receive payments once
product net sales exceeded a pre-determined baseline. Our net sales of Evista
were insufficient for us to achieve our revenue and profit goals and as a result
we incurred an operating loss for 2002 of $35.1 million on this contract, $28.9
million from operating activities and $6.2 million in unused sales force
capacity. This contract was terminated effective December 31, 2002.
Most of our service revenue is derived from a limited number of clients, the
loss of any one of which could adversely affect our business.
Our revenue and profitability depend to a great extent on our relationships
with a limited number of large pharmaceutical companies. In 2003, we had two
major clients that accounted for approximately 35.3% and 32.4%, respectively, or
a total of 67.7%, of our service revenue. We are likely to continue to
experience a high degree of client concentration, particularly if there is
further consolidation within the pharmaceutical industry. The loss or a
significant reduction of business from any of our major clients could have a
material adverse effect on our business, financial condition and results of
operations. For example, in February 2004, we announced the early termination of
our fee for service contract arrangement with Novartis for the promotion of
Diovan and Lotrel. As a result, $28.9 million of anticipated revenue associated
with the Novartis contract in 2004 will not be realized. In February 2002, we
announced the termination of our fee for service contract arrangement with Bayer
and as a result, our 2002 revenues were reduced by approximately $20.0 million.
Our service contracts are generally short-term agreements and are cancelable at
any time, which may result in lost revenue and additional costs and expenses.
Our service contracts are generally for a term of one to three years and
many may be terminated by the client at any time for any reason. For example, as
discussed above, as a result of the early termination of our fee for service
contract arrangements with Bayer and Novartis, our 2002 revenues were reduced by
approximately $20.0 million due to the Bayer contract termination, and $28.9
million of anticipated revenue associated with the Novartis contract in 2004
will not be realized. The termination of a contract by one of our major clients
not only results in lost revenue, but also may cause us to incur additional
costs and expenses. All of our sales representatives are employees rather than
independent contractors. Accordingly, when a contract is terminated, unless we
can immediately transfer the related sales force to a new program, we either
must continue to compensate those employees, without realizing any related
revenue, or terminate their employment. If we terminate their employment, we may
incur significant expenses relating to their termination.
We and two of our officers are defendants in a class action shareholder lawsuit
which could divert our time and attention from more productive activities.
Beginning on January 24, 2002, several purported class action complaints
were filed in the U.S. District Court for the District of New Jersey, against us
and certain of our officers on behalf of persons who purchased our common stock
during the period between May 22, 2001 and August 12, 2002. We believe that
meritorious defenses
16
exist to the allegations asserted in these lawsuits and we intend to vigorously
defend these actions. Although we currently maintain director and officer
liability insurance coverage, there is no assurance that we will continue to
maintain such coverage or that any such coverage will be adequate to offset
potential damages.
Our failure, or that of our clients, to comply with applicable healthcare
regulations could limit, prohibit or otherwise adversely impact our business
activities.
Various laws, regulations and guidelines established by government,
industry and professional bodies affect, among other matters, the provision of,
licensing, labeling, marketing, promotion, sale and distribution of healthcare
services and products, including pharmaceutical and MD&D products. In
particular, the healthcare industry is governed by various federal and state
laws pertaining to healthcare fraud and abuse, including prohibitions on the
payment or acceptance of kickbacks or other remuneration in return for the
purchase or lease of products that are paid for by Medicare or Medicaid.
Sanctions for violating these laws include civil and criminal fines and
penalties and possible exclusion from Medicare, Medicaid and other federal or
state healthcare programs. Although we believe our current business arrangements
do not violate these federal and state fraud and abuse laws, we cannot be
certain that our business practices will not be challenged under these laws in
the future or that a challenge would not have a material adverse effect on our
business, financial condition and results of operations. Our failure, or the
failure of our clients, to comply with these laws, regulations and guidelines,
or any change in these laws, regulations and guidelines may, among other things,
limit or prohibit our business activities or those of our clients, subject us or
our clients to adverse publicity, increase the cost of regulatory compliance and
insurance coverage or subject us or our clients to monetary fines or other
penalties.
Our industry is highly competitive and our failure to address competitive
developments promptly will limit our ability to retain and increase our market
share.
Our primary competitors for sales services include in-house sales and
marketing departments of pharmaceutical companies, other CSOs and drug
wholesalers. We also compete for the licensing and acquisition of pharmaceutical
and MD&D products with other larger pharmaceutical and MD&D companies. There are
relatively few barriers to entry in the businesses in which we compete and, as
the industry continues to evolve, new competitors are likely to emerge. Many of
our current and potential competitors are larger than we are and have
substantially greater capital, personnel and other resources than we have.
Increased competition may lead to price and other forms of competition that
could have a material adverse effect on our market share, our ability to source
new business opportunities, our business, financial condition and results of
operations.
Consolidation of the wholesale distribution network for pharmaceutical products
could adversely impact the terms and conditions of our product sales.
The distribution network for pharmaceutical products has recently
experienced significant consolidation among wholesalers and chain stores. As a
result, a few large wholesale distributors control a significant share of the
market and we have less ability to negotiate price, return policies and other
terms and related provisions of the sale. As our distribution of products
expands, some of these wholesalers and distributors may account for a
significant portion of our product sales. Our inability to negotiate favorable
terms and conditions for product sales to those wholesalers could have a
material adverse effect on our business, financial condition and results of
operations.
If we are unable to attract key employees and consultants, we may be unable to
develop our emerging business model.
Successful execution of our business strategy depends, in large part, on
our ability to attract and retain qualified management, marketing and other
personnel with the skills and qualifications necessary to fully execute our
programs and strategy. Competition for personnel among companies in the
pharmaceutical industry is intense and we cannot assure you that we will be able
to continue to attract or retain the personnel necessary to support the growth
of our business.
17
Our business will suffer if we fail to attract and retain qualified sales
representatives.
The success and growth of our business depends on our ability to attract
and retain qualified pharmaceutical sales representatives. There is intense
competition for pharmaceutical sales representatives from CSOs and
pharmaceutical companies. On occasion, our clients have hired the sales
representatives that we trained to detail their products. We cannot be certain
that we can continue to attract and retain qualified personnel. If we cannot
attract and retain qualified sales personnel, we will not be able to expand our
teams business and our ability to perform under our existing contracts will be
impaired.
Our business will suffer if we lose certain key management personnel.
The success of our business also depends on our ability to attract and
retain qualified senior management, and financial and administrative personnel
who are in high demand and who often have multiple employment options.
Currently, we depend on a number of our senior executives, including Charles T.
Saldarini, our chief executive officer, Steven K. Budd, our president, global
sales and marketing services, and Bernard C. Boyle, our chief financial officer.
The loss of the services of any one or more of these executives could have a
material adverse effect on our business, financial condition and results of
operations. Except for a $5 million key-man life insurance policy on the life of
Mr. Saldarini and a $3 million policy on the life of Mr. Budd, we do not
maintain and do not contemplate obtaining insurance policies on any of our
employees.
Our controlling stockholder continues to have effective control of us, which
could delay or prevent a change in corporate control that may otherwise be
beneficial to our stockholders.
John P. Dugan, our chairman, beneficially owns approximately 34% of our
outstanding common stock. As a result, Mr. Dugan will be able to exercise
substantial control over the election of all of our directors, and to determine
the outcome of most corporate actions requiring stockholder approval, including
a merger with or into another company, the sale of all or substantially all of
our assets and amendments to our certificate of incorporation.
We have anti-takeover defenses that could delay or prevent an acquisition and
could adversely affect the price of our common stock.
Our certificate of incorporation and bylaws include provisions, such as
providing for three classes of directors, which are intended to enhance the
likelihood of continuity and stability in the composition of our board of
directors. These provisions may make it more difficult to remove our directors
and management and may adversely affect the price of our common stock. In
addition, our certificate of incorporation authorizes the issuance of "blank
check" preferred stock. This provision could have the effect of delaying,
deterring or preventing a future takeover or a change in control, unless the
takeover or change in control is approved by our board of directors, even though
the transaction might offer our stockholders an opportunity to sell their shares
at a price above the current market price.
Our quarterly revenues and operating results may vary, which may cause the price
of our common stock to fluctuate.
Our quarterly operating results may vary as a result of a number of
factors, including:
o the commencement, delay, cancellation or completion of programs;
o regulatory developments;
o uncertainty related to compensation based on achieving
performance benchmarks;
o the mix of services provided;
o the mix of programs -- i.e., contract sales, copromotion,
exclusive marketing, licenses;
o the timing and amount of expenses for implementing new programs
and services and acquiring license rights for products;
o the accuracy of estimates of resources required for ongoing
programs;
o the timing and integration of acquisitions;
o changes in regulations related to pharmaceutical companies; and
o general economic conditions.
18
In addition, in the case of revenue related to service contracts, we
recognize revenue as services are performed, while program costs, other than
training costs, are expensed as incurred. As a result, during the first two to
three months of a new contract, we may incur substantial expenses associated
with implementing that new program without recognizing any revenue under that
contract. This could have a material adverse impact on our operating results and
the price of our common stock for the quarters in which these expenses are
incurred. For these and other reasons, we believe that quarterly comparisons of
our financial results are not necessarily meaningful and should not be relied
upon as an indication of future performance. Fluctuations in quarterly results
could materially adversely affect the market price of our common stock in a
manner unrelated to our long-term operating performance.
Our stock price is volatile and could be further affected by events not within
our control. In 2003 our stock traded at a low of $6.86 and a high of $31.71.
The market for our common stock is volatile. The trading price of our
common stock has been and will continue to be subject to:
o volatility in the trading markets generally;
o significant fluctuations in our quarterly operating results;
o announcements regarding our business or the business of our
competitors;
o industry development;
o regulatory developments;
o changes in product mix;
o changes in revenue and revenue growth rates for us and for our
industry as a whole; and
o statements or changes in opinions, ratings or earnings estimates
made by brokerage firms or industry analysts relating to the
markets in which we operate or expect to operate.
Employees
As of December 31, 2003, we had 3,884 employees. Included in that amount
are 420 part-time field representatives employed by InServe, the number of which
vary from time to time based on project demand. We are not party to a collective
bargaining agreement with a labor union and we believe that our relations with
our employees are good.
Available Information
Our website address is www.pdi-inc.com. We are not including the
information contained on our website as part or, or incorporating it by
reference into, this annual report on Form 10-K. We make available free of
charge through our website our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and all amendments to those reports as
soon as reasonably practicable after such material is electronically filed with
or furnished to the Securities and Exchange Commission.
The public may read and copy any materials we file with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers such as us that file electronically with the SEC. The website
address is www.sec.gov.
ITEM 2. PROPERTIES
Facilities
Our corporate headquarters are located in Upper Saddle River, New Jersey,
in a 48,600 square foot facility. The lease for all but approximately 10,000
square feet of this space expires in the fourth quarter of 2004. The lease on
the remaining space expires in the second quarter of 2004. We have leased
approximately 84,000 square feet in Saddle River, New Jersey for a term of
approximately 12 years. We expect to relocate our corporate headquarters to this
location during the second quarter of 2004.
19
TVG operates out of a 48,000 square foot facility in Fort Washington,
Pennsylvania, under a lease that expires in the third quarter of 2005.
InServe operates out of a 9,100 square foot facility in Novato, California,
under a lease which expires in the second quarter of 2005.
We believe that our current and recently leased facilities are adequate for
our current and foreseeable operations and that suitable additional space will
be available if needed.
ITEM 3. LEGAL PROCEEDINGS
Securities Litigation
In January and February 2002, we, our chief executive officer and our chief
financial officer were served with three complaints that were filed in the
United States District Court for the District of New Jersey alleging violations
of the Securities Exchange Act of 1934 (the "1934 Act"). These complaints were
brought as purported shareholder class actions under Sections 10(b) and 20(a) of
the 1934 Act and Rule 10b-5 established thereunder. On May 23, 2002, the Court
consolidated all three lawsuits into a single action entitled In re PDI
Securities Litigation, Master File No. 02-CV-0211, and appointed lead plaintiffs
("Lead Plaintiffs") and Lead Plaintiffs' counsel. On or about December 13, 2002,
Lead Plaintiffs filed a second consolidated and amended complaint ("Second
Consolidated and Amended Complaint"), which superseded their earlier complaints.
The complaint names us, our chief executive officer and our chief financial
officer as defendants; purports to state claims against us on behalf of all
persons who purchased our common stock between May 22, 2001 and August 12, 2002;
and seeks money damages in unspecified amounts and litigation expenses including
attorneys' and experts' fees. The essence of the allegations in the Second
Consolidated and Amended Complaint is that we intentionally or recklessly made
false or misleading public statements and omissions concerning our financial
condition and prospects with respect to our marketing of Ceftin in connection
with the October 2000 distribution agreement with GlaxoSmithKline, our marketing
of Lotensin in connection with the May 2001 distribution agreement with Novartis
Pharmaceuticals Corporation, as well as our marketing of Evista in connection
with the October 2001 distribution agreement with Eli Lilly.
In February 2003, we filed a motion to dismiss the Second Consolidated and
Amended Complaint under the Private Securities Litigation Reform Act of 1995 and
Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. We believe that
the allegations in this purported securities class action are without merit and
we intend to defend the action vigorously.
Bayer-Baycol Litigation
We have been named as a defendant in numerous lawsuits, including two class
action matters, alleging claims arising from the use of Baycol, a prescription
cholesterol-lowering medication. Baycol was distributed, promoted and sold by
Bayer in the U.S. through early August 2001, at which time Bayer voluntarily
withdrew Baycol from the U.S. market. Bayer retained certain companies, such as
us, to provide detailing services on its behalf pursuant to contract sales force
agreements. We may be named in additional similar lawsuits. To date, we have
defended these actions vigorously and have asserted a contractual right of
defense and indemnification against Bayer for all costs and expenses we incur
relating to these proceedings. In February 2003, we entered into a joint defense
and indemnification agreement with Bayer, pursuant to which Bayer has agreed to
assume substantially all of our defense costs in pending and prospective
proceedings and to indemnify us in these lawsuits, subject to certain limited
exceptions. Further, Bayer agreed to reimburse us for all reasonable costs and
expenses incurred to date in defending these proceedings. As of February 20,
2004 Bayer has reimbursed us for approximately $1.6 million in legal expenses,
almost all of which was received in 2003 and is reflected as a credit within
selling, general and administrative expense.
20
Auxilium Pharmaceuticals Litigation
On January 6, 2003, we were named as a defendant in a lawsuit filed by
Auxilium Pharmaceuticals, Inc. (Auxilium), in the Pennsylvania Court of Common
Pleas, Montgomery County. Auxilium was seeking monetary damages and injunctive
relief, including preliminary injunctive relief, based on several claims related
to our alleged breaches of a contract sales force agreement entered into by the
parties on November 20, 2002, and claims that we were misappropriating trade
secrets in connection with our exclusive license agreement with Cellegy.
On May 8, 2003, we entered into a settlement and mutual release agreement
with Auxilium (Settlement Agreement), by which the lawsuit and all related
counter claims were dropped without any admission of wrongdoing by either party.
The settlement terms included a cash payment which was paid upon execution of
the Settlement Agreement as well as certain other additional expenses. We
recorded a $2.1 million charge in the first quarter of 2003 related to this
settlement. Pursuant to the Settlement Agreement, we also agreed that we would
(a) not sell, ship, distribute or transfer any Fortigel product to any
wholesalers, chain drug stores, pharmacies or hospitals prior to November 1,
2003, and (b) pay Auxilium an additional amount per prescription to be
determined based upon a specified formula, in the event any prescriptions were
filled for Fortigel prior to January 26, 2004. As discussed above, in July 2003,
Cellegy received a letter from the FDA rejecting its NDA for Fortigel. We will
not pay any additional amount to Auxilium as set forth in clause (b) above since
Fortigel was not approved by the FDA prior to January 26, 2004. We do not
believe that the terms of the Settlement Agreement will have any material impact
on the success of our commercialization of the product if, or when, the FDA
approves it.
Cellegy Pharmaceuticals Litigation
On December 12, 2003, we filed a complaint against Cellegy in the U.S.
District Court for the Southern District of New York. The complaint alleges that
Cellegy fraudulently induced us to enter into a license agreement with Cellegy
regarding Fortigel on December 31, 2002. The complaint also alleges claims for
misrepresentation and breach of contract related to the license agreement. In
the complaint, we seek, among other things, rescission of the license agreement
and return of the $15.0 million we paid Cellegy. After we filed this lawsuit,
also on December 12, 2003, Cellegy filed a complaint against us in the U.S.
District Court for the Northern District of California. Cellegy's complaint
seeks a declaration that Cellegy did not fraudulently induce us to enter the
license agreement and that Cellegy has not breached its obligations under the
license agreement. We are unable to predict the ultimate outcome of these
lawsuits.
Other Legal Proceedings
We are currently a party to other legal proceedings incidental to our
business. While management currently believes that the ultimate outcome of these
proceedings, individually and in the aggregate, will not have a material adverse
effect on our consolidated financial statements, litigation is subject to
inherent uncertainties. Were we to settle a proceeding for a material amount or
were an unfavorable ruling to occur, there exists the possibility of a material
adverse impact on our business, financial condition and results of operations.
No amounts have been accrued for losses under any of the above mentioned
matters, other than for the Auxilium litigation settlement reserve, as no other
amounts are considered probable or reasonably estimable at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
21
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"PDII." The following table sets forth, for each of the periods indicated, the
range of high and low closing sales prices for the common stock as reported by
the Nasdaq National Market.
High Low
------ ------
2003
First quarter............................................ 12.650 7.100
Second quarter........................................... 12.600 7.350
Third quarter............................................ 26.810 10.330
Fourth quarter........................................... 30.870 20.250
2002
First quarter............................................ 22.410 13.300
Second quarter........................................... 20.000 14.130
Third quarter............................................ 14.900 4.070
Fourth quarter........................................... 10.790 3.040
We believe that, as of March 1, 2004, we had approximately 3,000 beneficial
stockholders.
Equity Compensation Plan Information
Year Ended December 31, 2003
Number of securities
remaining available for
Number of securities Weighted-average future issuance under
to be issued upon exercise price of equity compensation
exercise of outstanding plans (excluding
outstanding options, options, warrants securities reflected in
Plan Category warrants and rights and rights column (a))
- --------------------------------- -------------------- ------------------ -----------------------
(a) (b)
Equity compensation plans
approved by security holders
(2000 Omnibus Incentive
Compensation Plan and 1998
Stock Option Plan)............ 1,037,599 $27.33 939,611
Equity compensation plans not
approved by security
holders(1).................... -- -- --
========= ====== =======
Total............................ 1,037,599 $27.33 939,611
========= ====== =======
(1) The Company does not have any equity compensation plans which have not been
approved by security holders.
Dividend policy
We have not paid any dividends and do not intend to pay any dividends in
the foreseeable future. Future earnings, if any, will be used to finance the
future growth of our business. Future dividends, if any, will be determined by
our board of directors.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below as of and for the
years ended December 31, 2003, 2002, 2001, 2000 and 1999 are derived from our
audited consolidated financial statements and the accompanying notes. Our
consolidated financial statements for 1999 reflect our acquisition of TVG in May
1999, which was accounted for as a pooling of interests, on a pro forma basis as
if TVG had been owned by the Company the entire period. Consolidated balance
sheets at December 31, 2003 and 2002 and consolidated statements of operations,
22
stockholders' equity and cash flows for the three years ended December 31, 2003,
2002 and 2001 and the related notes are included elsewhere in this Annual Report
on Form 10-K and have been audited by PricewaterhouseCoopers LLP, independent
auditors. The selected financial data set forth below should be read together
with, and are qualified by reference to, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our audited consolidated
financial statements and related notes appearing elsewhere in this report.
Statement of operations data:
Years Ended December 31,
----------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(in thousands, except per share data)
Revenue
Service, net.............................................. $329,061 $277,575 $281,269 $315,867 $174,902
Product, net.............................................. (11,613) 6,438 415,314 101,008 --
-------- -------- -------- -------- --------
Total revenue, net..................................... 317,448 284,013 696,583 416,875 174,902
-------- -------- -------- -------- --------
Cost of goods and services
Program expenses.......................................... 227,080 254,140 232,171 235,355 130,121
Cost of goods sold........................................ 1,287 -- 328,629 68,997 --
-------- -------- -------- -------- --------
Total cost of goods and services....................... 228,367 254,140 560,800 304,352 130,121
-------- -------- -------- -------- --------
Gross profit................................................. 89,081 29,873 135,783 112,523 44,781
Operating expenses
Compensation expense...................................... 36,901 32,670 39,263 32,820 19,611
Other selling, general and administrative expenses........ 30,347 44,163 83,815 38,827 9,448
Restructuring and other related expenses.................. 143 3,215 -- -- --
Litigation settlement..................................... 2,100 -- -- -- --
Acquisition and related expenses.......................... -- -- -- -- 1,246
-------- -------- -------- -------- --------
Total operating expenses............................... 69,491 80,048 123,078 71,647 30,305
-------- -------- -------- -------- --------
Operating income (loss)...................................... 19,590 (50,175) 12,705 40,876 14,476
Other income, net............................................ 1,073 1,967 2,275 4,864 3,471
-------- -------- -------- -------- --------
Income (loss) before provision (benefit) for income taxes ... 20,663 (48,208) 14,980 45,740 17,947
Provision (benefit) for income taxes......................... 8,405 (17,447) 8,626 18,712 7,539
-------- -------- -------- -------- --------
Net income (loss)............................................ $ 12,258 $(30,761) $ 6,354 $ 27,028 $ 10,408
======== ======== ======== ======== ========
Basic net income (loss) per share(1)......................... $ 0.86 $ (2.19) $ 0.46 $ 2.00 $ 0.87
======== ======== ======== ======== ========
Diluted net income (loss) per share(1)....................... $ 0.85 $ (2.19) $ 0.45 $ 1.96 $ 0.86
======== ======== ======== ======== ========
Basic weighted average number of shares outstanding(1)....... 14,231 14,033 13,886 13,503 11,958
======== ======== ======== ======== ========
Diluted weighted average number of shares outstanding(1)..... 14,431 14,033 14,113 13,773 12,167
======== ======== ======== ======== ========
Years Ended December 31,
------------------------------------------------------
1999
-------
(in thousands, except per share data)
Pro forma data (unaudited)
Income before provision for income taxes.................. $17,947
Pro forma provision for income taxes (2).................. 7,677
-------
Pro forma net income (2).................................. $10,270
=======
Pro forma basic net income per share (2).................. $ 0.86
=======
Pro forma diluted net income per share (2)................ $ 0.84
=======
Basic weighted average number of shares outstanding (1)... 11,958
=======
Pro forma diluted weighted average number of shares
outstanding (1)........................................ 12,167
=======
Balance sheet data:
As of December 31,
--------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(in thousands)
Cash and cash equivalents................................ $113,288 $ 66,827 $160,043 $109,000 $ 57,787
Working capital.......................................... 100,009 81,854 113,685 120,720 53,144
Total assets............................................. 219,623 190,939 302,671 270,225 102,960
Total long-term debt..................................... -- -- -- -- --
Stockholders' equity .................................... 138,448 123,211 150,935 138,110 60,820
- ----------
(1) See Note 9 to our audited consolidated financial statements included
elsewhere in this report for a description of the computation of basic and
diluted weighted average number of shares outstanding.
23
(2) Prior to our initial public offering, we were an S corporation and had not
been subject to Federal or New Jersey corporate income taxes, other than a
New Jersey state corporate income tax of approximately 2%. In addition,
TVG, a 1999 acquisition accounted for as a pooling of interest, was also
taxed as an S corporation from January 1997 to May 1999. Pro forma
provision for income taxes, pro forma net income and basic and diluted net
income per share for 1999 reflect a provision for income taxes as if we and
TVG had been taxed at the statutory tax rates in effect for C corporations
for all periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Identifying Important Factors That Could Cause Our Actual
Results to Differ From Those Projected in Forward Looking Statements.
Pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this report are advised that this
document contains both statements of historical facts and forward looking
statements. Forward looking statements are subject to risks and uncertainties,
which could cause our actual results to differ materially from those indicated
by the forward looking statements. Examples of forward looking statements
include, but are not limited to (i) projections of revenues, income or loss,
earnings per share, capital expenditures, dividends, capital structure and other
financial items, (ii) statements regarding our plans and objectives including
product enhancements, or estimates or predictions of actions by customers,
suppliers, competitors or regulatory authorities, (iii) statements of future
economic performance, and (iv) statements of assumptions underlying other
statements.
This report also identifies important factors that could cause our actual
results to differ materially from those indicated by the forward looking
statements. These risks and uncertainties include, but are not limited to, the
factors, risks and uncertainties (i) identified or discussed herein, (ii) set
forth under the headings "Business" and "Risk Factors" in Part I, Item 1; "Legal
Proceedings" in Part I, Item 3; and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Part II, Item 7, of this
Annual Report on Form 10-K, and (iii) set forth in the Company's periodic
reports on Forms 10-Q and 8-K as filed with the Securities and Exchange
Commission since January 1, 2003.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our consolidated
financial statements and the related notes appearing elsewhere in this report.
Overview
We are a healthcare sales and marketing company serving the
biopharmaceutical and medical devices and diagnostics (MD&D) industries. We
create and execute sales and marketing campaigns intended to improve the
profitability of pharmaceutical and MD&D products. We do this by partnering with
companies who own the intellectual property rights to these products and
recognize our ability to commercialize these products and maximize their sales
performance. We have a variety of agreement types that we enter into with our
partner companies, from fee for service arrangements to equity investments in a
product or company.
Description of Reporting Segments and Nature of Contracts
Our business is organized into three reporting segments:
* PDI sales and marketing services group (SMSG), comprised of:
o dedicated contract sales services (CSO);
o shared contract sales services (CSO);
o marketing research and consulting services (MR&C); and
o medical education and communication services (EdComm).
* PDI pharmaceutical products group (PPG), comprised of:
24
o copromotion;
o licensing;
o acquisitions; and
o integrated commercialization services.
* PDI medical devices and diagnostics group (MD&D), comprised of:
o contract sales services (CSO);
o clinical sales teams;
o copromotion;
o licensing; and
o acquisitions.
An analysis of these reporting segments and their results of operations is
contained in Note 23 to the consolidated financial statements found elsewhere in
this report and in the Consolidated Results of Operations discussion below.
PDI Sales and Marketing Services Group
Given the customized nature of our business, we utilize a variety of
contract structures. Historically, most of our product detailing contracts have
been fee for service, i.e., the client pays a fee for a specified package of
services. These contracts typically include operational benchmarks, such as a
minimum number of sales representatives or a minimum number of calls. Also, our
contracts might have a lower base fee offset by built-in incentives we can earn
based on our performance. In these situations, we have the opportunity to earn
additional fees, as incentives, based on attaining performance benchmarks.
Our product detailing contracts generally are for terms of one to three
years and may be renewed or extended. However, the majority of these contracts
are terminable by the client for any reason on 30 to 90 days' notice. These
contracts typically, but not always, provide for termination payments in the
event they are terminated by the client without cause. While the cancellation of
a contract by a client without cause may result in the imposition of penalties
on the client, these penalties may not act as an adequate deterrent to the
termination of any contract. In addition, we cannot assure you that these
penalties will offset the revenue we could have earned under the contract or the
costs we may incur as a result of its termination. The loss or termination of a
large contract or the loss of multiple contracts could have a material adverse
effect on our business, financial condition and results of operations. As an
example, in February 2004, Novartis notified us that it was exercising its right
to terminate its contract with us without cause and as a result, $28.9 million
of anticipated revenue associated with the Novartis contract in 2004 will not be
realized. This contract was to run through December 31, 2004. Contracts may also
be terminated for cause if we fail to meet stated performance benchmarks. The
loss or termination of a large contract or the loss of multiple contracts would
have a material adverse effect on our business, financial condition and results
of operations.
Our MR&C and EdComm contracts generally are for projects lasting from three
to six months. The contracts are terminable by the client and provide for
termination payments in the event they are terminated without cause. Termination
payments include payment for all work completed to date, plus the cost of any
nonrefundable commitments made on behalf of the client. Due to the typical size
of the projects, it is unlikely the loss or termination of any individual MR&C
or EdComm contract would have a material adverse effect on our business,
financial condition and results of operations.
PDI Pharmaceutical Products Group
The contracts within the pharmaceutical products group can be either
performance based or fee for service and may require sales, marketing and
distribution of product. In performance based contracts, we provide and finance
a portion, if not all, of the commercial activities in support of a brand in
return for a percentage of product sales. An important performance parameter is
normally the level of sales or prescriptions attained by the product during the
period of our marketing or promotional responsibility, and in some cases, for
periods after our promotional activities have ended.
In the fourth quarter of 2000, we entered into a performance based contract
with GSK. Our agreement with
25
GSK was in support of Ceftin and was an exclusive sales, marketing and
distribution contract. The agreement had a five-year term, but was cancelable by
either party without cause on 120 days' notice. The agreement was terminated by
mutual consent, effective February 28, 2002, due to the unexpected entry of a
competitive generic product.
In May 2001, we entered into a copromotion agreement with Novartis
Pharmaceuticals Corporation (Novartis) for the U.S. sales, marketing and
promotion rights for Lotensin(R), Lotensin HCT(R) and Lotrel(R). That agreement
ran through December 31, 2003. On May 20, 2002, that agreement was replaced by
two separate agreements: one for Lotensin and another one for Lotrel, Diovan(R)
and Diovan HCT(R). Both agreements ran through December 31, 2003; however, the
Lotrel-Diovan agreement was renewed on December 24, 2003 for an additional one
year period. In February 2004, we were notified by Novartis of its intent to
terminate the Lotrel-Diovan contract without cause, effective March 16, 2004
and, as a result, $28.9 million of anticipated revenue associated with the
Lotrel-Diovan contract in 2004 will not be realized. We will continue to be
compensated under the terms of the agreement through the effective termination
date. Even though the Lotensin agreement ended December 31, 2003, we are still
entitled to receive royalty payments on the sales of Lotensin through December
31, 2004. The Lotensin agreement called for us to provide promotion, selling,
marketing and brand management for Lotensin. In exchange, we were entitled to
receive a percentage of product revenue based on certain total prescription
(TRx) objectives above specified contractual baselines. The revenue resulting
from the efforts of the Novartis sales force responsible for Lotrel-Diovan was
classified in the SMSG segment in 2003 instead of the PPG segment, where it was
classified in 2002, due to the fact that during 2002, we were reliant on the
attainment of performance incentives, whereas in 2003 this contract was
basically a fixed fee arrangement.
In October 2001, we entered into an agreement with Eli Lilly and Company
(Eli Lilly) to copromote Evista(R) in the U.S. Under this agreement, we were
entitled to be compensated based upon net sales achieved above a predetermined
level. In the event these predetermined net sales levels were not achieved, we
would not receive any revenue to offset expenses incurred. During 2002, it
became apparent that the net sales levels likely to be achieved would not be
sufficient to recoup our expenses. In November 2002, we agreed with Eli Lilly to
terminate the Evista copromotion agreement effective December 21, 2002.
On December 31, 2002, we entered into an exclusive licensing agreement with
Cellegy Pharmaceuticals, Inc. (Cellegy) for the exclusive North American rights
for Fortigel(TM), a testosterone gel product. The agreement is in effect for the
commercial life of the product. Cellegy submitted a New Drug Application (NDA)
for the hypogonadism indication to the U.S. Food and Drug Administration (FDA)
in June 2002. In July 2003, Cellegy received a letter from the FDA rejecting its
NDA for Fortigel. Cellegy has told us that it is in discussions with the FDA to
determine the appropriate course of action needed to meet deficiencies cited by
the FDA in its determination. Since we filed the lawsuit, Cellegy is no longer
in regular contact with us regarding Fortigel. Thus, for example, we are unaware
of the FDA status regarding Fortigel (as of December 31, 2003, it had not been
approved) and are unaware of what steps Cellegy is taking to develop Fortigel,
to obtain FDA approval for Fortigel, and/or to arrange for a party to
manufacture Fortigel. We have requested this information from Cellegy but have
not received it. Accordingly, we may not possess the most current and reliable
information concerning the current status of, or future prospects relating to,
Fortigel. The issuance of the non-approvable letter by the FDA concerning
Fortigel, however, casts significant doubt upon Fortigel's prospects and whether
it will ever be approved. We cannot predict with any certainty whether the FDA
will ultimately approve Fortigel for sale in the U.S. Under the terms of the
agreement, we paid Cellegy a $15.0 million initial licensing fee on December 31,
2002. This payment was made prior to FDA approval and since there is no
alternative future use of the licensed rights, we expensed the $15.0 million
payment in December 2002, when incurred. This amount was recorded in other
selling, general and administrative expenses in the December 31, 2002
consolidated statements of operations. Pursuant to the terms of the licensing
agreement, we will be required to pay Cellegy a $10.0 million incremental
license fee milestone payment upon Fortigel's receipt of all approvals required
by the FDA (if such approvals are obtained) to promote,