Item 1. Business
Overview
We are a leading global contract research organization providing drug discovery, development and lifecycle management services. Our clients and partners include pharmaceutical, biotechnology, medical device, academic, non-profit and government organizations. We apply innovative technologies, therapeutic expertise and a commitment to quality to help clients and partners accelerate the development of safe and effective therapeutics and maximize the returns on their research and development investments.
We have been in the drug development business for more than 25 years. Our development services include preclinical drug discovery services, programs, Phase I through Phase IV clinical development services and post-approval services, as well as bioanalytical, cGMP, global central laboratory and vaccines and biologics laboratory services. We have extensive clinical trial experience, including regional, national and global studies across a wide spectrum of therapeutic areas and in over 100 countries, spanning six continents. In addition, for marketed drugs, biologics and devices, we offer support such as medical information, patient compliance programs, patient and disease registry programs, product safety and pharmacovigilance, standard response document development, observational studies, Phase IV monitored studies and prescription-to-over-the-counter, or Rx to OTC, programs. Our services offer our clients a way to identify and develop drug candidates more quickly and cost-effectively.
With 86 offices in 43 countries and more than 11,000 employees worldwide, our global infrastructure enables us to accommodate the multinational drug development needs of our clients. We have provided services to 49 of the top 50 pharmaceutical companies in the world as ranked by 2009 healthcare research and development spending. We also work with leading biotechnology companies and government organizations that sponsor clinical research. We are one of the world’s largest providers of drug development services based on 2010 annual net revenue generated from contract research organizations.
Founded upon principles of excellence and passion, PPD shares its clients’ focus on delivering life-changing therapies to help people live healthier lives. We are committed to bringing scientific and clinical expertise, quality and speed to every drug discovery and development program to help our clients develop safe and effective products.
Industry Overview
Drug discovery and development is the process of creating drugs for the treatment of human disease. The drug discovery process aims to identify potential drug candidates, while the drug development process involves the testing of these drug candidates in animals and humans to meet regulatory requirements. Discovering and developing new drugs is an extremely expensive, complex, high-risk and time-consuming process. Multiple industry sources estimate the fully capitalized cost of developing and commercializing a new pharmaceutical product ranges from $800 million to over $1 billion. In addition, it generally takes between 10 and 15 years to develop a new prescription drug and obtain approval to market it in the United States.
The drug development services industry provides independent product development services to pharmaceutical, biotechnology companies, and government organizations. This industry has evolved from providing limited clinical trial services in the 1970s to a full-service industry today characterized by broader relationships with clients and by service offerings that encompass the entire drug development process, including preclinical evaluations, study design, clinical trial management, data collection, biostatistical analyses, regulatory consulting, clinical laboratory and diagnostic services, pre- and post-approval safety analysis, product registration and post-approval support.
Over the past 25 years, technological advances, as well as the emergence of the biotechnology industry, have dramatically changed the drug discovery process. New and improved technologies have evolved such as ultra high-throughput screening, new in vitro and in vivo preclinical profiling techniques and the gene-based drug research commonly referred to as genomics. The objective of these innovations is to find more drug targets and to screen chemical compounds against targets much more quickly, with literally millions of compounds possible. This process is expected to produce many more molecules having the ability to affect biological activity. These molecules then need to be tested quickly and economically to determine their viability as potentially safe and effective drug candidates.
The Drug Discovery Process
Targets. Historically, scientists have used classical cellular and molecular biology techniques to map biological pathways in cells to provide a cellular basis for understanding disease processes and to identify key proteins involved in the disease. Proteins that are increased, decreased or altered in some manner in a disease are potential drug targets and can be confirmed in a genetic in vivo animal model that knocks out expression of the protein or over-expresses the protein. Scientists also use genomics to pinpoint the genes responsible for cellular disease functions. The preferred genes encode proteins that are used as drug targets in chemical screens.
Screening. After identifying a potential drug target, researchers develop tests, or assays, to screen chemicals for their ability to alter the functional activity of the target. Ones that do so are called “hits.” High-throughput screening processes can quickly evaluate thousands of chemicals.
Lead Generation. Once a hit is identified in a functional assay, the compound is profiled for drug characteristics such as solubility, metabolism, chemical and metabolic stability and feasibility for commercial production. Scientists now also design compound libraries to provide a starting point to identify leads in the drug discovery process and to better understand the biochemistry and therapeutic relevance of targets. High quality libraries contain compounds of known purity, structure and weight, and also have diverse structural variations. Hits that have good potency and selectivity are called “leads” and are then tested for their potential as drug development candidates.
Lead Optimization. The process of “lead optimization” involves refining the chemical structure of a lead to improve its drug characteristics, with the goal of producing a preclinical drug candidate. Lead optimization typically combines empirical and rational drug design. In empirical design procedures, large numbers of related compounds are screened for selected chemical characteristics. In rational drug design, chemicals are optimized based on the three-dimensional structure of the target. A lead that has been optimized to meet particular drug candidate criteria and is ready for toxicity testing is called a preclinical candidate.
Process Research and Development. Compounds created for screening in lead generation and lead optimization are made in relatively small, milligram quantities. Before a drug candidate can be taken into preclinical and clinical trials, larger quantities must be produced. The goal of process research is to improve production of drug candidates in these larger quantities, typically by minimizing the number of production steps, and to determine how to reduce the time and cost of production. Process development refers to the production scale-up and further refinement required for clinical trials and commercial manufacturing.
The Drug Development Process
The drug development process consists of two stages: preclinical and clinical. In the preclinical stage, the new drug is tested in vitro, or in a test tube, and in vivo, or in animals, generally over a one- to three-year period to assess and optimize potential use in humans. After successful preclinical testing, the new drug can be advanced to the clinical development stage, which involves testing in humans. The following discussion describes the role of the U.S. Food and Drug Administration, or FDA, in the clinical drug development process. Similar regulatory processes exist in other countries.
Prior to commencing human clinical trials in the United States, a company must file with the FDA an investigational new drug application, or IND, containing information about animal toxicity and distribution studies, manufacturing and control data, stability data and a clinical development plan for the product, and a study protocol for the initial proposed clinical trial of the drug or biologic in humans. The design of these trials, also referred to as the study protocols, is essential to the success of the drug development effort. The protocols must correctly anticipate the nature of
the data to be generated and results that the FDA will require before approving the drug. If the FDA does not comment within 30 days after an IND filing, human clinical trials may begin.
The clinical stage is the most time-consuming and expensive part of the drug development process. The drug undergoes a series of tests in humans, including healthy volunteers as well as participants with the targeted disease or condition. Human trials usually start on a small scale to assess safety and then expand to larger trials to test efficacy and safety in the target population. These trials are generally conducted in the following three phases, with multiple trials generally conducted within each phase:
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Phase I trials involve testing the drug on a limited number of healthy individuals, typically 20 to 80 people, to determine the drug’s basic safety data, including tolerance, absorption, metabolism and excretion. This phase lasts an average of six months to one year. In some therapeutic areas such as oncology, where cytotoxic compounds are being investigated, it is sometimes necessary to run Phase I trials in diagnosed patients instead of healthy volunteers.
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Phase II trials involve testing a small number of volunteer participants, typically 100 to 200 people, who suffer from the targeted disease or condition, to determine the drug’s effectiveness and how different doses work. This phase lasts an average of one to two years.
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Phase III trials involve testing large numbers of participants, typically several hundred to several thousand people, to verify efficacy on a large scale, as well as long-term safety. These trials involve numerous sites and generally last two to three years.
After the successful completion of all clinical phases, a company submits to the FDA a new drug application, or NDA, for a drug, or a biologic license application, or BLA, for a biologic, requesting that the product be approved for marketing. The NDA/BLA is a comprehensive, multivolume filing that includes, among other things, the results of all preclinical and clinical studies, information about how the product will be manufactured and tested, additional stability data and proposed labeling. Manufacturing and quality control procedures must conform to rigorous standards in order to receive FDA approval and the validation of these procedures is a costly endeavor. The FDA’s review can last from several months to several years, with the median approval time historically lasting approximately 13 months, although review times appear to have increased in recent years. Drugs that successfully complete this review may be marketed in the United States. As a condition to its approval of a drug, the FDA may require post-approval clinical trials following receipt of approval in order to monitor long-term risks and benefits, to study different dosage levels or to evaluate different safety and efficacy parameters in target populations. In recent years, the FDA has increased its reliance on these trials, and with the passage of the Food and Drug Administration Amendments Act, or FDA Act, in late 2007, the FDA is likely to require sponsors to run more post-approval trials in the future.
Trends Affecting the Drug Discovery and Development Industry
The drug discovery and development services industry has been and will continue to be affected by, among others, the following trends:
Rapid Technological Change and Increased Data. Scientific and technological advancements are rapidly changing the drug discovery and development processes, requiring industry participants to make significant investments to keep pace with competition. The technology to understand gene function, known as functional genomics, is dramatically increasing the number of identified potential drug targets within the human body. Pharmaceuticals on the market today target approximately 500 human gene products. With an estimated 20,000 to 25,000 human protein-coding genes, an enormous number of targets for therapeutic intervention remain untapped. The number of targets increases the need for companies to use state-of-the-art technologies to effectively validate and optimize promising targets and lead candidates. These evolving technologies and the expertise to manage them are costly and involve significant investments in expertise, capital, intellectual property and sophisticated instrumentation. Thus, drug development service firms that have the capability and expertise required to provide early-stage research and development services offer the potential to offset some of these investments and reduce the financial risk of drug discovery efforts.
Changes in the Regulatory Environment. The drug discovery and development process is heavily regulated by the FDA and its Center for Drug Evaluation and Research. Recent product safety concerns, increases in drug and general healthcare costs and the emergence of importation issues have placed the FDA and other regulatory agencies under
increased scrutiny. The war on terror, the risk of global vaccine shortages and the threat of new potential pandemics have elevated the FDA’s focus on research in the areas of bioterrorism and vaccine development. As a result of these and other events, drug safety, cost and availability are under intense monitoring and review by Congress, the FDA and other government agencies. In 2007, primarily in response to the FDA’s handling of postmarket data and recent drug safety concerns, the FDA Act was signed into law. In addition to reauthorizing and amending various provisions that were scheduled to expire, this Act provided the FDA with new regulatory authority to require drug sponsors to run post-approval studies and clinical trials and develop and implement risk evaluation and mitigation strategies. It is also likely that additional legislation will be passed that will impact the FDA and drug development and approval process in the United States. The FDA Act, continued drug safety issues and future legislation could have a lasting and pronounced impact on the drug discovery and development industry.
Government-Sponsored Drug Research and Development. Government agencies continue to be a significant source of funding for new drug and vaccine research and development. The total budget of the National Institutes of Health, or NIH, for fiscal year 2011 is approximately $32.3 billion, including significant appropriations for drug research and development initiatives in the areas of cancer, vaccines, AIDS and chronic diseases such as diabetes. The total budget request for fiscal year 2011 for the CDC, or Center of Disease Control, dedicates several billion dollars for infectious diseases, pandemic flu and vaccines for children. As a result, drug research and development service providers and contractors, including CROs, should continue to benefit from government-sponsored research and development initiatives.
Increase in Potential New Drug Candidates. The number of drug compounds in various stages of development has increased steadily over the past five years, with particularly strong growth in the number of compounds in early stages of development. While research and development spending and the number of drug candidates are increasing, the time and cost required to develop a new drug candidate also have increased. Many pharmaceutical and biotechnology companies do not have sufficient internal resources to pursue development of all of these new drug candidates on their own. Consequently, these companies are looking to the drug discovery and development services industry for cost-effective, innovative and rapid means of developing new drugs.
Research and Development Productivity. While the total number of compounds in clinical development has increased in the last several years, thereby increasing the aggregate spending on research and development programs associated with new drug candidates, the number of novel new drugs approved for marketing remained relatively flat or even declined in recent years. Pharmaceutical and biotechnology companies have responded by focusing on efforts to extend the value of existing products, improve clinical success rates, restructure and re-engineer business processes and business units and lower clinical study costs. Furthermore, many pharmaceutical and biotechnology companies have also responded to the productivity challenge by increasing their focus on licensing and collaborative arrangements to improve new drug pipelines and gain financing for future development and marketing programs.
Biotechnology Industry Growth. The U.S. biotechnology industry has grown rapidly over the last decade and has emerged as a key client segment for the drug discovery and development services industry. While the biotechnology industry accounts for a smaller percentage of total industry R&D expenditure, the rate of biotechnology companies’ spending is higher than traditional pharmaceutical companies. In recent years, this industry has generated significant numbers of new drug candidates that will require development and regulatory approval. Many biotechnology companies do not have the necessary staff, operating procedures, experience or expertise to conduct clinical trials on their own. Because of the time and cost involved, these companies rely heavily on CROs to conduct clinical research for their drug candidates. The ability of small and mid-sized biotech companies to attract the funding needed to sustain operations and advance clinical candidates to subsequent stages in the development process was significantly and adversely affected by the global financial crisis and can affect the growth of the development services industry.
Globalization of Clinical Trials. Clinical trials have become increasingly global as sponsors seek to accelerate patient recruitment, broaden access to trained investigators, reduce costs and gain access to new sources of market expertise. Moreover, pharmaceutical and biotechnology companies are increasingly seeking to file drug registration packages in multiple countries to expand drug product markets. More clinical study work is being conducted in Asia, Eastern Europe, and Latin America, as well as other geographic regions. The clinical studies to support these registration packages frequently include a combination of multinational and domestic trials. This trend puts an emphasis on global experience and coordination throughout the development process, including the collection, analysis, integration and reporting of clinical trial data.
Cost Pressures of Introducing New Drugs. Market forces, healthcare reform and other governmental initiatives place significant pressures on pharmaceutical and biotechnology companies to reduce drug prices. In addition, increased competition as a result of patent expiration, market acceptance of generic drugs, and governmental and privately managed care organization efforts to reduce healthcare costs have added to drug pricing pressures. The industry is responding by consolidating, streamlining operations, decentralizing internal discovery and development processes, and minimizing fixed costs. In addition, increased pressures to differentiate products and justify drug pricing are resulting in an increased focus on healthcare economics, safety monitoring and commercialization services. Moreover, pharmaceutical and biotechnology companies are attempting to increase the speed and efficiency of internal new drug discovery and development processes.
PPD’s Solution
We address the needs of the pharmaceutical, biotechnology industries, as well as academic, non-profit and government organizations, for drug discovery and development by providing integrated services to help our clients maximize the return on their research and development investments. Our application of innovative technologies, therapeutic expertise and commitment to quality throughout the drug discovery and development process offers our clients a way to identify and develop successful drugs and devices more quickly and cost-effectively. We have obtained significant drug development expertise from more than 25 years of operation. Finally, with global infrastructure and expertise in key regions throughout the world, we are able to accommodate the multinational development needs of our clients.
Our Strategy
Our corporate mission is to help clients maximize the return on their R&D investments and accelerate the development of safe and effective therapeutics to patients. The key parts of our strategy to accomplish this mission include the following:
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Build our core competencies. We are an established company led by professionals with significant drug development and post-approval experience helping bring successful products to market throughout the world and continuing to support those products after market. This experience and expertise constitute our core operational strengths. Our performance in development services has made us one of the largest providers of those services globally. We are continually building our competencies by seeking to hire top professionals in key markets around the world.
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Provide a broad range of integrated drug discovery and development services and products. We offer a broad range of integrated services that are designed to address our clients’ needs from the preclinical through post-approval phase. By integrating extensive drug discovery and development services across our clients’ product life cycles, we can more effectively serve existing clients and attract new clients. We believe that our range of drug discovery and development services is one of the most extensive available within a single company.
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Incorporate advanced technologies into our service offerings. We have broad experience in the use of technology to improve quality while creating cost efficiencies and accelerating the drug discovery and development processes. We offer our clients a wide range of technology-based services and products, using a mixture of commercially available third-party systems and internally developed software to help expedite the drug discovery and development processes for both drugs and devices. As new technologies develop, we equip and train our employees to make use of the innovations. We also plan to continue to leverage and build strategic technology relationships.
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Expand globally to meet client needs. We currently have operations in Africa, the Americas, Asia Pacific, Europe and Middle East, which position us to meet our clients’ multinational needs. We intend to further expand globally when we deem it appropriate to meet our existing and prospective clients’ demands.
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Pursue strategic acquisitions and investments. We will continue to actively seek strategic acquisitions and investments, both within and complementary to our current business. Our criteria for acquisitions and investments include complementary client lists, ability to increase market share within and across clients,
complementary therapeutic area and service segment strengths, strategic geographic capabilities, particular process expertise and complementary services, products or technologies.
Our Services
We provide services designed to increase efficiency, reduce time and save costs through our global infrastructure, integrated R&D technologies experience, and client-focused communications. We operate in two segments: Clinical Development Services and Laboratory Services. See Note 16 in the notes to consolidated financial statements for segment information regarding net revenue and operating income (loss).
Our Clinical Development Services Segment
We have designed our various global services to be flexible and integrated in order to assist our clients in optimizing their R&D spending through the clinical stages of the development process. We provide a broad range of clinical development services to meet clients’ needs.
Global Product Development Services. We specialize in developing integrated product development strategies that provide companies with interdisciplinary preclinical; chemistry, manufacturing and controls, or CMC; medical; and regulatory road maps for the development of their products through global marketing approvals and the post-marketing life-cycle. Our experienced physicians and scientists supplement our clients’ program teams to develop and execute an integrated product development plan designed to speed the product to market with reduced risk. Our awareness of the biopharmaceutical industry’s early-stage program needs allows for rapid initiation of the development planning from preclinical testing into the clinic. Our global footprint allows us to provide high quality development services to achieve development goals that meet our clients’ expectations.
Phases II-IV Clinical Trial Management. The core of our clinical development business is a comprehensive package of services for Phases II-IV clinical trials which allows us to offer our clients an integrated package of clinical management services. We have significant clinical trials experience in the following areas:
General Areas of Expertise
Specific Areas of Expertise
Analgesia
Acute and chronic pain, cancer break-through pain
Cardiovascular
Hypertension, angina pectoris, stroke, peripheral arterial disease, congestive heart failure, atrial fibrillation, acute coronary syndrome, thromboembolic disorders
Central nervous system
Schizophrenia, depression, epilepsy, chronic pain, anxiety, panic disorders, insomnia, multiple sclerosis, Alzheimer’s disease, Parkinson’s disease, acute pain, neuropathic pain, mood disorders, anxiety, attention-deficit hyperactivity disorder, psychotic disorders, substance abuse disorders
Critical care
Sepsis, acute respiratory distress syndrome, trauma
Dermatology
Wound healing, acne, hair loss, psoriasis
Gastroenterology
Duodenal ulcer, gastric ulcer, gastro-esophageal reflux disease, H.pylori, nonsteroidal anti-inflammatory drug-induced ulcers, inflammatory bowel disease, irritable bowel syndrome
Genitourinary
Incontinence, sexual dysfunction, overactive bladder
Hematology
Leukemia, hemophilia, lymphoma, myeloma, anemia
HIV/AIDS
Primary disease, treatment/prophylaxis of opportunistic infections
Infectious diseases
Clostridium difficile, bacteremia, community-acquired pneumonia, resistant pathogens, complicated skin and skin structure infection, sepsis, human papilloma virus, herpes simplex, chronic hepatitis B, chronic hepatitis C, genital herpes, respiratory syncytial virus, influenza, vaccines
Metabolic/endocrine
Diabetes (both Type 1 and Type 2), growth hormone, hyperlipidemia
Oncology
Genitourinary, gastrointestinal, thoracic, hematologic, supportive, breast/gynecological and other cancers
Pulmonary/allergy
Asthma, allergic rhinitis, chronic sinusitis, neonatal RSV treatment, prophylaxis
Rheumatology/immunology
Rheumatoid arthritis, osteoarthritis, lupus, gout, psoriasis
Urology
Sexual dysfunction, urinary incontinence, overactive bladder
Women’s health
Osteoporosis, hormone replacement therapy
We provide our clients with one or more of the following Phase II-IV clinical trial management services:
Study Protocol and Case Report Form Design. The protocol defines the medical issue the study seeks to examine and the statistical methods that will be used. Accordingly, the protocol specifies, for example, the frequency and type of laboratory and clinical measures that are to be tracked and analyzed, the number of participants required to produce a statistically valid result, the period of time over which they must be tracked, and the frequency and dosage of drug administration. To be successful and for the product to make it to market, the protocol must fulfill requirements of regulatory authorities. Once the study protocol has been finalized, the case report form, or CRF, must be developed. The CRF is the critical document for investigative sites to record the necessary clinical data as dictated by the study protocol. If necessary, the protocol and CRF change at different stages of a trial. A CRF for one participant in a given study might consist of 100 or more pages. We serve our clients in the critical area of study design by applying our experience in the preparation of study protocols and CRFs and providing the associated study-specific training. More recently, the industry has shifted towards electronic data capture, or EDC. In this case, the paper-based CFR is replaced by custom data capture screens that enable real-time data entry and facilitate remote monitoring by our clinical team. We believe we are an industry leader in EDC and provide a variety of EDC solutions for the majority of our customers.
Clinical Trial Feasibility Assessment. We offer comprehensive feasibility assessment for clinical trials and programs to assist with refinement of study design, operational planning and preliminary site identification. We use a variety of data sources during feasibility assessment, including our own experience in the indication, information collected from medical literature and information from global investigator surveys. To facilitate investigator survey conduct globally, we have created the eFeasibility system, which allows investigators to receive relevant study information and provide feedback in a secure online environment without having to provide repetitive information that is unlikely to change over time. We also supplement our own data with commercially available information on clinical trial experience and current patterns of care for the condition. The result of this evaluation is a complete picture of the planned trial or program, including how it fits into the current therapeutic landscape, the competitive trial environment, optimal choice of sites and countries, potential regulatory hurdles and enrollment projections.
Site and Investigator Recruitment. Independent physicians, referred to as investigators, administer the compound under investigation to participants at hospitals, clinics or other locations, referred to as sites. A significant portion of a trial’s success depends on the identification and recruitment of experienced investigators with an adequate base of participants who satisfy the requirements of the study protocol. We recruit these investigators to participate in clinical trials and have access to a database of over 40,000 investigators who have conducted clinical trials for us in the past. In addition to this database, we license a commercial investigator database, supplementing our internal resources to provide qualified investigators for clinical trials in any therapeutic area. We also work closely with clients to identify additional investigative sites with a proven record in managing and overseeing clinical studies. We are continually looking for new investigative sites around the world that have the ability to recruit patients in the therapeutic area of the trial, to comply with GCPs, or good clinical practices, and GPPs, or good pharmacoepidemiology practices, and to meet our expectations for data quality and ethical trial conduct.
Patient Enrollment. The investigators, with our assistance, find and enroll patients suitable for the study. The speed with which trials can be completed is significantly affected by the rate at which patients are enrolled. Prospective patients are required to review information about the drug or device and its possible side effects, and sign an informed consent form to record their knowledge and acceptance of potential side effects. Patients also undergo a medical examination to determine whether they meet the requirements of the study protocol. Those who qualify and agree to participate are then randomized to study treatment as specified by the study protocol, or they might be studied naturalistically according to the approved label in post-marketing studies. Participants undergo follow-up examination by the investigator as specified by the study protocol. We supplement investigator enrollment for studies with comprehensive patient recruitment services. These services consist of site and patient-facing information to increase awareness of trials that we are conducting on behalf of our sponsors. Examples of these services include development of study branding and materials to promote awareness of the trial at sites, creation of aids such as flip charts and videos to assist in the informed consent process, patient resource guides, referral outreach, advertising through traditional media (newspaper, radio, television) and the development of study websites with internet and social media network advertising.
Interactive Voice and/or Web Response Systems. We provide computer-automated systems to conduct various real-time interactive transactions within clinical trials. Investigators, site personnel and study participants may contact the interactive system via phone or internet and have access to role-specific functionality based on their unique, password-secured identity. The transactional functionality of our interactive systems includes any combination of the following: participant screening; randomization; study treatment assignment; study supplies management; study visit scheduling; participant diary data collection; emergency study treatment unmasking; and study participant status updating. We can also include additional protocol-specific functionality. The interactive systems also provide frequently-updated reports. These reports provide important real-time status information for clinical monitoring and project management staff, as well as our clients. Our support services for these interactive systems include 24/7/365 access to support assistance for callers, and high-reliability, high-availability management of the computer, web-hosting and telephone equipment for the systems.
Global Clinical Supplies. We provide global clinical supply management services for study treatments (drugs, biologics or devices) being evaluated within clinical trials. These services include inventory planning and management, regional warehouse depot storage in various locations around the world, management of third-party primary packaging and labeling, product re-labeling, total investigative product accountability, purchase of ancillary and commercially available products, import/export coordination and management of product return and destruction. We operate a full-service import, storage and distribution depot in each of the following locations: Kiev, Ukraine; Moscow, Russia; Johannesburg, South Africa; Sao Paulo, Brazil; Athlone, Ireland; and scheduled to open in 2011, Beijing, China.
Study Monitoring and Data Capture. As they examine participants and conduct tests in accordance with the study protocol, investigators record data on CRFs or enter data into an EDC system. Specially trained persons known as monitors visit sites regularly to ensure that CRFs are completed correctly and to verify that the study has been conducted in compliance with the protocol and GCP. We offer data capture technologies that can significantly enhance both the quality and timeliness of clinical data collection while achieving real time data assessment of trial progress. Our study monitoring and data collection and cleaning services are designed to comply with the safety reporting guidelines of the FDA and other relevant regulatory agencies, as well as provide timely reviews for independent data monitoring safety committees. With significant experience conducting large global clinical trials, we have monitored thousands of clinical trials, including many large international trials with hundreds of sites and thousands of participants per trial. Our project management services are key to providing leadership and direction, across our global team, utilizing systems and processes to assure quality, effective delivery and accuracy throughout the project. Our global risk management process addresses potential obstacles, provides strategic intervention solutions and determines escalation pathways for further discussion, if needed.
We monitor our clinical trials in compliance with government regulations and guidelines. We have adopted global standard operating procedures intended not only to satisfy regulatory requirements in the United States and in many foreign countries, but also to serve as a tool for controlling and enhancing the quality of our clinical trials. All of our standard operating procedures comply with GCP requirements and the International Conference on Harmonisation, or ICH, standards. The FDA has adopted these standards in its guidance documents and the members of the European community and Japan have codified these standards into their clinical research regulations. We compile, validate, analyze, interpret and submit data generated during clinical trials to the FDA or other relevant regulatory agencies for purposes of assisting our clients in obtaining regulatory approval. We also provide consulting on the conduct of clinical trials for simultaneous regulatory submissions to multiple countries.
Government Services. We have an extensive history of working with the NIH, particularly with the National Institute of Allergy and Infectious Diseases, or NIAID. We have experience working as the clinical site monitoring group for the Division of AIDS, or DAIDS, at NIAID since 1990. The initial clinical site contract requirements were for monitoring services at domestic sites; however, this has been expanded over the years to include both domestic and international sites as well as GCP training for the sites, laboratory audits and GLP training and quality management. In addition to the monitoring contract with DAIDS, we provide support to all DAIDS clinical research programs. Other groups we support within NIAID include the Division of Microbiology and Infectious Diseases and the Division of Allergy Immunology and Transplantation. In the past year, we have assisted the Division of Microbiology and Infectious Disease with their H1N1 pandemic response by providing protocol development, essential document collection, clinical monitoring and safety services. In addition to work with the NIH, we were awarded a contract with the FDA to assess their spontaneous adverse event safety surveillance system.
Data Management and Biostatistical Analysis. We provide clients with design input for product development plans, protocol design, CRF design and database development. In addition, we have in-depth experience building data
capture systems and our database structures comply with established industry standards and government regulations. Our experienced data management staff works with monitors and sites to clean the CRF data in real time. We prepare statistical planning and analysis summaries for interim and final analyses, data safety monitoring committees, endpoint adjudication committees and regulatory submissions, including NDAs, BLAs and premarket approval applications, or PMAs. We deliver real-time analysis presentations to clients seeking to have frequent review of their data through the life of their projects. We have supported clients in integrated data for submissions as well as full delivery of regulatory-compliant data files.
Our biostatistics technology infrastructure allows us to streamline processes and enable true global integration of our staff, services and solutions, ensuring future compliance and scalable operations. Our statistical science services streamlines and improves the development of investigative drugs through the implementation of innovative and advanced statistical methodology in clinical trials. Our clients rely on our statistical scientists to plan and perform the highly technical, specialized statistical methods that can be required to submit drug marketing applications to regulatory agencies, publish manuscripts in medical and statistical journals, complete post-marketing clinical trials and observational studies, and evaluate medical treatments on behalf of government agencies.
Global Regulatory and Medical Writing Services. We provide comprehensive global regulatory strategic planning and consulting services for product development from preclinical phase through post approval life cycle optimization and management for all product platforms including drugs, biologics, vaccines, devices and generics. These services include preclinical, chemistry, manufacturing and controls, or CMC, regulatory agency liaison and facilitation of client meetings with regulatory authorities, and product development strategy through all phases and clinical protocol considerations, all enhanced with strategic regulatory intelligence. With multinational global clinical trials, we plan, capture and track the critical regulatory agency activities, milestones and timelines through an electronic tool, RESULT, which offers added efficiency and precision. These services are complemented by full medical writing services, including clinical study report writing, protocol development, application authoring, program management and other regulatory services designed to reduce overall development time. We have full service electronic publishing and submissions outfit for regulatory dossiers and reports with extensive experience in the preparation, assembly, publication and submission of dossiers such as clinical trial and marketing applications and reports to regulatory agencies.
In addition, our global operations enable effective navigation of regulatory agencies with strong relationships with boards of health and up-to-date knowledge of the dynamic and evolving regulatory landscape worldwide. We capture this extensive regulatory intelligence in a database from which strategic information is derived to augment clinical trials and enhance accuracy and value of services delivered to clients to enable successful outcomes.
Our preclinical experts integrate pharmacology, metabolism, pharmacokinetic and toxicology expertise to provide preclinical program design and project management services. We provide a broad range of preclinical services including:
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preclinical program design;
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toxicology consulting; and
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technical writing and regulatory submissions.
To support the clinical development program, we write the toxicology study protocols; identify qualified GLP testing facilities; manage the placement and conduct of studies; and prepare and review pharmacology, toxicology, absorption and metabolism data for regulatory submissions.
Our technical writers, alongside our toxicologists, prepare pharmacology and toxicology summaries for regulatory submissions. They also work with regulatory authorities to develop preclinical plans. We offer a full range of regulatory support services, including document preparation, review and submission for all preclinical regulatory filings required by regulatory agencies, and facilitation of meetings with regulatory agencies to ensure successful outcomes.
Safety/Pharmacovigilance. We provide comprehensive pharmacovigilance services to the pharmaceutical, biotechnology and medical device industry. In addition to full safety case processing, data entry and analysis, we offer full medical support, data safety and endpoint committee coordination, endpoint dossier preparation and product complaint management. Our global medical staff provides ongoing support to all of the clinical development functions. Our global
reach enables us to offer services such as Senior Medical Officer support for Health Canada and expedited safety report submissions in the Americas, Europe and Asia Pacific region.
Post-Approval Services. We provide custom-designed post-approval services for pharmaceutical and biotechnology clients. The portfolio of services we offer in this area can be divided into two distinct segments: Late Phase Services, which includes Phase IIIb/IV studies, observational studies and registries, database studies, epidemiology, health economics and reimbursement planning, health outcomes, and risk evaluation and mitigation strategies, or REMS; and Pharmacovigilance and Medical Communications Services, which includes pharmacovigilance, adverse event reporting, literature surveillance, signal detection, regulatory submission, professional call center services, drug information, patient persistency, safety and REMS call center and writing and editorial services. We deliver our late phase research through an innovative operational model that combines remote site management and real time data review with on-site monitoring. This approach enables cost-efficient alternative monitoring solutions and results in increased site communication and satisfaction.
PPD GlobalView, our proprietary web-based data capture system, provides our post-approval studies with a customizable, intuitive system for investigators to fulfill their study objectives. Due to the relative size of such studies and their objective to evaluate product use in a real-world setting after approval, late phase studies sometimes also recruit investigators without research experience. PPD GlobalView provides such sites with an easy-to-use study tool that integrates into the workflow of busy medical practices. Applying advanced technologies and experience, we combine health outcomes such as epidemiology, psychometrics and economics with clinical research to measure and compare risks, benefits, economic impact and quality-of-life impact of drug therapies. Our Phase IV monitoring studies can produce valuable safety and efficacy data analyses, as well as provide information for participant education programs. Our registries and observational studies collect real-world data on how a product is used in a non-controlled setting. Data can be used to determine actual prescriber use or treatment patterns, to collect potential safety signals for further investigation, and to evaluate effectiveness and participant quality of life. Our participant adherence programs can optimize real-world outcomes and indicate ways to help enhance proper use of a drug by the physician and participant.
In July 2010, we announced an agreement with Microsoft Corp. to jointly implement an innovative technology solution designed to improve efficiency in managing FDA-mandated REMS programs. When completed, this first-of-its kind technology solution will provide biopharmaceutical companies with a long-term system for managing operational components of REMS programs while tracking large amounts of information collected from multiple sources, including patients, healthcare providers and pharmacies. REMS programs are required by the FDA for certain marketed drugs to ensure the benefits of the product offered to consumers outweigh the risks.
eClinical Initiatives. We continue to invest in technology to support our business. In 2010, we implemented a web portal strategy designed to integrate our applications for our internal staff, clients, investigator sites and patients. We are also investing in identification and access management technology designed to provide streamlined access to our systems, increase security and offer more effective management of user accounts. These technologies should improve our transparency to data and offer a greater ability to integrate with our sponsors.
As of December 31, 2010, our web portals were supporting more than 400 client studies across more than 90 pharmaceutical, biotechnology, clinical, laboratory and government clients, with more than 11,000 external users. This technology has become a core part of how we provide secure, timely access to key study information to our clients. We continue to expand our use of a web-based document management system across the enterprise. This system enables us to utilize resources across disparate locations through the use of workflow automation, electronic signatures and content sharing for global project and departmental teams.
As trials continue to move to EDC, PPD is committed to offering the best solutions available. Our preferred remote deposit capture, or RDC, technology is the Oracle® Clinical’s RDC platform, but we offer our clients access to other industry leading EDC platforms such as Medidata’s Rave®. Supporting web portal and EDC platforms, our technical operation group provides end-user support, study set-up, maintenance and solution development. All of these efforts support our goal of alignment to a global business providing enabling technologies to our staff and clients based on proactive, intelligent and consumable data.
We provide consulting services to help pharmaceutical and biotechnology companies assess and resolve clinical data management and safety system challenges, such as integrating and customizing systems, migrating clinical and safety data, providing computer systems validation services that include compliance evaluation, and updating or replacing legacy systems to meet regulatory guidance. We provide expertise on the Oracle Health Sciences suite of products with a full range of support services including installation, training, validation, technical support and custom development. Also, leveraging our technical infrastructure, we provide application service provider hosting services for the entire Oracle Health Sciences suite of products.
Our Laboratory Services Segment
We provide our clients with one or more of the following laboratory services:
Phase I Clinic. Having conducted Phase I studies for more than 21 years, we are one of the industry’s most experienced Phase I trial providers. Our 330+ bed Phase I clinic in Austin, Texas, capitalizes on our strengths in conducting first-in-man studies, cardiac safety monitoring and large, complex, procedure-intensive Phase I trials. Our professional physicians and highly trained research staff administer general Phase I safety tests, special population studies and bioavailability and bioequivalence testing. Bioavailability and bioequivalence testing involves administration of test compounds and obtaining biological fluids sequentially over time to measure absorption, distribution, metabolism and excretion of the drug. Our Phase I unit also includes a dental surgical and research clinic to evaluate the safety and effectiveness of new analgesic compounds in third molar extraction models. Our Phase I clinic has on-site capabilities for flow cytometry measurement, allowing rapid measurement of cell surface biomarkers immediately following blood sample collection to evaluate critical pharmacological actions and central laboratory capabilities for small to medium U.S. Phase II through IV multicenter safety studies. Our Phase I clinic integrates supporting data management, biostatistics and medical writing services within its program management. We have the capability to fully support comprehensive early clinical development programs. Our Phase I program can also be integrated with other services that we provide, such as bioanalytical for the measurement of the pharmaceutical compound and its metabolites in blood products and cGMP, or good manufacturing practices, to qualify clinical supplies that support our custom pharmacy compounding. In 2010, our Phase I Clinic entered into agreements with four independent North American patient clinics to extend our Phase I capabilities and allow us to undertake and schedule trials in special patient populations and also conduct a greater number of Phase I trials with biological, monoclonal antibody and protein-based pharmaceuticals.
Global Central Laboratories. With laboratory facilities in Highland Heights, Kentucky, Brussels, Belgium, Singapore and Beijing, China, our global central laboratories provide highly standardized safety and biomarker testing services with customized results databases for pharmaceutical and biotechnology companies engaged in clinical drug development, as well as government-funded studies. We focus on providing long-term, large-scale studies where laboratory measurement of clinically relevant endpoints is critical. Our global central laboratories utilize the same standard operating procedures and maintain identical instruments in every facility. All of our facilities are College of American Pathologists, or CAP accredited, and National Glycohemoglobin Standardization Program, or NGSP, and CDC certified. All of our facilities run the same CAP proficiency testing on a quarterly basis. In addition to these international quality standards we run our own unique Global Laboratory Assay Standardization Survey, or GLASS, program weekly on most common analytes, ensuring continuity and consistency of data at all stages of a clinical project. We also standardize data collection and reporting on a global basis utilizing the same software platform, ConneXion. This platform provides real time data and eliminates the need to merge data sets from different regions. This platform also provides clinical teams with a live, real-time database access via a secure web interface.
Vaccines and Biologics Laboratory. Our vaccines and biologics testing facility located in Wayne, Pennsylvania performs immunogenicity testing to establish efficacy of new vaccine candidates in inducing cellular and humoral immune responses and employs molecular detection methods such as polymerase chain reaction, or PCR, testing to detect the absence of pathogens following administration of a vaccine. Our laboratory is involved in vaccine testing for influenza, Human Immunodeficiency Virus, or HIV, haemophilus influenza type B, human papillomavirus, pneumococcus, staphylococcus, hepatitis A and B, measles, mumps and rubella, varicella zoster virus and rotavirus, as well as other viruses and bacteria. Our laboratory recently completed development of a multiplex assay to measure diphtheria, pertussis and tetanus antibodies and is developing assays for meningococcal A, C, Y and W-135 groups to round out their portfolio of assays for concomitant use testing according to the CDC’s recommended immunization schedules. Our laboratory also includes an on-site biorepository facility that enables storage and archiving of samples for future testing, including specialized biomarker testing of specific patient populations to speed drug discovery and development efforts.
Bioanalytical Laboratories. We provide bioanalytical services through GLP, or good laboratory practices, FDA Guidance-compliant laboratories in Richmond, Virginia and Middleton, Wisconsin. Our bioanalytical laboratories analyze biological fluid and tissue samples from animal preclinical and human clinical studies. The latter studies include those conducted by our Phase I unit as well as those conducted on behalf of our clients from Phase I through IV for drug and metabolite content and concentration and generic bioequivalence studies. We currently have more than 3,000 validated assays available for our clients’ use in conducting laboratory analyses. Our bioanalytical methods include liquid chromatography/mass spectrometry (LC/MS), high performance liquid chromatography (HPLC), radioimmunoassay (RIA) and enzyme-linked immunosorbent assay (ELISA). Our bioanalytical lab can now support the complete service necessary for macromolecular drug development. This includes pharmacokinetic evaluation of the therapeutic agent, immunogenicity testing to determine the presence of antibodies, and cell-based assays to determine the neutralizing antibody affect of the antibodies. The Richmond bioanalytical laboratory added the capability to quantify macromolecules by LC/MS and extend the measurement of biomarkers using flow cytometry. Support services include handling HIV-positive samples, managing data for pharmacokinetic studies from multicenter trials, and archiving samples and data. Our service offerings also include providing dedicated laboratory space to conduct complex immunologic Opsonophagocytic Assay, or OPA, bioassays for the vaccine industry. The bioanalytical labs implemented an electronic notebook, or eNotebook, program in 2010. This initiative has been designed for PPD’s procedures and has been fully validated. eNotebooks should greatly improve automation while maintaining the highest levels of study conduct quality. eNotebooks were put into limited practice in 2010, with full implementation expected in 2011.
cGMP Laboratory. We provide early preclinical development to post-approval testing services and product analysis laboratory services through our cGMP compliant laboratories located in Middleton, Wisconsin, Althone, Ireland and Wayne, Pennsylvania. Our product analysis services include analytical method development and validation, stability and quality control testing of product and pharmaceutical ingredients and impurities characterization for small and large molecules for all dosage forms. These analyses are necessary to characterize dosage form release patterns and stability under various environmental conditions in the intended package for clinical studies and marketing. These evaluations must be carried out from preclinical through Phase IV testing and the resulting data maintained over the commercial life of a product. New formulations, as well as generics and prescription products going to over-the counter status such that they no longer require physician prescription for consumer use, all require the same set of studies as the original dosage form. Our cGMP lab in Athlone, Ireland offers the advantage of proximity to our growing number of European clients and allows us to conduct release testing of products to be marketed in Europe for our global clients. We also have similar testing capabilities within our Wayne, Pennsylvania laboratory to offer these services to our east coast clients who require closer oversight of their contract labs.
Drug Discovery Services. We provide fully integrated drug discovery services through our BioDuro subsidiary located in an 110,000 square foot facility in Beijing, China. BioDuro provides the following discovery services:
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medicinal, library and process chemistry;
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custom synthesis;
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drug metabolism and pharmacokinetic analysis;
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discovery biology;
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pharmacology; and
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drug safety evaluations
We have also entered into two strategic relationships to provide proprietary chemistry and biologics discovery services. We made these investments to strengthen and differentiate our drug discovery services going forward. The first investment is a joint venture with Taijitu Biologics. Through this joint venture, we are developing an innovative and differentiated technology platform to discover and develop for clients monoclonal antibodies with enhanced potency and clinical efficacy while reducing the potential of undesired immune responses. With a greater proportion of R&D pipelines comprised of biologics, and particularly MAbs, we feel our investment and the surrounding business model will satisfy an unmet need for our clients. Completion of this automated technology platform is targeted for mid-2011. Second is our equity investment in X-Chem. PPD is the majority owner of X-Chem, which is creating and screening large and diverse small molecule libraries using a proprietary technology platform. Completion and validation of the platform is targeted for mid-2011. Both of these investments build on our ability to offer differentiated and integrated laboratory services across drug discovery for small and large molecules.
Clients and Marketing
We provide a broad range of drug discovery and development services and products to help pharmaceutical and biotechnology companies as well as academic, non-profit and government organizations develop pharmaceuticals and biologics and gain regulatory approval in the markets in which they plan to sell these products. We believe we are recognized among our clients as a leading global CRO.
Client Identification and Mix
We provide Phase I through Phase IV clinical development and post-approval services. We market these services in Africa, Asia Pacific, the Americas, Europe and Middle East. The key differentiators that help us win development business from pharmaceutical and biotechnology companies and academic, non-profit and government organizations include our global infrastructure, quality-driven execution, dedicated therapeutic expertise and service delivery. In addition, our post-approval services combine epidemiological, safety and health outcomes expertise to help pharmaceutical, biotechnology and device companies implement a wide range of strategies to study the long-term safety and effectiveness of products, capitalize on their strengths and maximize their life cycle. PPD also provides laboratory services that are designed to increase drug discovery and development speed and precision. We offer state-of-the-art laboratory technology, instruments and equipment, a commitment to quality results and strict compliance with regulatory standards. Our Vaccines and Biologics Center of Excellence is a first-of-its-kind network of world-class laboratory services devoted solely to vaccines and biologics drug development.
From a geographic perspective, 55.8% of our net revenue in 2010 was derived from the United States, with the remaining balance primarily from Europe. For additional information on the geographic distribution of our net revenue, see Note 16 in the notes to consolidated financial statements included elsewhere in this report.
For the year ended December 31, 2010, total net revenue for all of our services was derived from various industries approximately as follows:
For purposes of classifying net revenue, we define pharmaceutical to include companies with the majority of their research and development related to chemical entities, and biotechnology to include companies with the majority of their research and development related to biologically engineered compounds. Other includes companies primarily focused upon diagnostics and generic formulations. We refer to the Standard Industry Classification, or SIC, codes for publicly traded companies to determine their classification.
Concentration of business among large clients is not uncommon in our industry. Our diverse client mix, in which no single client in 2010 accounted for more than 10% of our net revenue, limits our exposure to significant risks associated with industry consolidation and major product cancellations. However, we have experienced higher concentration in the past and might experience it in the future. Approximately 50.1% of our 2010 net revenue was derived from clients headquartered outside the United States, particularly Europe and Japan. Approximately 44.2% of our 2010 net revenue was generated from services provided by our employees located in countries outside the United States. See Note 16 in the notes to consolidated financial statements included elsewhere in this report for the breakdown of this net revenue.
Marketing Strategy
With a primary focus on both large and small pharmaceutical and biotechnology companies, we promote our services through concentrated business development efforts, scientist-to-scientist communications and centralized corporate marketing programs.
We use corporate marketing to support the efforts of our centralized business development staff, calling on pharmaceutical, biotechnology and device companies. Our sales teams focus on client segments and service areas. In addition, while service area representatives call on particular functional groups within a given biopharmaceutical or device client, our strategic account directors are responsible for managing the relationship and book of business with clients across our portfolio of services.
The top 50 publicly traded pharmaceutical companies, as ranked by 2009 research and development expenses, accounted for a majority of all pharmaceutical research and development spending in 2009, so we concentrate on these companies. Of the top 100 biotechnology companies in 2009, the top 50 accounted for 97% of the total biotechnology research and development expenditures. To appropriately focus our sales and marketing efforts among biotechnology companies, we consider additional factors such as the stage of a drug’s development and the financial stability of a potential client’s business.
Our business development personnel consult with potential pharmaceutical and biotechnology clients early in the project consideration stage in order to determine their requirements. Along with the appropriate operational, technical or scientific personnel, our business development representatives invest significant time to determine the optimal means to design and execute the potential client’s program requirements. As an example, recommendations we make to a potential client with respect to a drug development study design and implementation are an integral part of our bid proposal process and an important aspect of the integrated services we offer. Our preliminary efforts relating to the evaluation of a proposed clinical protocol and implementation plan enhance the opportunity for accelerated initiation and overall success of the trial.
Our global marketing initiatives include integrated, multi-channel campaigns designed to help differentiate and promote our expertise and services. Through trade events, online and print advertising in trade publications, direct communication, newsletters, our website and educational programs, we provide our perspective on current industry challenges or developments to create an ongoing dialogue with our clients and to promote our industry expertise, quality, technology and innovation. We reinforce key messages and selling points through client presentations, corporate material, at trade events and speaking engagements at industry conferences.
We encourage and sponsor the participation of our scientific and technical personnel in a variety of professional endeavors, including speaking and the presentation of papers at national and international professional trade meetings and the publication of scientific articles in medical and pharmaceutical journals. Through these presentations and publications, we seek to further our reputation for professional excellence.
Backlog
Our backlog consists of anticipated net revenue from contracts and letters of intent and, to a limited degree, verbal commitments we consider highly reliable, that either have not started but are anticipated to begin in the future, or are in process and have not been completed. Amounts included in backlog represent anticipated future net revenue, exclude net revenue that has been recognized previously in our statement of income, and have been adjusted for foreign currency fluctuations. Net revenue is defined as gross revenue, less fees and associated reimbursements. Once contracted work begins, net revenue is recognized over the life of the contract. Our backlog was $3.4 billion in anticipated net revenue at December 31, 2010, compared to $3.0 billion at December 31, 2009. As of December 31, 2010, approximately 13.4% of our backlog was denominated in currencies other than the U.S. dollar.
Our backlog as of any date is not necessarily a meaningful predictor of future results because backlog can be affected by a number of factors, including the size and duration of contracts, many of which are performed over several years, and the changes in labor utilization that typically occur during a study. Additionally, contracts relating to our clinical development business are subject to early termination by the client and clinical trials can be delayed or canceled for many reasons, including unexpected test results, safety concerns, regulatory developments, economic issues, availability of clinical trial material and protocol design matters. Also, the scope of a contract can change significantly during the course of a study. If the scope of a contract is revised, the adjustment to backlog occurs when the revised scope is approved by the client. For these and other reasons, we might not fully realize our entire backlog as net revenue.
Intellectual Property
In the course of conducting our business, we from time to time create inventions. Obtaining, maintaining and protecting our inventions, including seeking patent protection, might be important depending on the nature of the invention. To that end, we seek to implement patent and other intellectual property strategies to appropriately protect our intellectual property.
As of December 31, 2010, we owned or co-owned 14 issued U.S. patents, four pending U.S. patent applications, six issued foreign patents, one pending foreign patent application and one pending international application. We also have obtained licenses to patents from an academic institution. As of December 31, 2010, we had rights to two issued U.S. patents and four issued foreign patents. None of the patents or applications we own or have a license to is individually material to our business.
Pursuant to the terms of the Uruguay Round Agreements Act, patents issued from applications filed on or after June 8, 1995, have a term of 20 years from the date of filing, no matter how long it takes for the patent to issue. Because patent applications in the pharmaceutical industry often take a long time to issue, this method of patent term calculation can result in a shorter period of patent protection afforded to us compared to the prior method of term calculation, which was 17 years from the date of issue. Our issued U.S. patents expire between 2011 and 2025. We seek full patent term adjustment following allowance of a patent, where appropriate. However, we might not be successful in obtaining a patent term adjustment from the U.S. Patent Office for any issued patent.
While we file and prosecute patent applications to protect our inventions, our pending patent applications might not result in the issuance of patents or issued patents might not provide competitive advantages. Also, our patent protection might not prevent others from developing competitive products using related or other technology.
In addition to seeking the protection of patents and licenses, we rely on trade secrets, know-how and continuing technological innovation, which we seek to protect, in part, by confidentiality agreements with employees, consultants, suppliers and licensees. If these arrangements are not honored, we might not have adequate remedies for breach. Additionally, our trade secrets might otherwise become known or patented by our competitors.
The scope, enforceability and effective term of issued patents can be highly uncertain and often involve complex legal and factual questions. No consistent policy has emerged regarding the breadth of claims in pharmaceutical patents, so that even issued patents might later be modified or revoked by the relevant patent authorities or courts. Moreover, the issuance of a patent in one country does not assure the issuance of a patent with similar claim scope in another country, and claim interpretation and infringement laws vary among countries, so we are unable to predict the extent of patent protection in any country. The patents we obtain and the unpatented proprietary technology we hold might not afford us significant commercial protection or advantage.
Competition
The drug development outsourcing industry is highly competitive and fragmented, consisting of hundreds of smaller, limited-service providers and a number of full-service global development companies. In the past, the industry experienced some consolidation and a group of large, full-service competitors emerged, and consolidations and acquisitions have continued. These consolidations and other transactions could potentially increase competition in our industry for clients, experienced clinical personnel, geographic markets and acquisition candidates. Additional business combinations by competitors or clients are possible and could have a significant impact on the competitive landscape of the drug development outsourcing industry.
In addition to competing with a number of other global, full-service companies, we also compete against some medium-sized companies, in-house R&D departments of pharmaceutical and biotechnology companies, universities and teaching hospitals. Newer, smaller entities with specialty focuses, such as those aligned to a specific disease or therapeutic area, compete aggressively against larger companies for clients. Increased competition might lead to price and other forms of competition that could adversely affect our operating results.
Providers of outsourced drug development services compete on the basis of a number of factors. These factors include:
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the reputation for on-time quality performance;
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expertise and experience in specific therapeutic areas;
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scope of service offerings;
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staff expertise and qualifications;
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price;
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strengths in various geographic markets;
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technological expertise and systems;
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data management capabilities;
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ability to acquire, process, analyze and report data in a time-saving, accurate manner; and
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ability to manage large-scale clinical trials both domestically and internationally.
Over the past few years, our clients have increasingly pursued strategic outsourcing partnerships under which development services providers compete for selection as a vendor, with only a limited number of providers being chosen and therefore eligible to win future business from the client. While such partnerships are no guarantee of business, service providers that are not selected will have limited opportunities to secure work from that client. In addition, providing drug discovery and development services are labor-intensive and we compete for a limited pool of professionals to provide these services. Although there can be no assurance that we will continue to do so, we believe we compete favorably in these areas.
Despite recent consolidation, our industry remains highly fragmented, with several hundred smaller, limited-service providers and a small number of full-service companies with global capabilities. Although there are few barriers to entry for smaller, limited-service providers, there are significant barriers to becoming a global provider offering a broad range of services. These barriers include:
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the cost and experience necessary to develop broad therapeutic expertise;
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the ability to manage large, global, complex clinical trials;
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the ability to deliver high quality services consistently for large drug development projects;
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the experience to prepare regulatory submissions throughout the world; and
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the infrastructure and knowledge to respond to the global needs of clients.
For specialty areas such as drug information, post-approval services and analytical laboratory services, we compete in a market that has a myriad of niche providers as well as larger, established firms. For the most part, these niche providers offer specialty services with a focus on a specific geographic region, a particular service or function and/or a specific stage or phase of drug development. By contrast, we provide our services on a global basis across functional areas.
Government Regulation
The development, testing, manufacturing, labeling, storage and approval of pharmaceutical products are subject to rigorous regulation by numerous governmental authorities in the United States and other countries at the federal, state and local level, including the FDA. The process of obtaining approval for new pharmaceutical products and additional therapeutic indications for approved products is heavily regulated and requires expenditure of substantial resources and usually takes several years. Companies in the pharmaceutical and biotechnology industries, including our clients, have suffered significant setbacks in various stages of clinical trials, even in advanced clinical trials after promising results had been obtained in earlier studies. These regulations apply to our clients and are generally applicable to us when we are providing services to our clients. Consequently, we must comply with relevant laws and regulations in the conduct of our business.
Prior to commencing human clinical trials in the United States, a company developing a new drug must file an IND with the FDA. The IND must include information about animal toxicity and distribution studies, manufacturing and control data, stability data and a clinical development plan for the product, and a study protocol for the initial proposed clinical trial of the drug or biologic in humans. If the FDA does not object within 30 days after the IND is filed, human clinical trials may begin. The study protocol must be reviewed and approved by the institutional review board, or IRB, in each institution in which a study is conducted and each IRB may impose additional requirements on the way in which the study is conducted in its institution.
Human trials usually start on a small scale to assess safety and then expand to larger trials to test both efficacy and safety in the target population. The trials are generally conducted in three phases, which sometimes overlap, although the FDA may require a fourth phase as a condition of approval. After the successful completion of the first three clinical phases, a company requests approval for marketing its product by submitting an NDA for a drug or a BLA for a biologic. The NDA/BLA is a comprehensive, multivolume filing that includes, among other things, the results of all preclinical and clinical studies, information about how the product will be manufactured and tested, additional stability data and proposed labeling. The FDA’s review can last from several months to several years, with the median approval time historically lasting approximately 13 months, although review times appear to have increased in recent years. Once the NDA/BLA is approved, the product may be marketed in the United States, subject to any conditions imposed by the FDA as part of its approval. In addition, pursuant to the FDA Act that was signed into law in September 2007, the FDA can require drug companies to conduct post-approval clinical trials and implement REMS.
Laboratories such as ours that provide information included in IND applications and NDAs must conform to regulatory requirements that are designed to ensure the quality and integrity of the testing process. For example, our bioanalytical laboratories in Richmond, Virginia and Middleton, Wisconsin follow the FDA’s GLPs. These GLPs have also been adopted by the Ministry of Health in the United Kingdom and by similar regulatory authorities in other countries. Our product analysis lab in Middleton, Wisconsin, also follows the FDA’s cGMPs. Both GLPs and cGMPs require standardization procedures for all equipment, processes and analytical tests, for recording and reporting data, and for retaining appropriate records. To help ensure compliance with GLPs and cGMPs, we have established quality assurance at our laboratory facilities to audit test data and we conduct regular inspections of testing procedures and our laboratory facilities.
In addition, laboratories that analyze human blood or other biological samples for the diagnosis and treatment of study subjects must comply with the Clinical Laboratory Improvement Act, or CLIA. CLIA requires laboratories to meet staffing, proficiency and quality standards. Our laboratory in Austin, Texas and our central laboratory in Highland Heights, Kentucky are CLIA-certified.
The industry standard for the conduct of clinical research is embodied in the FDA’s regulations for IRBs, investigators and sponsor/monitors, which collectively are termed GCPs by industry, and the GCP guidelines issued by ICH, which have been agreed upon by industry and regulatory representatives from the United States, European Union, or EU, and Japan. Our global standard operating procedures are written in accordance with all FDA and ICH requirements. This enables our work to be conducted locally, regionally and globally to standards that meet all currently applicable regulatory requirements.
In the past several years, both the U.S. and foreign governments have become increasingly concerned about the privacy, security and disclosure of confidential personal data. The EU has adopted comprehensive regulation on the use and disclosure of personal information, including extra safeguards for medical data. These regulations place restrictions on the export of personal information outside the EU. Companies in the United States can satisfy these data export requirements by filing for safe harbor status according to a self-certification procedure agreed to by the EU and the United States. We monitor and implement procedures to comply with privacy, security and disclosure obligations, which include maintaining our safe harbor status.
The Department of Health and Human Services, or HHS, has promulgated final regulations under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, which governs the disclosure of confidential medical information in the United States. In 2009, the HHS issued draft regulations requiring notification to individuals when their health information is breached. These regulations, if finalized, will implement provisions of the Health Information Technology for Economic and Clinical Health Act, or HITECH, passed as part of the American Recovery and Reinvestment Act of 2009. Since January 2001, we have had a global privacy policy in place that includes a designated privacy officer, and we comply with the current HIPAA and proposed HITECH requirements. We plan to continue to monitor our compliance with these regulations and take necessary steps to ensure continued compliance with these and other applicable privacy regulations.
We are also subject to regulations enforced by the following agencies, among others:
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Occupational Safety and Health Administration;
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Nuclear Regulatory Commission;
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Environmental Protection Agency;
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Department of Transportation;
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International Civil Aviation Organization; and
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Drug Enforcement Administration.
We also must comply with other related international, federal, state and local regulations that govern the use, handling, disposal, packaging, shipment and receipt of certain drugs or unknown compounds, chemicals and chemical waste, toxic substances, biohazards and biohazardous waste, and radioactive materials and radioactive waste. In order to comply with these regulations, we have provided procedures, necessary equipment and ongoing training for our employees involved in these activities.
The failure on our part to comply with applicable regulations could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities. Furthermore, the issuance of a notice of finding by a governmental authority against either us or our clients, based upon a material violation by us of any applicable regulation, could materially and adversely affect our reputation and business.
Employees
As of December 31, 2010 we employed approximately 11,000 employees, of whom approximately 200 were in corporate operations functions. Approximately 48% of our employees are located outside of the United States. Of our staff, approximately 670 hold Ph.D., M.D., Pharm.D. or D.V.M. degrees and approximately 2,200 hold other master’s or other postgraduate degrees. None of our employees are subject to a collective bargaining agreement. Employees in some of our non-U.S. locations are represented by works councils as required by local laws. We believe that our relations with our employees are generally good.
We believe that our success is based on the quality and dedication of our employees. We strive to hire, develop and retain the best available people in terms of ability, experience, attitude and fit with our performance philosophy and standard operating procedures. The dedicated resources in our Global Learning and Performance group are focused on improving the skills, proficiency and capability of all of our employees to enable us to meet and exceed expectations of our clients. We invest heavily in new employees and believe we are an industry leader in both the thoroughness and effectiveness of our training programs. Our leadership development curriculum provides our top emerging leaders worldwide with strategic and global management skills they need to be our leaders of tomorrow. In addition, we encourage all employees to continually grow and broaden their skills through internal and external development opportunities and take ownership for their personal and professional development.
Available Information
Our corporate website address is www.ppdi.com. Information on our website is not incorporated by reference herein. We promptly post important information on our website, and make available free of charge through our web site 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.
Item 1A.
Item 1A. Risk Factors
Risks Related to Our Business
Changes in trends in the pharmaceutical and biotechnology industries, including difficult market conditions, could adversely affect our operating results.
Industry trends and economic and political factors that affect pharmaceutical and biotechnology companies and academic, non-profit and government entities that sponsor clinical research also affect our business. For example, the practice of many companies in these industries and government organizations has been to hire companies like us to conduct large development projects. If these industries reduce their tendency to outsource those projects in light of difficult conditions in credit markets and the economy in general, or for any reason, our operations, financial condition and growth rate could be materially and adversely affected. In the past, mergers, product withdrawal and liability lawsuits, and other factors in the pharmaceutical industry appear to have slowed decision-making by pharmaceutical companies and delayed drug development projects. Continuation or increases in these trends could have an adverse effect on our business. In addition, numerous governments have undertaken efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and pharmaceutical companies. If future cost-containment efforts limit the profits that can be derived on new drugs, our clients might reduce their drug discovery and development spending, which could reduce our revenue and have a material adverse effect on our results of operations.
Our revenue depends on a small number of industries and clients.
We provide services to the pharmaceutical and biotechnology industries and academic, non-profit and government organizations that sponsor clinical trials, and our revenue is highly dependent on expenditures by these clients. Accordingly, our operations could be materially adversely affected by consolidation in these industries or other factors resulting in a decrease in the number of our potential clients, including business reductions or failures due to a lack of financing. If the number of our potential clients declines even further, they might be able to negotiate price discounts or other terms for our services that are less favorable to us than has historically been the case. We have experienced client concentration in the past and could again in the future. The loss of business from a significant client could have a material adverse effect on our results of operations.
Neither request for proposal, or RFP, activity nor backlog necessarily result in revenue, and to the extent the mix of contracts in our backlog continues to shift toward larger contracts with a more global component, this might cause the rate at which this backlog converts into revenue to lengthen when compared to historical trends.
Neither request for proposal, or RFP, activity nor backlog as of any date is necessarily a meaningful predictor of future results. Clients can reduce the size of RFPs and also withdraw them. We also might not win RFPs for any number of reasons. Likewise, backlog can be affected by a number of factors, including the size and duration of contracts, many of which are performed over several years, and the changes in labor utilization that typically occur during a study. Additionally, the majority of our contracts are subject to early termination by the client and preclinical projects and clinical trials can be delayed or canceled for many reasons, including unexpected results, safety concerns, regulatory developments, economic issues, availability of clinical trial material and protocol design matters. Also, the scope of a contract can change significantly during the course of a study. If the scope of a contract is revised, the adjustment to backlog occurs when the revised scope is approved by the client. For these and other reasons, we might not fully realize our entire backlog as net revenue.
As we increasingly compete for and enter into large contracts that are more global in nature, we expect the rate at which this backlog converts into revenue, to increase or lengthen. An increase in this conversion rate means that the rate of revenue recognized on these large contract awards may be slower than what we have experienced in the past, which could impact our net revenues and results of operations on a quarterly and annual basis. The revenue recognition on larger, more global projects could be slower than on smaller, less global projects for a variety of reasons, including but not limited to an extended period of time between contract award and study start, as well as an increased timeframe for obtaining the necessary regulatory approvals.
The majority of our clients’ contracts can be delayed, terminated or reduced in scope upon short notice.
Most of our contracts are terminable by the client upon 30 to 90 days’ notice. Clients delay, terminate or reduce the scope of their contracts for a variety of reasons, including but not limited to:
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lack of available financing;
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products being tested fail to satisfy safety requirements;
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products have undesired clinical results;
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the client decides to forego a particular study;
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inability to enroll enough patients in the study;
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inability to recruit enough investigators;
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production problems cause shortages of the drug; and
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actions by regulatory authorities.
The delay, loss or reduction in scope of a large contract or multiple smaller contracts could adversely affect our operating results. Cancellation or delay of a large contract or multiple smaller contracts could result in under-utilized resources and require an adjustment to our backlog, negatively affecting our net revenue and results of operations. For example, in 2009, we experienced very high cancellation rates which significantly affected our revenue and backlog.
We might not be able to recruit and retain the experienced personnel we need to compete in the drug development industry.
Our future success depends on our ability to attract, retain and motivate highly skilled personnel. Competition for personnel in our industry is intense and we must have good people to succeed.
Management
Our future success depends on the personal efforts and abilities of the principal members of our senior management and scientific staff to provide strategic direction, develop business, manage our operations, and maintain a cohesive and stable work environment. For example, we rely on the services of Fredric N. Eshelman, our executive chairman, William J. Sharbaugh, our chief operating officer, Daniel G. Darazsdi, our chief financial officer, and our other officers, particularly in light of the previously announced May 2011 retirement of our chief executive officer, David L. Grange. We have initiated a search for a successor, and our success will depend, in part, on our ability to recruit, integrate and retain a new chief executive officer, and on our ability to manage our business effectively until we do. Although we have employment agreements with most of our executives, they are generally only for one or two years and do not assure that these named executives or any other executive with whom we have an employment agreement will remain with us. We do not have employment agreements with all of our key personnel.
Healthcare Providers
Our ability to maintain, expand or renew existing business with our clients and to get business from new clients, particularly in the drug development sector, depends on our ability to subcontract and retain healthcare providers with the skills necessary to keep pace with continuing changes in drug development technologies. Competition for experienced healthcare providers is intense. We compete with pharmaceutical and biotechnology companies, including our clients, other contract research companies and academic and research institutions, to recruit healthcare providers.
Scientists and Other Technical Professionals
Our ability to maintain, expand or renew existing business with our clients and to get business from new clients in the drug discovery and development area also depends on our ability to hire and retain scientists with the skills necessary to keep pace with continuing changes in drug discovery and development technologies. We face the same risks, challenges and competition in attracting and retaining experienced scientists as we do with healthcare providers.
Any inability to hire additional qualified personnel might also require an increase in the workload for both existing and new personnel. We might not be successful in attracting new healthcare providers, scientists or management, or in retaining or motivating our existing personnel. The shortage of experienced healthcare providers and scientists, or other factors, might lead to increased recruiting, relocation and compensation costs for these professionals, which might exceed our forecasts. These increased costs might reduce our profit margins or make hiring new healthcare providers or scientists impracticable. If we are unable to attract and retain any of these personnel, our ability to execute our business plan will be adversely affected.
Our future success depends on our ability to keep pace with rapid technological changes that could make our services less competitive or obsolete.
The biotechnology and pharmaceutical industries generally and drug discovery and development more specifically are subject to increasingly rapid technological changes. Our competitors or others might develop technologies, services or products that are more effective or commercially attractive than our current or future technologies, services or products, or that render our technologies, services or products less competitive or obsolete. If competitors introduce superior technologies, services or products and we cannot make enhancements to ours to remain competitive, our competitive position, and in turn our business, revenue and financial condition, would be materially and adversely affected.
Hardware or software failures, delays in the operations of our computer and communications systems or the failure to implement system enhancements could harm our business.
Our success depends on the efficient and uninterrupted operation of our computer and communications systems. A failure of our network or data gathering procedures could impede the processing of data, delivery of databases and services, client orders and day-to-day management of our business and could result in the corruption or loss of data. While some of our operations have disaster recovery plans in place, they might not adequately protect us, particularly because we currently do not have redundant facilities everywhere in the world to provide information technology capacity in the event of a system failure. Despite any precautions we take, damage from fire, floods, hurricanes, power loss, telecommunications failures, computer viruses, break-ins and similar events at our various computer facilities could result in interruptions in the flow of data to our servers and from our servers to our clients. In addition, any failure by our computer environment to provide our required data communications capacity could result in interruptions in our service. In the event of a delay in the delivery of data, we could be required to transfer our data collection operations to an alternative provider of server hosting services. Such a transfer could result in delays in our ability to deliver our products and services to our clients. Additionally, significant delays in the planned delivery of system enhancements, improvements and inadequate performance of the systems once they are completed could damage our reputation and harm our business. Finally, long-term disruptions in the infrastructure caused by events such as natural disasters, the outbreak of war, the escalation of hostilities and acts of terrorism, particularly involving cities in which we have offices, could adversely affect our businesses. Although we carry property and business interruption insurance, our coverage might not be adequate to compensate us for all losses that may occur.
Any failure by us to comply with existing regulations could harm our reputation and operating results.
We are subject to extensive regulation by federal, state and foreign governments. We must adhere to all regulatory requirements including the FDA’s current Good Clinical Practices, Good Laboratory Practice or Good Manufacturing Practice requirements. If we or these suppliers fail to comply with applicable regulations, including FDA pre-or post-approval inspections and cGMP requirements, then the FDA could sanction us. These sanctions could include fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of products, delay, suspension or withdrawal of approvals, license revocation, product seizures or recalls, operational restrictions or criminal prosecutions, any of which could significantly and adversely affect our reputation, operating results and future prospects. For example, if we were to fail to verify that informed consent is obtained from participants in connection with a particular clinical trial or grant deviations from the inclusion or exclusion criteria in a study protocol, the data collected from that trial could be disqualified and we might be required to conduct the trial again at no further cost to our client, but at a substantial reputational and financial cost to us.
If our operations are found to violate any applicable law or other governmental regulations, we might be subject to civil and criminal penalties, damages and fines. Similarly, if the hospitals, physicians or other providers or entities with which we do business are found non-compliant with applicable laws, they might be subject to sanctions, which could also have a negative impact on us. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations, and additional legal or regulatory change. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and damage our reputation.
We expend significant resources on compliance efforts and such expenses are unpredictable and might adversely affect our results. Changing laws, regulations and standards might also create uncertainty, higher expenses and increase
insurance costs. We are committed to compliance and maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment might result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
Changes in the U.S. and international healthcare industry, including reimbursement rates, could adversely harm our customers’ businesses, increase the cost of our business resulting in loss of business opportunities or limit our service offerings.
The U.S. and international healthcare industry is subject to changing political, economic and regulatory influences that may significantly affect the purchasing practices and pricing of pharmaceuticals. The laws and regulations governing the healthcare industry may change and additional government regulations might be enacted, which could prevent or delay regulatory approval of product candidates. In March 2010, the U.S. Congress enacted healthcare reform legislation intended over time to expand health insurance coverage and impose health industry cost containment measures. This legislation might significantly impact the pharmaceutical industry, which could hurt our business. The U.S. Congress has also considered and might adopt other legislation that could have the effect of putting downward pressure on the prices that pharmaceutical and biotechnology companies can charge for prescription drugs. Cost-containment measures, whether instituted by healthcare providers or imposed by government health administration regulators or new regulations, could result in greater selectivity in the purchase of drugs. As a result, third-party payers might challenge the price and cost-effectiveness of products. In addition, in many major markets outside the United States, pricing approval is required before sales might commence. As a result, significant uncertainty exists as to the reimbursement status of approved healthcare products. In addition to healthcare reform proposals, the expansion of managed care organizations, which focus on reducing healthcare costs by limiting expenditures on pharmaceuticals and medical devices could result in pharmaceutical, biotechnology and medical device companies spending less on research and development. If this were to occur, we would have fewer business opportunities and our revenues could decrease, possibly materially. Any of these factors could harm customers’ businesses, which would hurt our business.
Federal or state authorities might also adopt healthcare legislation or regulations that are more burdensome than existing regulations. For example, recent product safety concerns and the creation of the Drug Safety Oversight Board could change the regulatory environment for drug products, including the process for FDA product approval and post-approval safety surveillance. These and other changes in regulation could increase our expenses or limit our ability to offer some of our services. For example, the confidentiality of patient-specific information and the circumstances under which it may be released for inclusion in our databases or used in other aspects of our business are subject to substantial government regulation. Additional legislation or regulation governing the possession, use and dissemination of medical record information and other personal health information might require us to implement new security measures that require substantial expenditures or limit our ability to offer some of our services. These regulations might also increase costs by creating new privacy requirements for our informatics business and mandating additional privacy procedures for our clinical research business.
The drug discovery and development services industry is highly competitive.
The CRO industry is highly competitive and we face numerous competitors. If we fail to compete effectively, we might lose clients, which would cause our business to suffer.
We primarily compete against in-house departments of pharmaceutical companies, other full service CROs, small specialty CROs, and, to a lesser extent, universities, teaching hospitals, and other site organizations. Some of the larger CROs against which we compete include Quintiles Transnational Corporation, Covance Inc., Parexel International Corp., Kendle Inc. and Icon plc. Some of these competitors, including the in-house departments of pharmaceutical companies, have greater capital, technical and other resources than we have. In addition, our competitors that are smaller specialized companies might compete effectively against us based on price and their concentrated size and focus.
In recent years, a number of the large pharmaceutical companies have established formal or informal alliances with one or more CROs relating to the provision of services over extended time periods. These alliances differ in purpose, scope and term, but they have generally resulted in fewer CROs being approved or selected to perform work for the pharmaceutical company. Our success depends in part on successfully establishing and maintaining these kinds of
relationships on terms acceptable to us. If we fail to do so, our revenues and results of operations could be adversely affected, possibly materially.
Our business has experienced substantial expansion and contraction in the past and we might not properly manage any expansion or contraction in the future.
Rapid expansion or contraction could strain our operational, human and financial resources and facilities. If we fail to properly manage any changes, our expenses might grow more than revenue and our results of operations and financial condition might be negatively affected. In order to manage expansion or contraction, we must, among other things, do the following:
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continue to improve our operating, administrative and information systems;
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accurately predict our future personnel, resource and facility needs to meet our commitments;
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track the progress of ongoing projects; and
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attract and retain qualified management, sales, professional, scientific and technical operating personnel.
In addition, we have numerous business groups, subsidiaries and divisions, and recently reorganized our business segment reporting. If we cannot properly manage these groups, subsidiaries, divisions or segments, it will disrupt our operations. We also face additional risks in expanding our foreign operations. Specifically, we might find it difficult to:
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assimilate differences in foreign business practices and regulations;
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properly integrate systems and operating procedures;
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hire and retain qualified personnel; and
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overcome language and cultural barriers.
Future acquisitions or investments could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our business.
We anticipate that a portion of any future growth of our business might be accomplished by acquiring existing businesses, products or technologies. The success of any acquisition will depend upon, among other things, our ability to integrate acquired personnel, operations, products and technologies into our organization effectively, to retain and motivate key personnel of acquired businesses and to retain their clients. In addition, we might not be able to identify suitable acquisition opportunities or obtain any necessary financing on acceptable terms. We might also spend time and money investigating and negotiating with potential acquisition or investment targets, but not complete the transaction. Any future acquisition could involve other risks, including the assumption of additional liabilities and expenses, issuances of potentially dilutive securities or interest-bearing debt, transaction costs, reduction in our stock price as a result of any of these or because of market reaction to a transaction and diversion of management’s attention from other business concerns.
We have made and plan to continue to make investments in other companies. In many cases, there is no public market for the securities of these companies and we might not be able to sell these securities on terms acceptable to us, if at all. In addition, if these companies encounter financial difficulties, we might lose all or part of our investment. For example, in 2009 and 2010 we recorded an investment impairment of $2.1 million and $5.0 million, respectively, to write down the carrying value of certain investments due to an other-than-temporary decline in fair value. See Note 3 in the notes to consolidated financial statements included elsewhere in this report for a more detailed discussion of these impairments.
We have also made an investment in the Celtic Therapeutics Holdings, L.P. fund, which we account for using the equity method of accounting. This investment could have a significant impact on our financial results as our equity in the earnings of this investment can fluctuate significantly quarter to quarter based on the fund’s investments, new programs and the changes in fair market value of the investment portfolio. For example, we incurred losses of $2.1 million, $1.7 million and $4.6 million due to the expenditures of the fund during the first three quarters of 2010 and then recognized a $7.7 million gain in the fourth quarter due to additional third party investments in the fund and an increase in fair value of the fund’s investment portfolio.
The investment of our cash and cash equivalents, short-term and long-term investments balance are subject to risks which may cause losses and affect the liquidity of these investments.
At December 31, 2010, we had $479.6 million in cash and cash equivalents, $80.0 million in short-term investments and $78.7 in long-term investments. These investments are subject to general credit, liquidity, market and interest rate risks, which have been exacerbated by the global financial crisis. We classified our entire balance of auction rate securities as long-term investments at December 31, 2010 due to continuing uncertainties about the liquidity of the auction rate securities market. These risks might have a material adverse effect on our liquidity and financial condition, which could harm our business or our ability to pay dividends.
The fixed price nature of our development contracts could hurt our operating results
The majority of our contracts for the provision of development services are at fixed prices or fixed unit prices, and therefore have set limits on the amounts we can charge for our services. As a result, variations in the timing and progress of large contracts can materially affect our operating results. In addition, we bear the risk of cost overruns unless the scope of activity is revised from the contract specifications and we are able to negotiate a contract modification with the client shifting the additional cost to the client. If we fail to adequately price our contracts in total or at the unit level, or if we experience significant cost overruns, our operating results could be materially adversely affected. From time to time, we have had to commit unanticipated resources to complete projects, resulting in lower gross margins on those projects. We might experience similar situations in the future, which could have a material adverse impact on our operating results.
If we are unable to attract suitable willing investigators and enroll a sufficient number of participants for our clinical trials, our development business might suffer.
The clinical research studies we run rely upon the ready accessibility and willing participation of physician investigators and participant subjects. Investigators are typically located at hospitals, clinics or other sites and supervise administration of the study drug to participants during the course of a clinical trial. The rate of completion of clinical trials is significantly dependent upon the rate of participant enrollment. Participant enrollment is a function of many factors, including:
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the size of the patient population;
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perceived risks and benefits of the drug under study;
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availability of competing therapies, including those in clinical development;
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availability of clinical drug supply;
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availability of qualified clinical trial sites;
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availability and willingness of potential participants to enroll in clinical trials;
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design of the protocol;
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proximity of and access by participants to clinical sites;
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participant referral practices of physicians;
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eligibility criteria for the study in question; and
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efforts of the sponsor of and clinical sites involved in the trial to facilitate timely enrollment.
We might have difficulty obtaining sufficient patient enrollment or clinician support to conduct our clinical trials as planned, and we might need to expend substantial additional funds to obtain access to resources or delay or modify our plans significantly. These considerations might result in our being unable to successfully achieve our projected development timelines, or potentially even lead us to consider the termination of ongoing clinical trials or development of a product for a particular indication.
Our business exposes us to potential liability for personal injury or product liability claims that could affect our financial condition.
Our business involves the testing of new drugs on human volunteers and, if marketing approval is received for any of our drug candidates, their use by participants. This exposes us to the risk of liability for personal injury or death to patients resulting from, among other things, possible unforeseen adverse side effects or improper administration of a drug
or device. Many of these volunteers and participants are already seriously ill and are at risk of further illness or death. For example, we have from time to time been sued by individuals alleging personal injury due to their participation in a clinical trial and seeking damages from us under a variety of legal theories. If we are required to pay damages or incur defense costs in connection with any personal injury claim that is outside the scope of indemnification agreements we have with clients and collaborative partners, if any indemnification agreement is not performed in accordance with its terms or if our liability exceeds the amount of any applicable indemnification limits or available insurance coverage, we could be materially and adversely affected both financially and reputationally. We might also not be able to get adequate insurance for these risks at reasonable rates in the future.
Our business uses biological and hazardous materials, which could injure people or violate laws, resulting in liability that could hurt our financial condition and business
Our drug development activities involve the controlled use of potentially harmful biological materials, as well as hazardous materials, chemicals and various radioactive compounds. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and waste used in our operations. As a result, we might be required to incur significant costs to comply with laws and regulations. We cannot eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident, we could be held liable for any resulting damages and incur liabilities, which exceed our resources. In addition, we cannot predict the extent of the adverse effect on our business or the financial and other costs that might result from any new government requirements arising out of future legislative, administrative or judicial actions.
Our business is subject to international economic, currency, political and other risks that could negatively affect our revenue and results of operations.
Because we provide our services worldwide, our business is subject to risks associated with doing business internationally. Our net revenue from our non-U.S. operations represented approximately 44.2% of our total net revenue for the year ended December 31, 2010. We anticipate that revenue from international operations will grow in the future, particularly in light of our recent acquisitions and expansion in Central and Eastern Europe and China. Accordingly, our future results could be harmed by a variety of factors, including:
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changes in foreign currency exchange rates, which could result in foreign currency losses;
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changes in a specific country or region’s political or economic conditions;
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potential negative consequences from changes in tax laws affecting our ability to expatriate profits;
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difficulty in staffing and managing widespread operations, including risks of violations of local laws or the U.S. Foreign Corrupt Practices Act by employees overseas; and
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unfavorable labor regulations, including specifically those applicable to our European operations.
For example, in 2010 our operating income would have been higher by approximately $1.1 million, net of hedging gain, if the U.S. dollar had not strengthened relative to the euro, British pound and Brazilian real. Although we attempt to manage this risk through provisions in our contracts with our clients and other methods, including foreign currency hedging contracts, we might not be able to eliminate or manage these risks in the future and our operating income could be materially and adversely affected by a significant decline in the value of the U.S. dollar.
Our inability to adequately protect our intellectual property rights could hurt our business. The drug development industry has a history of patent and other intellectual property litigation, and we might be involved in costly intellectual property lawsuits.
Our success is dependent on our ability to protect the proprietary software, compositions, processes and other technologies we develop during the drug development process along with our ability to develop and protect patent and other intellectual rights and operate without infringing the intellectual property rights of others. The drug discovery and development industry has a history of patent and other intellectual property litigation and these lawsuits will likely continue. Accordingly, we face potential claims by companies alleging infringement of their intellectual property rights. Legal proceedings relating to intellectual property could be expensive, take significant time and divert management’s attention from other business concerns, whether we win or lose. If we do not prevail in an infringement lawsuit brought
against us, we might have to pay substantial damages and we could be required to stop the infringing activity or obtain a license to use technology on unfavorable terms.
Any patents that we own or license might not provide valuable protection in the future for the covered technology or products. Our pending patent applications might not result in the issuance of valid patents or the claim scope of our issued patents might not provide competitive advantages. Also, our patent protection might not prevent others from developing competitive products using related or other technology that does not infringe our patent rights. The scope, enforceability and effective term of patents can be highly uncertain and often involve complex legal and factual questions and proceedings. No consistent policy has emerged regarding the breadth of claims in pharmaceutical or biotechnology patents, so that even issued patents might later be modified or revoked by the relevant patent authorities or courts. These proceedings could be expensive, last several years and either prevent issuance of additional patents to us or result in a significant reduction in the scope or invalidation of our patents. Moreover, the issuance of a patent in one country does not assure the issuance of a patent with similar claim scope in another country, and claim interpretation and infringement laws vary among countries, so we are unable to predict the extent of patent protection in any country.
In addition to seeking the protection of patents and licenses, we also rely upon trade secrets, know-how and continuing technological innovation that we seek to protect, in part, by confidentiality agreements with employees, consultants, suppliers and licensees. If these agreements are not honored, we might not have adequate remedies for any breach. Additionally, our trade secrets might otherwise become known or patented by our competitors. Any inability to protect our intellectual property rights could materially and adversely affect our business.
Our operations might be affected by the occurrence of a natural disaster or other catastrophic event.
We depend on our clients, investigators, laboratories and other facilities for the continued operation of our business. Although we have contingency plans in effect for natural disasters or other catastrophic events, these events, including terrorist attacks, pandemic flu, hurricanes and ice storms, could still disrupt our operations or those of our clients, investigators and collaboration partners, which could also affect us. In particular, our headquarters are in Wilmington, North Carolina where hurricanes might occur. Even though we carry business interruption insurance policies and typically have provisions in our contracts that protect us in certain events, we might suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies or for which we do not have coverage. Any natural disaster or catastrophic event affecting us or our clients, investigators or collaboration partners could have a significant negative impact on our operations and financial performance.
Our operations might be affected if there was a disruption to the air travel system.
Our global central laboratories and some of our other services rely heavily on air travel for transport of clinical trial kits, other materials and people, and disruption to the air travel system could have a material adverse effect on our business. While we have developed contingency plans for a variety of events that could disrupt or limit available air transportation, these plans might not be effective or sufficient to avert such a material adverse effect.
Risks Related to Owning Our Stock
You might not receive any dividends, and the reduction or elimination of dividends might negatively affect the market price of our common stock.
We began paying dividends as a public company in late 2005. Future dividend payments are not guaranteed and are within the absolute discretion of our board of directors. You might not receive any dividends as a result of any of the following factors:
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we are not obligated to pay dividends;
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our board of directors could modify or revoke the dividend policy at any time and for any reason;
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even if the dividend policy is not modified or revoked, our board of directors could decide to reduce dividends or not to pay any dividends at all, at any time and for any reason;
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the amount of dividends distributed is subject to state law restrictions;
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new credit facilities or other agreements could limit the amount of dividends we are permitted to pay; and
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our stockholders have no contractual or other legal right to dividends.
Our dividend policy is based upon our assessment of the cash needs of our business and the environment in which it operates. That assessment could change due to, among other things, changes in general economic and financial market conditions, our results of operations, cash requirements, financial condition, contractual restrictions, growth opportunities, acquisitions, competitive or technological developments, provisions of applicable law and other factors that our board of directors might deem relevant. The reduction or elimination of dividends might negatively affect the market price of our common stock.
Our dividend policy and stock repurchase plan might limit our ability to pursue other growth opportunities.
Our board of directors has adopted an annual cash dividend policy which reflects an intention to distribute to our shareholders via regular quarterly dividends a portion of the cash generated by our business that exceeds our operating needs and capital expenditures. In addition, our board of directors authorized the us to repurchase up to $350.0 million of its common stock from time to time in the open market. As of December 31, 2010, $260.7 million remained available for share repurchases under the stock repurchase program, and in February 2011 we used $200.0 million in an accelerated share repurchase program with Barclays Capital. In developing the dividend policy and the stock repurchase plan, we have made assumptions for and judgments about our expected results of operations, anticipated levels of capital expenditures, income taxes and working capital. Payment of dividends or stock repurchases, if any, could limit our ability to finance any material expansion of our business, including through acquisitions, investments or increased capital spending, or to fund our operations.
Because our stock price is volatile, our stock price could experience substantial declines.
The market price of our common stock has historically experienced and might continue to experience volatility. Our quarterly operating results or anticipated future results, changes in general conditions in the economy or the financial markets, both of which experienced uncertainty in 2009 due to the global financial crisis, and other developments affecting us or our competitors have caused and could continue to cause the market price of our common stock to fluctuate substantially. These factors include ones beyond our control, such as changes in revenue and earnings estimates by analysts, market conditions within our industry, disclosures by product development partners and actions by regulatory authorities with respect to potential drug candidates, changes in pharmaceutical and biotechnology industries and the government sponsored clinical research sector. In addition, in recent years, the stock market has experienced significant price and volume fluctuations. The stock market, and in particular the market for pharmaceutical and biotechnology company stocks, has also experienced significant decreases in value in the past. This volatility and valuation decline have affected the market prices of securities issued by many companies, often for reasons unrelated to their operating performance, and might adversely affect the price of our common stock.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
As of February 15, 2011, we had 86 offices located in 43 countries on six continents. We own and operate six facilities and lease all of our other facilities. We believe that our facilities are adequate for our operations and that suitable additional space will be available when needed. Our material operating facilities which are operating leases comprising more than 40,000 square feet and our owned facilities as of February 15, 2011 were as follows:
Owned:
Leased:
Item 3.
Item 3. Legal Proceedings
None.
Item 4.
Item 4. [Removed and Reserved]
Executive Officers
The following table contains information concerning our executive officers as of February 25, 2011:
Name
Age
Position(s)
Fredric N. Eshelman, Pharm.D.
Executive Chairman, Board of Directors
David L. Grange(1)
Chief Executive Officer
Lee E. Babiss
Executive Vice President, Global Lab Services
Paul D. Colvin
Executive Vice President, Global Clinical Development
Daniel G. Darazsdi
Chief Financial Officer, Treasurer and Assistant Secretary
Christine A. Dingivan, M.D.
Executive Vice President, Chief Medical Officer
William W. Richardson
Senior Vice President, Global Business Development
William J. Sharbaugh
Chief Operating Officer
Michael O. Wilkinson, Ph.D.
Executive Vice President, Chief Information Officer
(1) As previously disclosed on Form 8-K filed on February 9, 2011, General Grange will be retiring from his position as Chief Executive Officer effective May 18, 2011.
Fredric N. Eshelman, Pharm.D. was promoted to Executive Chairman of the Board of Directors in July 2009 and is responsible for providing strategic direction to the company and overseeing the implementation of the company’s strategic and business plans. Prior to this promotion, Dr. Eshelman served as Chief Executive Officer and as a director from July 1990 to June 2009, and as Vice Chairman of the Board of Directors from 1993 to 2009. Dr. Eshelman founded our company’s predecessor in 1985 and served as its Chief Executive Officer until 1989. Prior to rejoining us in 1990, Dr. Eshelman served as Senior Vice President, Development and as a director of Glaxo Inc., a subsidiary of Glaxo Holdings plc.
David L. Grange is our Chief Executive Officer. Assuming the role of Chief Executive Officer in July 2009, General Grange has been a member of the Board of Directors since 2003. Prior to joining us, General Grange spent 10 years with the McCormick Foundation, where he most recently served as President and Chief Executive Officer. The foundation is a nonprofit organization that conducts grant-making programs and other operations, and is one of the nation’s largest charities. Prior to joining the foundation, General Grange had a 30-year career in the U.S. Army, with his final position as commanding general of the First Infantry Division.
Lee E. Babiss, Ph.D. is our Executive Vice President, Global Laboratory Services. Prior to joining PPD in February 2010, he served as president and director of pharmaceutical research for F. Hoffmann-La Roche, Ltd., in Basel, Switzerland. He spent seven years at Glaxo, Inc. where he served as vice president of biological sciences and genetics, where he had global accountability for developing and implementing the company’s corporate genetics strategy and oncology research efforts focused on the cell cycle. Dr. Babiss earned a doctorate in microbiology from Columbia University and completed his postdoctoral fellowship at The Rockefeller University, where he served as an assistant and associate professor. He has received numerous fellowship awards and grants and serves on several scientific advisory committees and boards.
Paul D. Colvin is our Executive Vice President, Global Clinical Development. Mr. Colvin served nearly three years as PPD’s Senior Vice President of Clinical Development for North America. He joined PPD after 14 years with Eli Lilly and Company in a series of leadership roles that included overseeing clinical operations and global patient recruitment and providing direction for the cardiovascular brand team and oncology, critical care, primary care and neuroscience groups.
Daniel G. Darazsdi is our Chief Financial Officer, Treasurer and Assistant Secretary. Mr. Darazsdi joined us in October 2007. Prior to his employment by us, Mr. Darazsdi spent 25 years with Honeywell International where he most recently served as vice president and Chief Financial Officer of finance transformation and operations. Over the years at Honeywell, he was Chief Financial Officer of the company’s global specialty materials business segment, VP of finance for Asia Pacific and held a variety of leadership roles in finance, including business analysis and planning and technology and business development leadership. Mr. Darazsdi is a Certified Management Accountant.
Christine A. Dingivan, M.D. is our Executive Vice President and Chief Medical Officer. Dr. Dingivan joined us in July 2008. Prior to joining us, Dr. Dingivan spent 12 years with MedImmune, which was acquired by AstraZeneca PLC in 2007, serving most recently as senior vice president of clinical development and operations. She oversaw strategic development and implementation of global clinical research programs across all therapeutic areas, provided senior clinical leadership for U.S. and European regulatory applications and chaired the clinical safety monitoring committee.
William W. Richardson is our Senior Vice President, Global Business Development. Prior to joining us in November 2005, Mr. Richardson served as Executive Vice President of Sales for Mylan Bertek Pharmaceuticals Inc. from 2000 to 2005. He was President and Chief Executive Officer of Bertek Pharmaceuticals Inc. from 1996 to 2000. He began his career as Sales Manager for Dow Hickam Pharmaceuticals and rose through its ranks to serve as President and CEO from 1992 to 1996.
William J. Sharbaugh is our Chief Operating Officer. Before Mr. Sharbaugh joined PPD in May 2007, he spent six years at Bristol-Myers Squibb where he most recently served as Vice President, Global Development Operations from 2005 to 2007, responsible for strategic direction for clinical operations located in 55 countries. From 2001 to 2005, Mr. Sharbaugh served as Executive Director of Global Clinical Supply Operations where he was responsible for planning, manufacturing, packaging and distributing investigational products worldwide. Prior to his tenure with Bristol-Myers Squibb, he spent 10 years at Merck and Co. in a variety of assignments in clinical supply operations, sales and manufacturing.
Michael O. Wilkinson, Ph.D. is our Executive Vice President, Global Clinical Development and Chief Information Officer. Prior to being promoted to this position, Dr. Wilkinson served as PPD’s Executive Vice President, Global Clinical Development. Dr. Wilkinson joined PPD in March 2008. Prior to that time, he served at Quintiles as Global Head of Internal Medicine from 2005 to 2007, Vice President of Project Management across all regions and therapeutic areas from 2003 to 2005, and in key account and program management roles in 2002 and 2003. From 2000 to 2002, Dr. Wilkinson led the clinical research project management practice at Campbell Alliance, a consulting firm, and from 1998 to 2000, he held program management roles in cardiovascular therapeutics at Quintiles. Before joining the drug development industry in 1998, Dr. Wilkinson served as a physiologist and medical service corps officer in the U.S. Navy from 1982 to 1998 and while in numerous leadership positions was responsible for human factors research and medical training.
PART II
Item 5.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded under the symbol “PPDI” and is quoted on the Nasdaq Global Select Market. The following table sets forth the high and low sales prices for shares of our common stock, as reported by Nasdaq for the periods indicated.
Holders
As of February 15, 2011, there were approximately 58,100 holders of our common stock.
Dividends
In October 2005, our board of directors adopted an annual cash dividend policy. In May 2009, our board of directors increased the annual dividend from $0.50 to $0.60 per year, payable quarterly at a rate of $0.15 per share. The annual cash dividend policy and the payment of future quarterly cash dividends under that policy are not guaranteed and are subject to the discretion of and continuing determination by our board of directors that the policy remains in the best interests of our shareholders and in compliance with applicable laws and agreements.
Stock Repurchase Plan
In February 2008, we announced our board of directors approved a stock repurchase program authorizing us to repurchase up to $350.0 million of our common stock from time to time in the open market. The timing and amount of any share repurchases, if any, will be determined by our management based on its evaluation of the market conditions and other factors. During 2009 and 2010, there were no share repurchases made and the maximum dollar value of shares that may yet be purchased under the share repurchase program remains at $260.7 million. On February 14, 2011, we entered into an accelerated share repurchase arrangement with Barclays Capital Inc. under which we used $200.0 million of the remaining amount to repurchase additional shares of our common stock. For more details, see our Current Report on Form 8-K dated February 14, 2011.
Equity Compensation Plans
The information required by Item 5 of Form 10-K regarding equity compensation plans is incorporated herein by reference to “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.
Item 6.
Item 6. Selected Financial Data
The following table represents selected historical consolidated financial data. The statements of income data for the years ended December 31, 2008, 2009 and 2010 and balance sheet data at December 31, 2009 and 2010 are derived from our audited consolidated financial statements included elsewhere in this report. The statements of income data for the years ended December 31, 2006 and 2007, and the balance sheet data at December 31, 2006, 2007 and 2008 are derived from audited consolidated financial statements not included in this report. The historical results are not necessarily indicative of the operating results to be expected in the future. The selected financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes to the financial statements included elsewhere in this report. Consolidated statements of income data have been reclassified in prior periods to reflect discontinued operations.
Consolidated Statements of Income Data (in thousands, except per share data):
Consolidated Balance Sheet Data (in thousands):
(1) We acquired companies in 2008 and 2009. Results of operations for these acquisitions are included in our consolidated results of operations as of and since the effective date of the acquisitions. For further details, see Note 2 in the notes to the consolidated financial statements.
(2) We acquired controlling interests in two companies in 2010. Results of operations for these acquisitions are included in our consolidated results of operations as of and since the effective date of the acquisitions. For further details, see Note 2 in the notes to the consolidated financial statements.
(3) In June 2010, we spun off our compound partnering business into a new independent, publicly traded company, Furiex Pharmaceuticals, Inc. For further details, see Note 18 in the notes to the consolidated financial statements.
(4) For 2009, restructuring costs related to our reduction of the North America workforce in our Clinical Development Services segment.
(5) For 2008, impairment of intangible asset related to the remaining unamortized value of our royalty interest in SinuNase.
(6) For 2007, 2008, 2009 and 2010, impairment of investments, net, includes charges to earnings for other-than-temporary declines in the fair market value of our other investments. For further details, see Note 3 in notes to consolidated financial statements.
(7) For 2009 and 2010, we recorded a loss of $1.3 million and $0.7 million, respectively, from equity method investment relating to Celtic Therapeutics Holdings, L.P. For further details, see Note 3 in the notes to the consolidated financial statements.
(8) In 2009, we completed dispositions of Piedmont Research Center, LLC and PPD Biomarker Discovery Sciences, LLC. In 2010, we discontinued the operations of our wholly owned subsidiary PPD Dermatology, Inc. Results of operations for these dispositions are included in discontinued operations, net of provision for income tax. For further details, see Note 2 in the notes to consolidated financial statements.
(9) Working capital equals current assets minus current liabilities.
(10) For 2006, long-term debt includes $74.8 million that we borrowed to finance the construction of our new headquarters building and related parking facility in Wilmington, North Carolina.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is provided to increase understanding of, and should be read in conjunction with, our consolidated financial statements and accompanying notes. In this discussion, the words “PPD”, “we”, “our” and “us” refer to Pharmaceutical Product Development, Inc., together with its subsidiaries where appropriate.
Forward-looking Statements
This Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These statements relate to future events or our future financial performance. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, expectations, predictions, assumptions and other statements that are not statements of historical facts. In some cases, you can identify forward-looking statements by terminology such as “might”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “intend”, “potential” or “continue”, or the negative of these terms, or other comparable terminology. These statements are only predictions. These statements rely on a number of assumptions and estimates that could be inaccurate and that are subject to risks and uncertainties. Actual events or results might differ materially due to a number of factors, including those listed below in “Potential Volatility of Quarterly and Annual Operating Results and Stock Price” and above in “Part I, Item 1A. Risk Factors.” Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Executive Overview
Our revenues are dependent on a relatively small number of industries and clients. As a result, we closely monitor the market for our services. For a discussion of the trends affecting the market for our services, see “Item 1. Business - Trends Affecting the Drug Discovery and Development Industry”. In 2010, we experienced higher demand for our services than we did in 2009, which was a difficult year due primarily to lower-than-expected new business authorizations and record cancellations. We continue to believe in the fundamentals of the market. We expect many clinical trial sponsors to continue to narrow their drug discovery and development services vendor lists and outsource a greater percentage of their research and development budgets in the years ahead. We made steady progress in 2010 in recovering from the challenges of 2009. For 2011, we plan to continue to pursue and establish innovative and strategic client relationships, while enhancing our focus on execution and quality, to differentiate our company and create value for our clients and our shareholders. We also expect to expand the scope of our discovery services offerings through new technologies that should differentiate us from our competitors. Finally, we will continue the initiatives started in 2010 to improve productivity and control costs to achieve our 2011 financial objectives.
We review various metrics to evaluate our financial performance, including period-to-period changes in backlog, new authorizations, cancellation rates, revenue, revenue conversion, margins and earnings. In 2010, we had net authorizations, defined as new authorizations less cancellations and adjustments, of $1.8 billion, an increase of 71.3% over 2009. The cancellation rate for 2010 was 5.5% of average beginning backlog compared to 6.8% for 2009. As of December 31, 2010, backlog was $3.4 billion, up 14.3% from December 31, 2009. The average length of our contracts in backlog decreased to 34 months as of December 31, 2010 from 35 months as of December 31, 2009. Revenue conversion, defined as revenue divided by prior periods’ ending backlog, in 2010 averaged 10.7% compared to 10.2% in 2009.
Backlog by client type as of December 31, 2010 was 75.9% pharmaceutical, 17.1% biotech and 7.0% government/other, as compared to 68.8% pharmaceutical, 25.8% biotech and 5.4% government/other as of December 31, 2009. Net revenue by client type for the year ended December 31, 2010 was 76.9% pharmaceutical, 16.8% biotech and 6.3% government/other, compared to 66.3% pharmaceutical, 25.8% biotech and 7.9% government/other in 2009. The change in the composition of our backlog and net revenue from 2009 to 2010 was primarily a result of an increase in percentage of authorizations from pharmaceutical companies in 2010 and mergers of biotechnology clients into pharmaceutical companies.
For 2010, net revenue contribution by business segment was 76.4% from Clinical Development Services, 23.0% from Laboratory Services and 0.6% for Discovery Sciences, compared to net revenue contribution for the year ended December 31, 2009 of 78.7% from Clinical Development Services, 20.9% from Laboratory Services and 0.4% for Discovery Sciences. The change in the mix of net revenue was due primarily to the acquisition of BioDuro in late 2009. Our top therapeutic areas by net revenue for the year ended December 31, 2010 were oncology, circulatory/cardiovascular, endocrine/metabolic, infectious disease and central nervous system. For a detailed discussion of our revenue, margins, earnings and other financial results for the year ended December 31, 2010, see “Results of Operations - Year Ended December 31, 2009 versus Year Ended December 31, 2010” below.
Our operating margin for 2010 was 12.7% and reflects investments we have made in our Phase II-IV business, overhead and integration expenses from our acquisitions of Excel and BioDuro in China, start-up expenses associated with our cGMP lab in Ireland and call center in Eastern Europe, and investment in information technology and business development. We anticipate an improvement in operating margin in 2011 based on projected revenue growth and leveraging our existing infrastructure. We continue to focus on all selling, general and administrative, or SG&A, expenses and on driving efficiencies, while selectively investing for future growth and productivity gains.
Capital expenditures for the year ended December 31, 2010 totaled $62.5 million. These capital expenditures were primarily for computer software and scientific equipment for our laboratory units and leasehold improvements for our new Bulgaria and China facilities. We made these investments to support our businesses and to improve the efficiencies of our operations. For 2011, we expect to spend between $85 million and $95 million for capital expenditures, primarily for investments in information technology and new laboratory equipment as well as facility expansions and improvements.
As of December 31, 2010, we had $638.3 million of cash, cash equivalents and short- and long-term investments. In 2010, we generated $247.7 million in cash from operations. The number of days’ revenue outstanding in accounts receivable and unbilled services, net of unearned income, also known as DSO, was 22 and 31 days as of December 31, 2010 and 2009, respectively. DSO decreased in 2010 due to improved cash collections, the mix of contracts performed, and their payment terms. We plan to continue to monitor DSO and the various factors that affect it. However, we expect
DSO will continue to fluctuate in the future depending on contract terms, the mix of contracts performed and our success in collecting receivables.
In May 2010, as previously disclosed, we discontinued the operations of our wholly owned subsidiary PPD Dermatology, Inc. due to unfavorable efficacy data associated with the MAG 131 program. In June 2010, we spun off our compound partnering business into a new independent, publicly traded company, Furiex Pharmaceuticals, Inc.
New Business Authorizations and Backlog
We add new business authorizations, which are sales of our services, to backlog when we enter into a contract or letter of intent or receive a verbal commitment. Authorizations have and will continue to vary significantly from quarter to quarter and contracts generally have terms ranging from several months to several years. We recognize revenue on these authorizations as services are performed. Our new authorizations for the years ended December 31, 2008, 2009 and 2010 were $2.7 billion, $1.9 billion and $2.5 billion, respectively.
The dollar amount of our backlog consists of anticipated future net revenue from contracts, letters of intent and verbal commitments we consider highly reliable, that either have not started but are anticipated to begin in the future, or are in process and have not been completed. As of December 31, 2010, the remaining duration of the contracts in our backlog ranged from one to 96 months, with a weighted-average duration of 34 months. The weighted-average duration of the contracts in our backlog will fluctuate from period to period in the future based on the contracts constituting our backlog at any given time. The dollar amount of our backlog excludes net revenue that has been recognized previously in our statements of income and is adjusted each quarter for foreign currency fluctuations. Our backlog as of December 31, 2008, 2009 and 2010 was $3.2 billion, $3.0 billion and $3.4 billion, respectively. For various reasons discussed in “Item 1. Business - Backlog”, our backlog might never be fully recognized as net revenue and is not necessarily a meaningful predictor of future performance.
Results of Operations
Revenue Recognition
We generally enter into contracts with customers to provide services with payments based on fixed and variable fee arrangements. We recognize revenue for services, as rendered, only after persuasive evidence of an arrangement exists, the sales price is determinable and collectability is reasonably assured. Once the above criteria have been met, we recognize revenue for the services provided based on the proportional performance methodology which determines the proportion of outputs or performance obligations which have been completed or delivered compared to the total contractual outputs or performance obligations. Under a small number of customer contracts, a portion of the payments owed to us are contingent upon successful achievement of performance standards or research and development success milestones. These payments are not included in the total contract value used for the proportional performance calculations until the achievement of the performance standard or milestone is reasonably assured. If we determine that a loss will result from the performance of a contract, we charge the entire amount of the estimated loss against income in the period in which such determination is made.
For most clinical trial related service contracts in our Clinical Development Services segment and our Laboratory Services segment, we base measurement of performance on a comparison of direct costs through that date to estimated total direct costs to complete the contract. Direct costs relate primarily to the amount of labor and related overhead costs for the delivery of services. We believe this is the best indicator of the performance of the contractual obligations. Changes in the estimated total direct costs to complete a contract without a corresponding proportional change to the contract value result in a cumulative adjustment to the amount of revenue recognized in the period in which the change in estimate is determined. For time-and-material contracts, we recognize revenue as hours are worked, multiplied by the applicable hourly rate.
Additionally, the Laboratory Services segment enters into arrangements in which the performance obligation is a specified laboratory test. We recognize revenue under these arrangements based upon the number of samples tested times the contracted unit price.
In the event of changes in the scope, nature, duration, or volume of services of the contract with a client, we negotiate to modify our existing contract or establish a new contract to reflect the changes. We recognized renegotiated amounts as revenue by revision to the total contract value resulting from the renegotiated contract.
We often offer volume rebates to our large customers based on annual volume thresholds. We record an estimate of the annual volume rebate as a reduction of revenue throughout the period based on the estimated total rebate to be earned for the period.
In connection with the management of clinical trials, we pay, on behalf of our clients, fees to investigators and test subjects as well as other out-of-pocket costs for items such as travel, printing, meetings and couriers. Our clients reimburse us for these costs. Amounts paid by us as a principal for out-of-pocket costs are included in direct costs and the reimbursements we receive as a principal are reported as reimbursed revenue. In our statements of income, we combine amounts paid by us as an agent for out-of-pocket costs with the corresponding reimbursements, or revenue, we receive as an agent. During the years ended December 31, 2008, 2009 and 2010, fees paid to investigators and other fees we paid as an agent and the associated reimbursements were approximately $319.0 million, $330.4 million and $380.7 million, respectively.
Most of our contracts can be terminated by our clients either immediately or after a specified period following notice. These contracts typically require the client to pay us the fees earned through the termination date, the fees and expenses to wind down the study and, in some cases, a termination fee or some portion of the fees or profit that we could have earned under the contract if it had not been terminated early. Therefore, revenue recognized prior to cancellation generally does not require a significant adjustment upon cancellation.
Prior to June 2010, the Discovery Sciences segment generated revenue from our compound partnering business in the form of upfront payments, development and regulatory milestone payments, and royalties. Upfront payments were generally paid within a short period of time following the execution of an out-license and collaboration agreement. Milestone payments were typically one-time payments to us triggered by the collaborator’s achievement of specified development and regulatory events such as the commencement of Phase III trials or regulatory submission or approval. Royalties were payments received by us based on net product sales of a collaboration. We recognized these various forms of payment from our collaborators when the event which triggered the obligation of payment had occurred, there were no further obligations on our part in connection with the payment and collection was reasonably assured.
Recording of Expenses
We generally record our operating expenses among the following categories:
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direct costs;
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research and development, or R&D;
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selling, general and administrative or SG&A; and
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depreciation and amortization.
Direct costs consist of amounts necessary to carry out the revenue and earnings process, and include direct labor and related benefit charges, other costs directly related to contracts, an allocation of facility and information technology costs, and reimbursable out-of-pocket expenses. Direct costs, as a percentage of net revenue, will fluctuate from one period to another as a result of changes in labor utilization and the mix of service offerings involved in the hundreds of studies being conducted during any period of time.
R&D expenses for the Clinical Development Services and Laboratory Services segments consist of labor and related benefits charges, materials, supplies and technology costs related to the development of new services offerings for customers. R&D costs for the Discovery Sciences segment consist primarily of costs associated with preclinical studies and the clinical trials of our product candidates, development materials, patent costs, labor and related benefit charges associated with personnel performing research and development work, supplies associated with this work, consulting services and an allocation of facility and information technology costs.
SG&A expenses consist primarily of administrative payroll and related benefit charges, sales, advertising and promotional expenses, recruiting and relocation expenses, training costs, administrative travel, an allocation of facility and information technology costs and costs related to operational employees performing administrative tasks.
Depreciation and amortization expenses consist of facility and equipment depreciation and amortization of intangible assets.
We record property and equipment in our financial statements at cost less accumulated depreciation. We record depreciation expense using the straight-line method, based on the following estimated useful lives:
We depreciate leasehold improvements over the shorter of the respective lives of the leases or the useful lives of the improvements.
Year Ended December 31, 2009 versus Year Ended December 31, 2010
The following table sets forth amounts from our consolidated financial statements along with the dollar and percentage change for the full year of 2009 compared to the full year of 2010.
Total net revenue increased $53.8 million to $1.5 billion in 2010. Service revenue was $1.4 billion, which accounted for 92.7% of total net revenue for 2010. The $47.3 million increase in service revenue was attributable to a $38.5 million increase in net revenue from our Laboratory Services segment and a $7.1 million increase in net revenue from our Clinical Development Services segment. The increase in net revenue from our Laboratory Services segment was primarily related to the BioDuro acquisition in late 2009. The increase in net revenue from our Clinical Development Services segment was related to a 71.3% increase in net authorizations from 2009 and a $14.6 million increase in net revenue in our Asia Pacific services related to growth in the region and our acquisition of Excel in late 2009. In 2009 and 2010, we recognized revenue of $6.3 million and $8.0 million, respectively, from the compound partnering business in our Discovery Sciences segment, which we spun off in June 2010. In 2010, the U.S. dollar strengthened relative to the euro and pound sterling. Converting our 2010 euro and pound sterling net revenue at average 2009 exchange rates, our Clinical Development Services segment net revenue for 2010 would have been $7.1 million higher.
Total direct costs increased $31.5 million to $763.3 million in 2010. The increase was mainly attributable to a $21.8 million increase in personnel costs, a $9.4 million increase in supply costs related to our laboratories, a $6.5 million increase in reimbursable out-of-pocket expenses, a $3.5 million reduction in research credits and a $2.1 million increase in
contract labor and consulting. These costs were partially offset by a foreign currency hedging gain of $7.1 million in 2010 compared to a foreign currency hedging loss of $4.4 million in 2009. The increase in personnel costs was due to a $6.3 million increase in incentive compensation expense and a $15.5 million increase in personnel costs due to headcount growth to support revenue growth.
R&D expenses increased $3.4 million to $16.7 million in 2010. The increase in R&D expense was primarily due to development costs associated with the two therapeutic compounds acquired from Janssen Pharmaceutica in November 2009 that were part of the compound partnering business in the Discovery Sciences segment. The majority of our R&D expenses were associated with our Discovery Sciences segment, which we spun off in June 2010.
SG&A expenses increased $48.3 million to $438.0 million in 2010. The increase in SG&A expenses was primarily related to a $30.5 million increase in personnel costs, a $5.2 million increase in facility costs primarily related to building impairment and lease termination costs, a $3.5 million reduction in research credits, a $2.6 million increase in non-billable travel and training costs, a $2.0 million increase in contract labor and subcontractor costs and a $1.8 million increase in recruitment and relocation, partially offset by a $2.7 million decrease in bad debt expense. More personnel related to acquired entities resulted in a $10.5 million increase in personnel costs, and the remainder of the increase was due to a decrease in utilization along with growth and expansion of our business.
Depreciation and amortization expense increased $1.3 million to $65.1 million in 2010, primarily because of property and equipment we acquired to accommodate growth.
Restructuring costs were $3.9 million in 2009 because of our July 2009 workforce reduction in North America by approximately 270 employees. We did not incur restructuring costs in 2010.
Impairment of investments in 2009 consisted of impairments of various investments in our short-term investment portfolio of $2.1 million. For 2010, we recorded $5.0 million of impairments due to an other-than-temporary decline in the value of several of our other investments. These impairments were based on the overall market conditions and the financial performance and estimated fair values of the individual investments held by each fund.
Loss from equity investment decreased by $0.6 million to $0.7 million in 2010. The decrease is attributable to the change in the net asset value of our investment in Celtic Therapeutics Holdings, L.P.
Interest and other income, net increased $2.9 million to $6.4 million in 2010. Changes in exchange rates from the time we recognize revenue until the client pays resulted in a net loss of $0.9 million in 2010, down from a net loss of $3.0 million in 2009.
Our provision for income taxes from continuing operations decreased $2.1 million to $60.8 million in 2010. Our effective income tax rate for 2010 was 32.3% compared to 29.3% for 2009. The increase in our effective tax rate was primarily attributable to $3.8 million of tax expense in 2010 related to a valuation allowance for deferred tax assets associated with the compound partnering spin-off.
In 2010, we incurred a loss from discontinued operations, net of income taxes of $3.7 million. This loss was attributable to discontinuing the operations of our wholly-owned subsidiary, PPD Dermatology, Inc. In 2009, we recognized $7.7 million in income from discontinued operations, net of income taxes in relation to the disposition of Piedmont Research Center, LLC, and PPD Biomarker Discovery Sciences, LLC. We recognized a net gain from the sale of businesses of $21.5 million, net of provision for income taxes in 2009 related to these dispositions. As a result, these business units have been shown as discontinued operations for 2009 and 2010.
Net income of $124.0 million in 2010 represents a decrease of 22.1% from $159.3 million in 2009. Net income per diluted share of $1.04 in 2010 represents a 22.4% decrease from $1.34 net income per diluted share in 2009. Net income changed for various reasons as explained above.
Year Ended December 31, 2008 versus Year Ended December 31, 2009
The following table sets forth amounts from our consolidated financial statements along with the dollar and percentage change for the full year of 2008 compared to the full year of 2009. The information below has been reclassified to reflect discontinued operations.
Total net revenue decreased $134.6 million to $1.4 billion in 2009. Service revenue was $1.3 billion, which accounted for 92.9% of total net revenue for 2009. The $118.5 million decrease in service revenue was attributable to a $117.1 million decrease in net revenue from our Clinical Development Services segment, offset by a $10.7 million increase in net revenue from our Laboratory Services segment. The increase in net revenue from our Laboratory Services segment was primarily related to the Vaccine Laboratory acquisition in late 2008 and BioDuro acquisition in late 2009. The decrease in Clinical Development Services segment net revenue was related to our high cancelation rate and a 43% decrease in net authorizations in 2009. In 2009 and 2008, we recognized revenue of $6.3 million and $18.4 million, respectively, in our Discovery Sciences segment, which we spun off in June 2010. Converting our 2009 euro and pound sterling net revenue at average 2008 exchange rates, our Clinical Development Services segment net revenue for 2009 would have been $15.0 million higher.
Total direct costs decreased $75.4 million to $731.8 million in 2009. The decrease was mainly attributable to a $39.9 million decrease in personnel costs, a $17.4 million decrease in contract labor and subcontractor costs, a $16.1 million decrease in reimbursable out-of-pocket expenses and a $9.1 million increase in research credits recognized in 2009. Of the $9.1 million increase in research credits, $4.9 million was related to expenses incurred in 2008. The direct costs
decrease was also attributable to a foreign currency hedging loss of $4.4 million in 2009 compared to a foreign currency hedging loss of $7.3 million in 2008.
R&D expenses increased $5.7 million to $13.3 million in 2009. The increase in R&D expense was primarily due to development costs associated with the two therapeutic compounds acquired from Janssen Pharmaceutica in November 2009 that were part of the Discovery Sciences segment. The majority of our R&D expenses were associated with our Discovery Sciences segment which was spun off in June 2010.
SG&A expenses decreased $3.8 million to $389.6 million in 2009. The decrease in SG&A expenses was primarily related to a $5.6 million decrease in recruitment and relocation costs, a $2.9 million decrease in non-billable travel costs and a $1.4 million decrease in bad debt expense, partially offset by a $6.0 million increase in investment banking, legal and accounting expenses, primarily related to our acquisitions and spin-off.
Depreciation and amortization expense increased $4.7 million to $63.9 million in 2009 related to property and equipment we acquired to accommodate growth.
Restructuring costs were $3.9 million in 2009. In July 2009, we reduced our Development segment workforce in North America by approximately 270 employees.
In 2008, Accentia announced its Phase III clinical trial in SinuNase failed to meet its goal in treating chronic sinusitis participants, discontinued the sales of antifungal products on which we received royalties and declared bankruptcy. As a result, we wrote off the $1.6 million of remaining unamortized value of our royalty interest in the antifungal products of Accentia.
Impairment of investments, net decreased $15.7 million to $2.1 million in 2009. Impairment of investments, net in 2009 consisted of impairments of various investments in our short-term investment portfolio of $2.1 million. Impairment of investments, net in 2008 consisted of a net impairment of an investment in our short-term investment portfolio of $3.7 million and a $14.0 million write-down for an other-than-temporary decline in the fair market value of our marketable investment in Accentia. The write-down on Accentia was based on a decrease in the publicly quoted market price of Accentia’s common stock and Accentia’s bankruptcy filing in November 2008.
In October 2009, we committed to invest up to $102.7 million in Celtic Therapeutics Holdings, L.P. As of December 31, 2009, we had invested a total of $32.7 million of the aggregate commitment. We account for this investment under the equity method of accounting. For 2009, we recognized a loss from equity investment of $1.3 million. As of December 31, 2009, our investment balance in Celtic was $31.4 million.
Interest and other income, net decreased $11.2 million to $3.5 million in 2009. This decrease was due primarily to an $11.5 million decrease in interest income as a result of lower interest rates earned on cash balances. Changes in exchange rates from the time we recognize revenue until the client pays also resulted in a net loss on foreign currency transactions of $3.0 million for 2009, down from a net loss of $3.8 million in 2008.
Our provision for income taxes from continuing operations decreased $28.6 million to $62.9 million in 2009. Our effective income tax rate for 2008 was 32.7% compared to 29.3% for 2009. The effective tax rate for 2009 was positively impacted by a shift in the geographical mix of our pre-tax earnings to the European and Asian tax jurisdictions, the receipt of nontaxable foreign research credits and the reduction in liabilities for uncertain tax positions in 2009.
The income from discontinued operations, net of income taxes was $7.7 million in 2009. In May 2009, we completed the disposition of substantially all of the assets of Piedmont Research Center, LLC. Piedmont Research Center provided preclinical research services. In December 2009, we completed the disposition of our wholly owned subsidiary PPD Biomarker Discovery Sciences, LLC. PPD Biomarker Discovery Sciences provided biomarker discovery services and participant sample analysis. We recognized a net gain from the sale of business of $21.5 million, net of provision for income taxes in 2009 related to these dispositions. In May 2010, we discontinued the operations of our wholly owned subsidiary PPD Dermatology, Inc. due to unfavorable efficacy data associated with the MAG-131 program. As a result, these business units have been shown as discontinued operations for 2009.
Net income of $159.3 million in 2009 represents a decrease of 15.1% from $187.5 million in 2008. Net income per diluted share of $1.34 in 2009 represents a 14.1% decrease from $1.56 net income per diluted share in 2008. Net income changed for various reasons as explained above.
Liquidity and Capital Resources
As of December 31, 2010, we had $479.6 million of cash and cash equivalents and $80.0 million of short-term investments. We invest our cash and cash equivalents and short-term investments in bank deposits, financial instruments that are issued or guaranteed by the U.S. government and municipal debt obligations. Our expected primary cash needs are for capital expenditures, expansion of services, possible acquisitions, investments, geographic expansion, dividends, working capital and other general corporate purposes. We have historically funded our operations, dividends and growth, including acquisitions, primarily with cash flow from operations.
We held approximately $88.6 million and $78.7 million, net of unrealized losses, in auction rate securities at December 31, 2009 and 2010, respectively. Our portfolio of investments in auction rate securities consists principally of interests in government-guaranteed student loans, insured municipal debt obligations and municipal preferred auction rate securities. We classified our entire balance of auction rate securities as long-term investments as of December 31, 2010 due to continuing uncertainties about the liquidity in the auction rate securities market. We also recorded unrealized losses on these investments of $21.3 million and $14.2 million as of December 31, 2009 and 2010, respectively. We concluded that this impairment was temporary because of our ability and intent to hold the auction rate securities until the fair value recovers. We will continue to seek to liquidate these investments at par value and will review the classification and valuation of these securities on a quarterly basis.
In 2010, our operating activities provided $247.7 million in cash as compared to $253.0 million for the same period last year. The change in operating cash flow was due primarily to lower net income in 2010 compared to 2009 partially offset by the gain on sale of business of $21.5 million in 2009, a decrease in impairment of intangible of $10.4 million and changes in operating cash receipts and payments totaling $11.4 million. The change in adjustments for accruals of expected future operating cash receipts and payments includes current income taxes of $31.0 million, prepaid expenses and investigator advances of $11.1 million, other accrued expenses and deferred rent of $5.9 million and other assets of $1.7 million. The change in adjustments to deferrals of past operating cash receipts and payments includes unearned income of ($23.8) million, payables to investigators of ($9.6) million and accounts receivable and unbilled of ($4.9) million. Fluctuations in receivables and unearned income occur on a regular basis as we perform services, achieve milestones or other billing criteria, send invoices to clients and collect outstanding accounts receivable. This activity varies by individual client and contract. We attempt to negotiate payment terms that provide for payment of services prior to or soon after the provision of services, but the levels of unbilled services and unearned revenue can vary significantly from period to period.
In 2010, our investing activities used $16.7 million in cash. We used cash of $63.3 million to purchase investments, $62.5 million for capital expenditures, $23.1 million for acquisitions and $19.2 million for loan advances. These amounts were offset by maturity and sale of investments of $133.6 million, changes in restricted cash of $7.5 million, proceeds from the sale of investment of $4.7 million, additional proceeds from the sale of business of $3.5 million and loan repayments of $2.0 million. Our capital expenditures in 2010 primarily consisted of $31.3 million for computer software and hardware, $17.1 million for various facility improvements and furnishings and $14.1 million for additional scientific equipment for our laboratory units. We expect our capital expenditures in 2011 will be approximately $85 million to $95 million, primarily for investments in information technology , new laboratory equipment as well as facility expansions and improvements.
In 2010, our financing activities used $155.9 million of cash. The biggest difference from 2009 was our contribution of $100.0 million of cash and cash equivalents to Furiex in the compound partnering spin-off. In 2010, we paid $71.3 million of dividends to shareholders, which were partially offset by proceeds of $15.1 million from stock option exercises and purchases under our employee stock purchase plan.
The following table sets forth amounts from our consolidated balance sheet affecting our working capital along with the dollar amount of the change from 2009 to 2010.
Working capital as of December 31, 2010 was $520.0 million, compared to $541.1 million at December 31, 2009. The decrease in working capital was due primarily to an increase in unearned income of $19.3 million and a decrease in other current assets of $10.9 million offset by a net increase in cash and short term investments of $6.0 million. During 2010, we contributed $100.0 million of cash and cash equivalents to Furiex in the compound partnering spin-off which was offset by cash generated in the normal course of business.
For the year ended December 31, 2010, DSO was 22 days, compared to 31 days for the year ended December 31, 2009. We calculate DSO by dividing accounts receivable and unbilled services less unearned income by average daily gross revenue for the applicable period. DSO will continue to fluctuate in the future depending on contract terms, the mix of contracts performed within a period, the levels of investigator advances and unearned income, and our success in collecting receivables.
We maintain a defined benefit pension plan for certain employees and former employees in the United Kingdom, or U.K. This pension plan was closed to new participants as of December 31, 2002. In December 2009, we amended the plan effective January 1, 2010. As amended, participants are entitled to receive benefits previously accrued, which are based on expected pay at retirement and number of years of service through January 1, 2010, but will received no additional credit for future years. The projected benefit obligation for the benefit plan at December 31, 2009 and December 31, 2010, was $58.3 million and $59.3 million, respectively, and the value of the plan assets was $42.8 million and $48.3 million, respectively. As a result, the plan was under-funded by $15.4 million in 2009 and by $11.0 million in 2010. The amount of contributions to the plan for the years ended December 31, 2009 and 2010 were $3.4 million and $2.8 million, respectively. We expect the pension cost to be recognized in our financial statements to decrease from the $1.8 million in 2010 to approximately $1.1 million in 2011. The expense to be recognized in future periods could increase or decrease depending upon the change in the fair market value of the plan assets. A decrease in the market value of plan assets and/or declines in interest rates are likely to cause the amount of the under-funded status to increase. After completion of the actuarial valuations in 2011, we could be required to record an additional reduction to shareholders’ equity. In connection with the plan, we recorded a decrease to shareholders’ equity in 2009 of $1.7 million and an increase of $2.1 million in 2010. Given the impact that the discount rate and stock market performance have on the projected benefit obligation and market value of plan assets, future changes in either one of these factors could significantly reduce or increase the amount of our pension plan under-funding.
Our $25.0 million revolving credit facility with Bank of America, N.A. expired on June 30, 2010 and we elected not to renew it.
In May 2009, our board of directors increased the annual dividend rate from $0.50 to $0.60 per share per year, payable quarterly at a rate of $0.15 per share effective beginning in the second quarter of 2009. The annual cash dividend policy and the payment of future quarterly cash dividends under that policy are not guaranteed and are subject to the discretion of and continuing determination by our board of directors that the policy remains in the best interests of our shareholders and in compliance with applicable laws and agreements.
In 2008, our board of directors approved a stock repurchase program authorizing us to repurchase up to $350.0 million of our common stock from time to time in the open market. We adopted a share repurchase program in view of the price at which our stock was trading at the time of the adoption of the program, the strength of our balance sheet and our ability to generate cash, and in order to minimize earnings dilution from future equity compensation awards. During the year ended December 31, 2008, we repurchased approximately 2,435,000 shares of our common stock for an aggregate purchase price, including broker commissions, of $89.3 million at an average price per share of $36.68. During 2009 and 2010, we did not repurchase any shares of our common stock. As of December 31, 2010, $260.7 million remained available for share repurchases under the stock repurchase program. On February 14, 2011, we entered into an accelerated share repurchase arrangement with Barclays Capital Inc. under which we expect to use approximately $200.0 million of the remaining amount to repurchase additional shares of our common stock.
In late 2009, we committed to invest up to $102.7 million in Celtic Therapeutics Holdings L.P. Celtic is an investment partnership organized for the purpose of identifying, acquiring and investing in a diversified portfolio of novel therapeutic product candidates, with a focus on mid-stage compounds that have progressed through human proof of concept studies that are targeted to address unmet medical needs. As of December 31, 2010, we had invested a total of $32.7 million of the aggregate commitment and had an investment balance of $30.7 million, which includes cumulative equity method investment losses to date. We expect to invest the remainder of our commitment over a period of three years.
In 2010, we entered into a non-revolving line of credit agreement to loan Celtic Pharma Development Services Bermuda Ltd., a subsidiary of Celtic Pharmaceutical Holdings L.P., up to $18.0 million to finance trade payables in connection with a specified drug candidate. Celtic Pharma Development Services Bermuda Ltd. has appointed us to conduct certain clinical studies on the specified drug candidate. Principal and interest are due and payable no later than June 30, 2013 and are secured by a guarantee of an affiliate of the borrower. As of December 31, 2010, we had advanced $9.2 million to the borrower.
As of December 31, 2010, we had commitments to invest up to an aggregate additional $10.8 million in four venture capital funds and $1.7 million in other investments. For further details, see Note 3 in the notes to consolidated financial statements.
As of December 31, 2010, the total gross unrecognized tax benefits were $30.0 million and of this total, $14.5 million is the amount that, if recognized, would reduce our effective tax rate. We believe that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by up to $1.7 million within the next twelve months due to the settlement of audits and the expiration of the statutes of limitations.
Our policy for recording interest and penalties associated with tax audits is to record them as a component of provision for income taxes. As of December 31, 2010, we accrued $4.1 million of interest and $0.9 million of penalties with respect to uncertain tax positions. To the extent these interest and penalties are not assessed, we will reduce amounts accrued and reflect them as a reduction of the overall income tax provision.
We analyzed filing positions in all of the significant federal, state and foreign jurisdictions where we are required to file income tax returns, as well as open tax years in these jurisdictions. The only periods subject to examination by the major tax jurisdictions where we do business are the 2007 through 2010 tax years. Various foreign and state income tax returns are under examination by taxing authorities. We do not believe that the outcome of any examination will have a material impact on our financial condition or results of operations.
Under most of our agreements for services, we typically agree to indemnify and defend the sponsor against third-party claims based on our negligence or willful misconduct. Any successful claims could have a material adverse effect on our financial statements.
We expect to continue expanding our operations through internal growth, strategic acquisitions and investments. We expect to fund these activities, the payment of future cash dividends and repurchases of stock from existing cash, cash
flows from operations and, if necessary or appropriate, borrowings under our future credit facilities. We believe that these sources of liquidity will be sufficient to fund our operations, dividends and stock repurchases, if any, for the foreseeable future. From time to time, we evaluate potential acquisitions, investments and other growth and strategic opportunities that might require additional external financing, and we might seek funds from public or private issuances of equity or debt securities. While we believe we have sufficient liquidity to fund our operations for the foreseeable future, our sources of liquidity and ability to pay dividends or repurchase our stock could be affected by current and anticipated difficult economic conditions; our dependence on a small number of industries and clients; compliance with regulations; reliance on key personnel; breach of contract, personal injury or other tort claims; international risks; environmental or intellectual property claims; or other factors described under “Item 1A. Risk Factors”, in this Item 7 under the subheadings “Contractual Obligations”, “Critical Accounting Policies and Estimates”, “Potential Liability and Insurance”, “Potential Volatility of Quarterly Operating Results and Stock Price” and under “Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to foreign currency risk by virtue of our international operations. We derived 39.1%, 40.4% and 44.2% of our net revenue for the years ended December 31, 2008, 2009 and 2010, respectively, from operations outside the United States. We generally reinvest funds generated by each subsidiary in the country where they are earned. Accordingly, we are exposed to adverse movements in foreign currencies, predominately in the pound sterling, euro and Brazilian real.
The vast majority of our contracts are entered into by our U.S., U.K. or Singapore subsidiaries. The contracts entered into by the U.S. subsidiaries are almost always denominated in U.S. dollars. Contracts entered into by our U.K. and Singapore subsidiaries are generally denominated in U.S. dollars, pounds sterling or euros, with the majority in U.S. dollars. Although an increase in exchange rates for the pound sterling or euro relative to the U.S. dollar increases net revenue from contracts denominated in these currencies, operating income is negatively affected due to an increase in operating expenses that occurs when we convert our expenses from local currencies into the U.S. dollar equivalent.
We also have currency risk resulting from the passage of time between the recognition of revenue, invoicing of clients under contracts and the collection of client payments against those invoices. If a contract is denominated in a currency other than the subsidiary’s local currency, we recognize an unbilled receivable at the time of revenue recognition and a receivable at the time of invoicing for the local currency equivalent of the foreign currency invoice amount. Changes in exchange rates from the time we recognize revenue until the time the client pays will result in our receiving either more or less in local currency than the amount that was originally invoiced. We recognize this difference as a foreign currency transaction gain or loss, as applicable, and report it in other income, net. If the exchange rate on accounts receivable balances denominated in pounds sterling and euros had increased by 10%, our foreign currency transaction loss would have increased by $5.2 million in the year ended December 31, 2010.
Our strategy for managing foreign currency risk relies primarily on receiving payment in the same currency used to pay expenses and other non-derivative hedging strategies. From time to time, we also enter into foreign currency hedging activities in an effort to manage our potential foreign exchange exposure. If the U.S. dollar had weakened an additional 10% relative to the pound sterling, euro and Brazilian real in 2010, income from continuing operations, including the impact of hedging, would have been approximately $0.7 million lower for the year based on revenues and the costs related to our foreign operations. From time to time, we also enter into foreign currency hedging activities in an effort to manage our potential foreign exchange exposure. We have hedged a significant portion of our foreign currency exposure for 2011.
Changes in exchange rates between the applicable foreign currency and the U.S. dollar will affect the translation of foreign subsidiaries’ financial results into U.S. dollars for purposes of reporting our consolidated financial results. The process by which we translate each foreign subsidiary’s financial results to U.S. dollars is as follows:
•
we translate statement of income accounts at average exchange rates for the period;
•
we translate balance sheet asset and liability accounts at end of period exchange rates; and
•
we translate equity accounts at historical exchange rates.
Translation of the balance sheet in this manner affects shareholders’ equity through the cumulative translation adjustment account. This account exists only in the foreign subsidiary’s U.S. dollar balance sheet and is necessary to keep the foreign balance sheet, stated in U.S. dollars, in balance. We report translation adjustments with accumulated other comprehensive income (loss) as a separate component of shareholders’ equity. To date, cumulative translation adjustments have not been material to our consolidated financial position. However, future translation adjustments could materially and adversely affect us.
Currently, there are no material exchange controls on the payment of dividends or otherwise prohibiting the transfer of funds out of any country in which we conduct operations. Although we perform services for clients located in a number of jurisdictions, we have not experienced any material difficulties in receiving funds remitted from foreign countries. However, new or modified exchange control restrictions could have an adverse effect on our financial condition. If we were to repatriate dividends from the cumulative amount of undistributed earnings in foreign entities, we would incur a tax liability not currently provided for in our balance sheet.
We are exposed to changes in interest rates on our cash, cash equivalents, investments and advances to and lines of credit with related parties. We invest our cash and investments in financial instruments with interest rates based on market conditions. If the interest rates on cash, cash equivalents and investments decreased by 10%, our interest income would have decreased by approximately $0.1 million in the year ended December 31, 2010.
We are also exposed to market risk related to our investments in auction rate securities. For further details, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”.
Item 8.
Item 8. Financial Statements and Supplementary Data
The information called for by this Item is set forth herein commencing on page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed only to provide reasonable assurance that information to be disclosed in our Exchange Act Reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide the reasonable assurance discussed above.
Internal Control Over Financial Reporting
No change to our internal control over financial reporting occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our Board of Directors and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
A control system, no matter how well designed and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met and must reflect the fact that there are resource constraints that require management to consider the benefits of internal controls relative to their costs. Because of these inherent limitations, management does not expect that our internal controls over financial reporting will prevent all errors and all fraud. Also, internal controls might become inadequate because of changes in business conditions or a decline in the degree of compliance with our policies or procedures.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment, we believe that, as of December 31, 2010, our internal control over financial reporting was effective based on those criteria.
Deloitte & Touche, LLP, the registered public accounting firm that audited the financial statements included in this annual report, has issued an attestation report on our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Pharmaceutical Product Development, Inc. and Subsidiaries
Wilmington, North Carolina
We have audited the internal control over financial reporting of Pharmaceutical Product Development, Inc. and Subsidiaries (the “Company”) as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s Board of Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2010 of the Company and our report dated February 25, 2011 expressed an unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
February 25, 2011
Item 9B.
Item 9B. Other information
None.
PART III
Certain information required by Part III is omitted from this report because the Registrant intends to file a definitive proxy statement for its 2011 Annual Meeting of Shareholders to be held on May 18, 2011 (the “Proxy Statement”) within 120 days after the end of its fiscal year pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, and the information included therein is incorporated herein by reference to the extent provided below.
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 of Form 10-K concerning the Registrant’s executive officers is set forth under the heading “Executive Officers” located at the end of Part I of this Form 10-K.
The board of directors has determined that Frederick Frank, Stuart Bondurant, Catherine M. Klema, Terry Magnuson and John A. McNeill, Jr., the members of the Finance and Audit Committee, are independent as defined in Rule 4200(a) (15) of the Nasdaq listing standards and Rule 10A-3 under the Securities Exchange Act of 1934. The board of directors has also determined that at least one committee member, namely Mr. Frank, is an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K.
Our board of directors has adopted a code of conduct that applies to all of our directors and employees. Our board has also adopted a separate code of ethics for our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and Controller, or persons performing similar functions. We will provide copies of our code of conduct and code of ethics without charge upon request. To obtain a copy of the code of ethics or code of conduct, please send your written request to Pharmaceutical Product Development, Inc., 929 North Front Street, Wilmington, NC 28401, Attn: General Counsel.
The other information required by Item 10 of Form 10-K is incorporated by reference to the information under the headings “Proposal No. 1 - Election of Directors” and “Other Information-Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
Item 11.
Item 11. Executive Compensation
The information required by Item 11 of Form 10-K is incorporated by reference to the information under the heading “Other Information -Compensation of Non-Employee Directors”, “-Director Compensation in Fiscal 2010,” “-Executive Compensation”, “-Compensation Committee Report,” and “-Compensation Committee Interlocks and Insider Participation” in the Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plans
The following table sets forth the indicated information with respect to our equity compensation plans as of December 31, 2010:
(1) This includes 6,836,131 shares of stock available for issuance under our amended and restated Equity Compensation Plan and 836,757 shares available for issuance under our Employee Stock Purchase Plan.
The other information required by Item 12 of Form 10-K is incorporated by reference to the information under the heading “Other Information - Principal Shareholders” in the Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 of Form 10-K is incorporated by reference to the information under the headings “Proposal No. 1 - Election of Directors - Nominees” and “Information About the Board of Directors and its Committees”, and “Other Information - Related Party Transactions” in the Proxy Statement.
Item 14.
Item 14. Principal Accounting Fees and Services
The information required by Item 14 of Form 10-K is incorporated by reference to the information under the heading “Other Information - Report of the Finance and Audit Committee” and “-Fees Paid to the Independent Registered Public Accounting Firm” in the Proxy Statement.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a) Financial Statements
Our consolidated financial statements filed as part of this report are listed in the attached Index to Consolidated Financial Statements. There are no schedules to our consolidated financial statements.
(b) Exhibits
^ Confidential treatment requested for portions of this exhibit.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Pharmaceutical Product Development, Inc. and Subsidiaries
Wilmington, North Carolina
We have audited the accompanying consolidated balance sheets of Pharmaceutical Product Development, Inc. and Subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Pharmaceutical Product Development, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
February 25,
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2009 AND 2010
(in thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
1. Summary of Operations and Significant Accounting Policies
Nature of business
Pharmaceutical Product Development, Inc. together with its subsidiaries (collectively the “Company”) provides a broad range of drug discovery, development and consulting services through its Clinical Development Services and Laboratory Services business segments. The Company provides services to clients and partners in the pharmaceutical, biotechnology and medical device industries and to academic and government organizations. The Company markets its Clinical Development Services and Laboratory Services globally.
On June 14, 2010, the Company spun off its compound partnering business into a new independent, publicly traded company, Furiex Pharmaceuticals, Inc. (Nasdaq: FURX). Substantially all of the operating business components of the Discovery Sciences segment were included in the spin-off. The Company contributed $100.0 million of cash and cash equivalents to Furiex and distributed all outstanding shares of Furiex to the Company’s shareholders as a pro-rata, tax-free dividend, issuing one share of Furiex common stock for every twelve shares of the Company’s common stock to shareholders of record on June 1, 2010. The results of operations for the former compound partnering business conducted by the Company until June 14, 2010 are included as part of this report as continuing operations because the Company believes this transaction does not qualify for discontinued operations treatment due to the ongoing master development services agreement between the Company and Furiex. The Company does not have any equity or other form of ownership interest in Furiex subsequent to the separation. For further details, see Note 18.
Prior to the Company’s June 2010 spin-off, the Discovery Sciences segment included the compound partnering business and a preclinical toxicology consulting business. In 2009, the Company sold both its preclinical research services and biomarker discovery business units which were part of the Discovery Sciences segment. In 2010, the Company discontinued the operations of its wholly owned subsidiary PPD Dermatology, Inc. The Company’s Discovery Sciences revenues were all generated in the United States.
Following the spin-off of the compound partnering business in mid-2010, the Company reorganized its operations into two new business segments, Clinical Development Services and Laboratory Services. See Note 16 for details. As a result of this reorganization, the Company changed the presentation of net revenue and direct costs on the consolidated statements of income.
Principles of consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, “U.S. GAAP”, and include the accounts of Pharmaceutical Product Development, Inc. and its majority-owned subsidiaries that the Company controls. Amounts pertaining to the noncontrolling ownership interests held by third parties in the operating results and financial position of the Company’s majority-owned subsidiaries are reported as noncontrolling interests. All intercompany balances and transactions have been eliminated in consolidation.
Recent accounting pronouncements
In June 2009, the Financial Accounting Standards Board, “FASB”, issued a new accounting standard modifying how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This standard clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. This standard requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity and requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. This standard was effective on January 1, 2010. The adoption of this standard had no impact on the Company’s consolidated financial statements.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
1. Summary of Operations and Significant Accounting Policies (continued):
In October 2009, FASB issued a new accounting standard related to the accounting for revenue arrangements with multiple deliverables. This standard applies to all deliverables in contractual arrangements in all industries in which a vendor will perform multiple revenue-generating activities. This standard also addresses the unit of accounting for an arrangement involving multiple deliverables and how arrangement consideration should be allocated. This standard will be effective for fiscal years beginning on or after June 15, 2010. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
In March 2010, FASB issued a new accounting standard, the objective of which is to establish a revenue recognition model for contingent consideration that is payable upon the achievement of an uncertain future event, referred to as a milestone. This consensus will apply to milestones in single or multiple-deliverable arrangements involving research and development transactions, and will be effective for fiscal years (and interim periods within those fiscal years) beginning on or after June 15, 2010. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
Revenue recognition
The Company generally enters into contracts with customers to provide services with payments based on fixed and variable fee arrangements. Revenue for services, as rendered, is recognized only after persuasive evidence of an arrangement exists, the sales price is determinable and collectability is reasonably assured. Once the above criteria have been met, the Company recognizes revenue for the services provided based on the proportional performance methodology which determines the proportion of outputs or performance obligations which have been completed or delivered compared to the total contractual outputs or performance obligations. Under a small number of customer contracts, a portion of the payments owed to us are contingent upon successful achievement of performance standards or research and development success milestones. These payments are not included in the total contract value used for the proportional performance calculations until the achievement of the performance standard or milestone is reasonably assured. If the Company determines that a loss will result from the performance of a contract, the entire amount of the estimated loss is charged against income in the period in which such determination is made.
For most clinical trial related service contracts in the Company’s Clinical Development Services segment and the Company’s Laboratory Services segment, measurement of performance is based on a comparison of direct costs through that date to estimated total direct costs to complete the contract. Direct costs relate primarily to the amount of labor and related overhead costs for the delivery of services. The Company believes this is the best indicator of the performance of the contractual obligations. Changes in the estimated total direct costs to complete a contract without a corresponding proportional change to the contract value result in a cumulative adjustment to the amount of revenue recognized in the period the change in estimate is determined. For time- and- material contracts, the Company recognizes revenue as hours are worked, multiplied by the applicable hourly rate. Additionally, the Laboratory Services segment enters into arrangements in which the performance obligation is a specified laboratory test. Revenue is recognized under these arrangements based upon the number of samples tested times the contracted unit price.
In the event of changes in the scope, nature, duration, or volume of services of the contract with a client, the Company negotiates to modify its existing contract or establishes a new contract to reflect the changes. The Company recognizes renegotiated amounts as revenue by revision to the total contract value resulting from the renegotiated contract.
The Company often offers volume rebates to its large customers based on annual volume thresholds. The Company records an estimate of the annual volume rebate as a reduction of revenue throughout the period based on the estimated total rebate to be earned for the period.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
1. Summary of Operations and Significant Accounting Policies
In connection with the management of clinical trials, the Company pays, on behalf of its clients, fees to investigators and test subjects as well as other out-of-pocket costs for items such as travel, printing, meetings and couriers. The Company’s clients reimburse the Company for these costs. The Company includes amounts paid by it as a principal for out-of-pocket costs in direct costs and reports the reimbursements it receives as a principal as reimbursed revenue. In the statements of income, the Company combines amounts paid by the Company as an agent for out-of-pocket costs with the corresponding reimbursements, or revenue, the Company receives as an agent. During the years ended December 31, 2008, 2009 and 2010, fees paid to investigators and other fees the Company paid as an agent and the associated reimbursements were approximately $319.0 million, $330.4 million and $380.7 million, respectively.
Most of the Company’s contracts can be terminated by the client either immediately or after a specified period following notice. These contracts require the client to pay the Company the fees earned through the termination date, the fees and expenses to wind down the study, and, in some cases, a termination fee or some portion of the fees or profit that the Company could have earned under the contract if it had not been terminated early. Therefore, revenue recognized prior to cancellation generally does not require a significant adjustment upon cancellation.
Prior to June 2010, the Discovery Sciences segment generated revenue from the Company’s compound partnering business in the form of upfront payments, development and regulatory milestone payments, and royalties. Upfront payments were generally paid within a short period of time following the execution of an out-license and collaboration agreement. Milestone payments were typically one-time payments to the Company triggered by the collaborator’s achievement of specified development and regulatory submission or approval. Royalties were payments received by the Company based on net product sales of a collaboration. The Company recognized these various forms of payment from its collaborators when the event which triggered the obligation had occurred, there were no further obligations on the Company’s part in connection with the payment, and collection was reasonably assured.
Cash and cash equivalents
Cash and cash equivalents consist of unrestricted cash accounts that are not subject to withdrawal restrictions or penalties, and all highly liquid investments that have a maturity of three months or less at the date of purchase.
Supplemental cash flow information consisted of the following:
See Note 2 for non-cash investing and financing activities related to the acquisitions that occurred in 2010.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
1. Summary of Operations and Significant Accounting Policies
Payables to investigators and investigator advances
Billings and payments to investigators are based on contractual agreements, which can differ from the accrual of the related costs. The Company generally recognizes investigator costs based upon the status of the work completed as a percentage of the total procedures required under the contract or based on patient enrollment over the term of the contract. The Company classifies payments made in excess of the accrued costs as investigator advances and accrued costs in excess of amounts paid as payables to investigators in its consolidated balance sheets.
Inventory
The Company values inventories, which consist principally of laboratory supplies, at the lower of cost (first-in, first-out method) or market. As of December 31, 2009 and 2010, other current assets included inventories totaling $4.1 million and $2.8 million, respectively.
Property and equipment
The Company records property and equipment at cost less accumulated depreciation. The Company records depreciation using the straight-line method, based on the following estimated useful lives:
The Company depreciates leasehold improvements over the shorter of the respective lives of the leases or the useful lives of the improvements.
Internal use software
The Company accounts for internal use software in accordance with the provisions of accounting standards, which require certain direct costs and interest costs incurred during the application stage of development to be capitalized and amortized over the useful life of the software.
Operating leases
The Company records rent expense for operating leases, some of which have escalating rent over the term of the lease, on a straight-line basis over the initial effective lease term. The Company begins depreciation on the date of initial possession, which is generally when the Company enters the space and begins to make improvements in preparation of intended use. Some of the Company’s facility leases provide for concessions by the landlords, including payments for leasehold improvements and free rent periods. The Company reflects these concessions as deferred rent in the accompanying consolidated financial statements. The Company accounts for the difference between rent expense and rent paid as deferred rent. For tenant improvement allowances, rent holidays and other lease incentives, the Company records a deferred rent liability at the inception of the lease term and amortizes the deferred rent over the term of the lease as a reduction to rent expense.
Goodwill, intangible assets and long-lived assets
The Company assigns to goodwill the excess of the purchase price of a business acquired over the fair value of net tangible assets, identifiable intangible assets and acquired in-process research and development costs at the date of the acquisition. The Company evaluates goodwill for impairment on an annual basis at October 1 or more frequently if events or changes in circumstances indicate that goodwill might be impaired. Any impairment could have a material adverse effect on the Company’s financial position and results of operations.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
1. Summary of Operations and Significant Accounting Policies
Long-lived assets, including fixed assets and intangible assets, are reviewed for impairment when circumstances indicate that the carrying amount of assets might not be recoverable. This evaluation involves various analyses, including undiscounted cash flow projections. In the event undiscounted cash flow projections indicate impairment, the Company would record an impairment based on the fair value of the assets at the date of the impairment.
Intangible assets consist of customer relationships, non-compete agreements, trade name, backlog and an other intangible asset. The Company amortizes customer relationships, non-compete agreements, trade name, in-process R&D and backlog on a straight-line basis, based on an estimated useful life of one to ten years. The weighted-average amortization period for remaining amortization is 6.4 years for these intangibles. The in-process R&D will not be amortized until it becomes a sellable service. The other intangible asset has an indefinite life, and therefore, the Company does not amortize this asset.
Short-term and long-term investments
The Company’s short-term and long-term investments are classified as available-for-sale securities. The Company determines realized and unrealized gains and losses on short-term and long-term investments on a specific identification basis.
Other investments
The Company also invests in privately held entities in the form of equity, for which fair values are not readily determinable. The Company classifies these investments as other investments using the cost method or equity method based on its percentage ownership and its ability to exert significant influence over, but not control of, the investee.
Under the cost method, the Company determines realized and unrealized losses on a specific identification basis. The Company assesses the net realizable value of these entities on a quarterly basis to determine if there has been a decline in the estimated fair value of these entities below cost basis, and if so, if the decline is other- than- temporary. This quarterly review involves an evaluation of the entity, including, among other things, the market condition of its overall industry, historical and projected financial performance, expected cash needs and recent funding events, as well as the Company’s expected holding period and the length of time and the extent to which the estimated fair value of the investment has been less than cost. Upon realization or recognition of an other- than- temporary decline in the value of an investment, the Company records an impairment in that investment.
Under the equity method, the Company states investments at initial cost and then adjusts them for subsequent additional investments and the Company’s proportionate shares of earnings or losses and distributions. The Company records its share of the investee’s earnings or losses in earnings (losses) from equity method investment, net of income taxes in the consolidated statements of income. The Company’s only equity method investment is an investment fund and the Company’s share of the investee’s earnings or losses are based on the changes in the net asset value of the fund which is determined primarily based on the fair value of the fund’s underlying investments.
The Company evaluates its equity method investment for impairment when events or changes in circumstances indicate, in its judgment, that the carrying value of such investment might have experienced an other-than-temporary decline in value. When evidence of loss in value has occurred, the Company compares the estimated fair value of the investment to the carrying value of the investment to determine whether an impairment has occurred. If the estimated fair value is less than the carrying value and the Company considers the decline in value to be other-than-temporary, the excess of the carrying value over the estimated fair value is recognized in the financial statements as an impairment.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
1. Summary of Operations and Significant Accounting Policies
Fair value
The accounting standards establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the inputs as follows:
•
Level 1 - Valuations based on quoted prices for identical assets or liabilities in active markets that the Company has the ability to access. Items valued using Level 1 inputs include money market funds, U.S. treasury securities and exchange-traded equity securities.
•
Level 2 - Valuations based on quoted prices in markets that are not active, or for which all significant inputs are observable, either directly or indirectly. Level 2 valuations include the use of matrix pricing models, quotes for comparable securities and valuation models using observable market inputs. Items valued using Level 2 inputs include derivatives and corporate and municipal debt securities.
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Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Items valued using Level 3 inputs include auction rate securities which are valued using unobservable inputs such as time to market liquidity and appropriate rates of return for comparable securities.
These accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability, or the exit price, in an orderly transaction between market participants at the measurement date. Therefore, even when market assumptions are not readily available, the Company’s own assumptions reflect those that market participants would use in pricing the asset or liability at the measurement date. Many financial instruments have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that buyers are willing to pay for an asset. Ask prices represent the lowest price that sellers are willing to accept for an asset. For financial instruments whose inputs are based on bid-ask prices, the Company’s policy is to set fair value at the average of the bid and ask prices.
The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company reports transfers between valuation levels at their fair value as of the end of the month in which such changes in the fair value inputs occurs.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
1. Summary of Operations and Significant Accounting Policies
Short and long-term investments and cash equivalents - Where quoted prices are available in an active market, the Company classifies securities in Level 1 of the valuation hierarchy. Level 1 securities include highly liquid debt obligations for which there are quoted prices in active markets, money market funds that trade daily based on net asset values or quoted prices in active markets, and exchange-traded equities. If quoted market prices are not available for the specific security, then the Company estimates fair values by using pricing models or quoted prices of securities with similar characteristics. Examples of such instruments are commercial paper, municipal debt obligations (including variable rate demand notes and fixed maturity obligations), which would generally be classified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation, the Company classifies securities within Level 3 of the valuation hierarchy. The Company has classified its entire balance of auction rate securities as Level 3.
Derivatives - The Company’s derivative portfolio consists solely of foreign currency forwards and foreign currency option derivatives. The Company values its derivative positions using generally accepted developed models that use as their basis readily observable market parameters that can be validated to external sources, including industry pricing services. These models reflect the contractual terms of the derivatives, including the period to maturity, and market-based parameters such as interest rates, forward rates, currency exchange rates and the credit quality of the counterparty, and do not require significant judgment. The Company classifies these instruments within Level 2 of the valuation hierarchy.
Equity method investment - The Company’s equity method investment is an investment partnership. The investment partnership holds a number of investments and is valued at net asset value as determined by the fund manager based on the most recent financial information available. The valuation of the underlying investments is based on significant unobservable data and is thus deemed to be a Level 3 valuation.
Cost method investments - The Company’s cost method investments are recorded at cost at the time of the investment and are written down if and when there are declines deemed to be other- than- temporary. The valuation of these assets when required are performed using Level 3 inputs.
Long-lived assets - The Company does not remeasure its long-lived assets to fair value on a recurring basis but instead tests them for impairment when triggering events occur that indicate the fair value may be impaired. When required, the Company values these assets using Level 3 inputs.
Unbilled services and unearned income
In general, prerequisites for billings are established by contractual provisions, including predetermined payment schedules, the achievement of contract milestones or submission of appropriate billing detail. Unbilled services represent revenue recognized to date for which amounts are currently unbillable to the customer pursuant to contractual terms. Conversely, the Company records unearned income for amounts billed to customers for which revenue has not been recognized at the balance sheet date.
Income taxes
The Company computes income taxes using the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactment of changes in tax law or rates. If it is more likely than not that some or all of a deferred tax asset will not be realized, the Company records a valuation allowance.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
1. Summary of Operations and Significant Accounting Policies
Concentration of credit risk
Accounting standards require disclosure of information about financial instruments with off- balance- sheet risk and financial instruments with concentrations of credit risk. Financial instruments that subject the Company to concentrations of credit risk consist principally of accounts receivable and unbilled services, cash equivalents and short-term investments.
The Company’s clients are primarily pharmaceutical and biotechnology companies and academic and government organizations. No single client accounted for more than 10% of the Company’s net revenue in 2008, 2009 or 2010. Concentrations of credit risk with respect to accounts receivable and unbilled services, net are limited to a degree due to the large number of Company clients. No single client accounted for more than 10% of the Company’s accounts receivable and unbilled services, net balance at December 31, 2009 or 2010. The Company performs ongoing credit evaluations of clients’ financial condition and, generally, does not require collateral. The Company continually monitors collections and payments from customers and maintains an allowance for estimated credit losses based on an assessment of risk, historical experience and specific customer collection issues. The Company writes-off uncollectible invoices when collection efforts have been exhausted.
As of December 31, 2010, the Company’s cash equivalents consist principally of cash and U.S. Treasury money market and global liquidity funds. Bank deposits often exceed the FDIC insurance limit. Based on the nature of the financial instruments and/or historical realization of these financial instruments, the Company believes they bear minimal credit risk. At December 31, 2010, short-term investments were generally municipal debt securities, U.S. Treasury securities and corporate FDIC insured debt securities. At December 31, 2010, long-term investments consisted of auction rate securities.
Comprehensive income (loss)
The Company has elected to present comprehensive income (loss) and its components in the consolidated statements of equity and comprehensive income. The components of comprehensive income (loss) are net income and all other non-owner changes in equity.
The balances in accumulated other comprehensive loss were as follows:
Components of accumulated other comprehensive loss on the consolidated statements of equity and comprehensive income included the following tax expense (benefit):
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
1. Summary of Operations and Significant Accounting Policies
Foreign currency translations and transactions
The Company translates assets and liabilities of foreign operations, where the functional currency is the local currency, into U.S. dollars at the rate of exchange at each reporting date. The Company translates income and expenses at the average rates of exchange prevailing during the month in which a transaction occurs. The Company records gains or losses from translating foreign currency financial statements in other comprehensive income. The increase or decrease in cumulative translation adjustment included in other comprehensive income for the years ended December 31, 2008, 2009 and 2010 totaled ($34.8) million, $20.3 million and ($9.9) million, respectively. The Company includes foreign currency transaction gains and losses in other income (expense), net. Foreign currency transaction gains during 2008, 2009 and 2010 were $41.1 million, $24.8 million and $25.0 million, respectively. Foreign currency transaction losses during 2008, 2009 and 2010 were $44.8 million, $27.8 million and $25.9 million, respectively.
Earnings per share
The Company computes basic income per share information based on the weighted-average number of common shares outstanding during the year. The Company computes diluted income per share information based on the weighted-average number of common shares outstanding during the year plus the effects of any dilutive common stock equivalents. The Company excluded 1,403,982 shares, 6,947,701 shares and 8,321,281shares from the calculation of diluted earnings per share during 2008, 2009 and 2010, respectively, because they were antidilutive. The antidilutive shares consist of shares underlying stock options, employee stock purchase plan subscriptions and restricted stock that were antidilutive for the year.
Pension plans
The market value of plan assets is the asset value used in the calculation of pension expense. The market value of the plan assets is based on the net asset value reported by the investment fund trustee, based on the market prices of the underlying securities. This value is binding for purposes of liquidation requests.
Redeemable noncontrolling interests
As further detailed in Note 2, Acquisitions and Dispositions, the holders of noncontrolling equity interests in one of the Company’s subsidiaries have a put option that allows them to require the Company to purchase the remaining noncontrolling equity at the then fair market value. The put option is embedded in the shares owned by the noncontrolling interest holders and is not freestanding. Noncontrolling interests that are redeemable at the option of the noncontrolling interest holders and outside the Company’s control will not be considered permanent equity. As such, the Company reports the redeemable noncontrolling interests in the mezzanine section in the consolidated balance sheet as of December 31, 2010.
The Company recognizes the changes in redemption value of the redeemable noncontrolling interests through additional paid in capital over the redemption period. The Company estimated the fair value of the redeemable noncontrolling interests to be $1.7 million as of both the acquisition date and December 31, 2010.
Share-based compensation
The Company measures share-based compensation cost at the grant date, based on the fair value of the award, and recognizes it as expense over the employees’ requisite service period.
Advertising costs
The Company charges advertising costs to operations as incurred. Advertising costs were approximately $2.0 million, $2.7 million and $3.3 million for the years ended December 31, 2008, 2009 and 2010, respectively.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
1. Summary of Operations and Significant Accounting Policies
Research and development costs
Research and development costs for the Clinical Development Services and Laboratory Services segments consist of labor and related benefits charges, materials, supplies and technology costs related to the development of new service offerings for customers.
Research and development costs for the Discovery Sciences segment (see Note 16) consisted primarily of costs associated with preclinical studies and the clinical trials of the Company’s product candidates, development materials, patent costs, labor and related benefit charges associated with personnel performing research and development work, supplies associated with this work, consulting services and an allocation of facility and information technology costs.
All research and development costs for the Company’s drug candidates and external collaborations were expensed as incurred.
Other income (expense), net
Other income (expense), net is recorded in the statement of income as non-operating income. Other income (expense), net for the years ended December 31, 2008, 2009 and 2010 totaled ($1.4) million, ($1.0) million and $3.5 million, respectively. Other income during 2008, 2009 and 2010 was $3.5 million, $3.0 million and $5.6 million, respectively. Other expense during 2008, 2009 and 2010 was ($4.9) million, ($4.0) million and ($2.1) million, respectively.
Use of estimates in preparation of the financial statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Restructuring
In 2009, the Company reduced its workforce in North America by approximately 270 employees due to lower demand for its services. The Company accrued and paid restructuring costs associated with this reduction in its workforce of $3.9 million in 2009.
2. Acquisitions and Dispositions
Acquisitions
In October 2008, the Company completed its acquisition of InnoPharm, an independent contract research organization, for total consideration of $9.0 million. The Company paid $7.3 million at closing and the remaining $1.7 million in October 2010. The Company believes the acquisition of InnoPharm strengthens its presence in Eastern Europe by adding offices in Russia and Ukraine and allows for continued growth in this region while enhancing its ability to conduct global studies for clients. This acquisition is included in the Company’s Clinical Development Services segment.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
2. Acquisitions and Dispositions
In December 2008, the Company entered into a strategic collaboration with Merck & Co., Inc., involving vaccine testing and assay development. Under the agreements, the Company purchased Merck’s 130,000 square-foot vaccine testing laboratory and related equipment, for total consideration of $25.2 million. As part of the collaboration, the Company will provide Merck with assay development and immunogenicity testing services to support Merck’s vaccine portfolio over a period of five years. The acquisition of Merck’s vaccine testing facility significantly expands the Company’s overall global central laboratory business, adding vaccine and biologic testing, assay development and sample storage capabilities to its current suite of laboratory services. This acquisition is included in the Company’s Laboratory Services segment.
In April 2009, the Company acquired 100 percent of the outstanding equity interests of Magen BioSciences, Inc., a biotechnology company focused on the development of dermatologic therapies, for total consideration of $14.9 million. Of this amount, the Company paid $13.1 million at closing and deposited the remaining $1.8 million into an escrow account to secure indemnification claims. In the second quarter of 2010, the Company asserted claims against the former Magen stockholders under the merger agreement. The escrowed funds remain in the escrow account. The Company recorded the escrowed funds as a component of other accrued expenses as of December 31, 2010. The Company acquired Magen to expand its former compound partnering program to include dermatological drug discovery and gained screening capability for dermatologic compounds. This acquisition was included in the Company’s Discovery Sciences segment. As discussed below, in May 2010, the Company discontinued the operations of this dermatological business unit.
In April 2009, the Company acquired 100 percent of the outstanding equity interests of AbC.R.O., Inc., a contract research organization operating in Central and Eastern Europe, for total consideration of $40.0 million. Of this amount, the Company paid $36.4 million at closing and deposited the remaining $3.6 million into an escrow account to secure indemnification claims. The escrowed funds are scheduled to be released in the second quarter of 2011. The Company recorded a liability to pay the escrowed funds as a component of other accrued expenses as of December 31, 2010. Through the acquisition, the Company expanded its infrastructure in this region for clinical research by adding offices in Romania, Bulgaria, Serbia and Croatia, and strengthened its operations in other countries in the region. This acquisition is included in the Company’s Clinical Development Services segment. The fair value of the financial assets acquired included accounts receivable of $3.9 million and unbilled receivables of $2.4 million.
In November 2009, the Company acquired 100 percent of the outstanding equity interests of Excel PharmaStudies, Inc., a contract research organization operating in China. The total purchase price was $22.2 million, subject to working capital adjustments. Of this amount, the Company paid $15.7 million at closing and an additional $2.7 million in 2010. At closing, the Company also deposited $3.8 million of the purchase price into an escrow account to secure indemnification claims, which is scheduled to be released by May 2011. The Company recorded a liability to pay the escrowed funds as a component of other accrued expenses as of December 31, 2010. Through the acquisition, the Company expanded its Phase II-IV clinical trial operations in China. This acquisition is included in the Company’s Clinical Development Services segment. The fair value of the financial assets acquired includes accounts receivable of $1.6 million.
In November 2009, the Company acquired 100 percent of the outstanding equity interests of BioDuro LLC, a drug discovery services company focused on integrated drug discovery programs and services in China, for total consideration of $78.6 million. As of December 31, 2010, the Company had paid $75.8 million. At acquisition, the Company deposited $12.0 million of the purchase price into an escrow account to secure indemnification claims and the payment of other obligations. The Company released $9.2 million of the escrowed funds in 2010 and $2.8 million remains in escrow at December 31, 2010. The remaining escrow is recorded in other accrued expenses for $1.1 million and other long-term liabilities for $1.7 million at December 31, 2010. The escrowed funds are scheduled to be released by April 2013. Through the acquisition, the Company expanded its drug development capabilities within the region. This acquisition is included in the Company’s Laboratory Services segment. The fair value of the financial assets acquired included accounts receivable, net of $3.2 million and unbilled receivables of $1.6 million.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
2. Acquisitions and Dispositions
In October 2010, the Company acquired a 60 percent interest in X-Chem, Inc. which is developing proprietary small molecule drug discovery services capabilities, for total consideration of $15.5 million. The Company paid $7.0 million to acquire existing outstanding equity interests and $8.5 million to acquire newly issued shares. The Company recorded the transaction as the acquisition of a controlling interest and consolidates X-Chem in the financial statements of the Company. The Company recorded the assets, liabilities and noncontrolling interests as of the acquisition date at fair value, including accounts receivable, net of $0.6 million. The fair value of the noncontrolling interest in X-Chem, Inc. was estimated by applying the discounted cash flows method of the income approach. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. At any time prior to October 31, 2014, the Company has the option to purchase the remaining 40 percent of X-Chem at an entity valuation of $70.0 million. If the Company does not exercise its option the noncontrolling interest holders have the right to purchase the Company’s ownership interests at an entity valuation of $20.0 million between November 1, 2015 and November 30, 2015. X-Chem is required to declare and pay dividends in the future based on a formula agreed to by the Company and the noncontrolling interest holders. As of December 31, 2010, the Company had paid $4.5 million of the total $7.0 million purchase price to acquire outstanding equity interests. The Company deposited the remaining $2.5 million of the purchase price into an escrow account to secure indemnification claims and the payment of other obligations. The escrowed funds are scheduled to be released in April 2013 and the Company recorded a liability to pay the escrowed funds as a component of other long-term liabilities as of December 31, 2010. Through the acquisition, the Company expanded its drug discovery services capabilities. This acquisition is included in the Company’s Laboratory Services segment.
Acquisition costs related to Magen, AbC.R.O., Excel, BioDuro, X-Chem and BioDuro Biologics were not significant and are included in selling, general and administrative costs in the consolidated statements of income. The factors that contributed to the recognition of goodwill included securing new technologies and synergies that are specific to the Company’s business; access to new global markets which are expected to increase revenues and profits; acquisition of a talented workforce; and cost savings opportunities associated with the delivery of the Company’s services.
As of December 31, 2010, the Company held $14.5 million in escrow relating to payments to be made for the AbC.R.O., Magen, Excel, BioDuro and X-Chem acquisitions, of which $10.3 million is reflected as cash held in escrow in the accompanying consolidated balance sheet and $4.2 million is reflected as a component of other assets. These escrows secure the indemnification obligations contained in the definitive agreements governing these transactions. The Company classified these balances as current or long-term based on the expected date of the release of the funds.
The Company accounted for these acquisitions under the acquisition method of accounting. Accordingly, the Company allocated the total purchase price for these acquisitions to the estimated fair value of assets acquired and liabilities assumed, which are set forth in the following tables:
2008 and 2009 Acquisitions:
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
2. Acquisitions and Dispositions
The purchase price allocation for the above-referenced acquisitions was complete at December 31, 2010.
Preliminary Purchase Price Allocation for 2010 Acquisition:
Pro forma results of operations prior to the dates of acquisition have not been presented because the pro forma results are not materially different from the actual results presented.
The Company will not be able to deduct the goodwill related to the AbC.R.O., Magen, Excel, BioDuro or X-Chem acquisitions for tax purposes.
In December 2010, the Company formed BioDuro Biologics Pte. Ltd. to develop proprietary biological drug discovery services capabilities with an investment of $5.0 million and sold a 25 percent interest in the entity in exchange for $1.7 million in intangible assets. The Company recorded the exchange of the 25 percent noncontrolling interests in the entity at the fair value of the intangible assets acquired. At any time between December 2014 and December 2016, the Company has the right to acquire the 25 percent noncontrolling interest at fair value. If the Company fails to exercise its purchase option, then during the 183-day period following the expiration of this option the minority owners have the right to require the Company to purchase their noncontrolling interests at fair value. BioDuro Biologics is included in the Company’s Laboratory Services segment.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
2. Acquisitions and Dispositions
Dispositions
In May 2009, the Company completed its disposition of substantially all of the assets of its wholly owned subsidiary Piedmont Research Center, LLC for total consideration of $46.0 million. As of December 31, 2009, the purchaser had an indemnification holdback of $3.4 million, which was included as a component of other current assets. The Company received $3.5 million in 2010 for the holdback plus accrued interest. Piedmont Research Center provided preclinical research services and was included in the Company’s Discovery Sciences segment.
In December 2009, the Company completed the disposition of its wholly owned subsidiary PPD Biomarker Discovery Sciences, LLC for total consideration of $0.1 million and the right to receive a percentage of the revenue received by the purchaser under contracts in backlog as of the date of the acquisition. Contingent consideration will be recognized when and if received in the future. PPD Biomarker Discovery Sciences provided biomarker discovery services and participant sample analysis and was included in the Company’s Discovery Sciences segment.
Due to the unique service offerings of these subsidiaries, the Company determined these business units were no longer a long-term strategic fit and elected to sell them.
In May 2010, the Company discontinued the operations of its wholly owned subsidiary PPD Dermatology, Inc. which was part of the Company’s Discovery Sciences segment.
The results of Piedmont Research Center, PPD Biomarker Discovery Sciences and PPD Dermatology are reported as discontinued operations within the consolidated statements of income as set forth in the following table:
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
3. Cash and Cash Equivalents, Short-term Investments, Long-term Investments and Other Investments
Cash and cash equivalents, short-term investments, long-term investments and other investments were composed of the following as of the dates set forth below:
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
3. Cash and Cash Equivalents, Short-term Investments, Long-term Investments and Other Investments
For the years ended December 31, 2008, 2009 and 2010, the Company had the following gross realized gains and losses on investments:
Short-term and long-term investments
In 2008, one of the investments in the Company’s short-term investment portfolio incurred a loss of $7.3 million. The Company elected to liquidate the balance of this investment during 2008 and was reimbursed by an investment fund manager for $3.6 million of its loss.
The Company held $88.6 million and $78.7 million, net of unrealized losses, in auction rate securities at December 31, 2009 and 2010, respectively. The Company’s portfolio of investments in auction rate securities consists principally of interests in government-guaranteed student loans, insured municipal debt obligations and municipal preferred auction rate securities. The Company classified its entire balance of auction rate securities as long-term investments as of December 31, 2010 due to continuing uncertainties about the liquidity of the auction rate securities market. The Company also recorded unrealized losses on these investments of $21.3 million and $14.2 million as of December 31, 2009 and 2010, respectively. The Company recorded these unrealized losses based on a Level 3 valuation, including assumptions about appropriate maturity periods of the instruments by utilizing a 2 to 5 year workout period based on industry expectations, market interest rates for comparable securities and the underlying credit-worthiness of the issuers. The Company concluded that this impairment was temporary because of its ability to hold the auction rate securities until the fair value recovers and has no current plans to sell the securities. The Company will continue to review the classification and valuation of these securities on a quarterly basis.
The estimated fair value of short-term and long-term investment securities at December 31, 2010, by contractual maturity, was as follows:
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
3. Cash and Cash Equivalents, Short-term Investments, Long-term Investments and Other Investments
Equity method investment
In October 2009, the Company committed to invest up to $102.7 million in Celtic Therapeutics Holdings, L.P., or Celtic, as a limited partner. Celtic is an investment partnership organized for the purpose of identifying, acquiring and investing in a diversified portfolio of novel therapeutic product candidates, with a focus on mid-stage compounds that have progressed through human proof of concept studies and that are targeted to address unmet medical needs. At December 31, 2010, the Company has 56.8% of the partnership interests. The Company accounts for this investment under the equity method of accounting because the Company is a limited partner and the general partner has all decision-making authority relating to investment decisions and fund operations. As such, the Company is deemed to lack the control of the entity required for consolidation. Additionally, the Company anticipates that its ownership position will decrease to less than 50% as Celtic secures new investors. As of December 31, 2010, the Company had invested a total of $32.7 million of the aggregate commitment. During the years ended December 31, 2009 and 2010, the Company recognized a loss of $1.3 million and $0.7 million, respectively, which was based on the Company’s percentage ownership of Celtic’s losses. As of December 31, 2010, the Company had an investment balance of $30.7 million, which included cumulative investment losses to date. The Company expects to invest the remainder of its commitment over a period of three years.
Cost method investments
The Company is a limited partner in several venture capital funds established for the purpose of investing in life science and healthcare companies. These funds require the Company to commit to make investments in the funds over a period of time. The Company accounts for these funds as cost method investments and determines realized and unrealized losses on a specific identification method. During the years ended December 31, 2009 and 2010, the Company recorded $0.7 million and $5.0 million, respectively, for impairments related to other-than-temporary declines in value of several of its venture capital funds, based on the overall market conditions and the financial performance and estimated fair values of the individual investments held by each fund.
The Company is a stockholder in Accelerator III Corporation and certain of its incubator companies. Accelerator III requires the Company to make investments upon request up to its committed capital amount. The Company accounts for this investment as a cost method investment and determines realized and unrealized losses on a specific identification method. In December 2009, the Company realized an other-than-temporary decline in value of $1.4 million on this investment. The write-down was based on the financial performance of the incubator companies. During the year ended December 31, 2010, the Company recorded a $0.2 million pre-tax gain on an incubator company that had previously been fully impaired. The incubator company was dissolved and its assets were distributed.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
3. Cash and Cash Equivalents, Short-term Investments, Long-term Investments and Other Investments
The Company’s capital commitments at December 31, 2010 were as follows:
(1) The Company’s percentage ownership of incubator companies might vary but will not exceed 19.9%.
(2) The funding commitments to Bay City Capital Fund IV, L.P. and A.M. Pappas Life Science Ventures, III, L.P. have expired for new investments. The Company may still be required to fund additional investments in existing fund portfolio companies and the ongoing operations of the funds up to the amount of the remaining capital commitment.
In May 2010, the Company invested $5.0 million for a 10.4% ownership interest in Liquidia Technologies, Inc.
During the year ended December 31, 2010, the Company recorded a $3.5 million pretax gain on the sale of a cost method investment that had previously been fully impaired in 2009. The investment was sold in connection with the acquisition of the investee by a major pharmaceutical company.
During the year ended December 31, 2008, the Company recorded a charge to earnings of $14.0 million for an other-than-temporary decline in the fair market value of its investment in Accentia Biopharmaceuticals, Inc. The write-down was based on a decrease in the publicly quoted market price. In March 2008, Accentia achieved less than favorable results from its Phase III clinical trial for SinuNase. Accentia filed for bankruptcy in November 2008. As of December 31, 2008, the Company had completely written off its investment in Accentia. During the year ended December 31, 2009, the Company sold all of its shares of stock in Accentia at various prices for total proceeds of $1.2 million, resulting in a realized gain of the same amount.
4. Accounts Receivable and Unbilled Services
Accounts receivable and unbilled services, net, consisted of the following amounts on the dates set forth below:
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
4. Accounts Receivable and Unbilled Services
The Company derived 38.9% and 38.8% of its accounts receivable and unbilled services, net, from operations outside the United States as of December 31, 2009 and 2010, respectively. Of these amounts, the Company derived 63.1% and 60.2% from operations in the United Kingdom as of December 31, 2009 and 2010, respectively.
Change in allowance for doubtful accounts consisted of the following:
The Company maintains allowances for potential credit losses.
5. Property and Equipment
Property and equipment, stated at cost, consisted of the following amounts on the dates set forth below:
As of December 31, 2010, fixed assets not placed in service included software licenses purchased from a third-party vendor with annual payment terms as follows:
The Company classified its liability related to these licenses as $4.2 million in other accrued expense and $4.0 million in other long-term liabilities on its consolidated balance sheet as of December 31, 2010. Depreciation expense for the years ended December 31, 2008, 2009 and 2010 was $59.1 million, $61.9 million and $61.3 million, respectively.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
6. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the years ended December 31, 2009 and 2010, by operating segment, were as follows:
In May 2009, the Company completed its disposition of substantially all of the assets of Piedmont Research Center, LLC, resulting in the write-off of $8.5 million in goodwill.
As of December 31, 2010, the Company’s acquisitions of Excel and BioDuro had adjustments to goodwill of $4.3 million and $0.7 million, respectively, as a result of information that became available after the preliminary purchase price allocation was established.
The Company’s intangible assets were composed of the following as of the dates set forth below:
The Company recorded an impairment of a royalty stream purchase agreement intangible and a compound partnering program intangible of $1.6 million and $10.4 million in 2008 and 2009, respectively.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
6. Goodwill and Intangible Assets
Amortization expense for the years ended December 31, 2008, 2009 and 2010 was $0.1 million, $2.0 million and $3.8 million, respectively. As of December 31, 2010, estimated amortization expense for each of the next five years is as follows:
7. Other Accrued Expenses
Other accrued expenses consisted of the following amounts on the dates set forth below:
8. Debt Instruments and Lease Obligations
Revolving credit facility
The Company’s $25.0 million revolving credit facility with Bank of America, N.A. expired on June 30, 2010, and the Company elected not to renew the credit facility.
Lease obligations
The Company is obligated under noncancellable operating leases expiring at various dates through 2040 relating to its buildings and certain equipment. Rental expense for operating leases included in continuing operations, net of sublease income of $2.1 million, $1.1 million and $0.9 million, was $52.1 million, $54.0 million and $56.2 million for the years ended December 31, 2008, 2009 and 2010, respectively. Rent expense for operating leases included in discontinued operations was $1.6 million, $1.5 million and $0.7 million for the years ended December 31, 2008, 2009 and 2010, respectively.
On December 31, 2009, the Company sold PPD Biomarker Discovery Sciences but retained the lease obligation for the PPD Biomarker Discovery Sciences facility. Because the Company no longer had employees utilizing the facility and had no future plans to utilize the facility, the Company recorded a lease restructuring expense of $4.6 million as a component of discontinued operations. The Company recorded accretion expense of $0.4 million and cash payments of $3.5 million against this liability during 2010.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
8. Debt Instruments and Lease Obligations
As of December 31, 2010, future minimum payments for lease obligations for subsequent years were as follows:
9. Accounting for Derivative Instruments and Hedging Activities
The Company has significant international revenues and expenses, and related receivables and payables, denominated in currencies other than the functional currency of the related subsidiary. As a result, the Company’s operating results can be affected by changes in foreign currency exchange rates. In an effort to minimize this risk, from time to time, the Company purchases foreign currency option and forward contracts as hedges against anticipated and recorded transactions, and the related receivables and payables denominated in foreign currencies. The Company only uses foreign currency option and forward contracts as hedges to minimize the variability in the Company’s operating results arising from foreign currency exchange rate movements and not for speculative or trading purposes.
The Company recognizes changes in the fair value of the effective portion of foreign exchange derivatives that are designated and qualify as cash flow hedges of forecasted revenue and expense transactions in accumulated other comprehensive income, or OCI. The Company reclassifies these amounts from OCI and recognizes them in earnings when either the forecasted transaction occurs or it becomes probable that the forecasted transaction will not occur. The Company reclassifies OCI associated with hedges of foreign currency revenue into direct costs upon recognition of the forecasted transaction in the statements of income. The ineffective portion of a derivative instrument is recognized in earnings in the current period as a component of direct costs, and is measured by comparing the fair value of the forward contract to the change in the forward value of the anticipated transaction. Hedging portfolio ineffectiveness during 2008, 2009 and 2010 was $0.2 million, $47,000 and $58,000, respectively.
The Company recognizes the fair value of foreign currency options and forwards used to manage the Company’s exposure on receivables and payables denominated in foreign currencies other than the entity’s functional currency, with fluctuations in the fair value being included in the statements of income. All foreign currency options and forwards related to receivables and payables hedging, entered into during the year reported in the statements of income were not significant.
As of December 31, 2010, the Company’s outstanding hedging contracts were scheduled to expire over the next 12 months. The Company expects to reclassify the current gain positions of $3.5 million, net of tax, within the next 12 months from OCI into the statement of income. As of December 31, 2009 and 2010, the Company’s foreign currency derivative portfolio resulted in the Company recognizing an asset of $9.0 million and $6.7 million, respectively, as a component of other current assets and a liability of $0.6 million and $1.4 million, respectively, as a component of other accrued expenses.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
10. Shareholders’ Equity
Stock repurchase program
In February 2008, the Company’s board of directors approved a stock repurchase program authorizing the Company to repurchase up to $350.0 million of its common stock from time to time in the open market. The timing and amount of any share repurchases will be determined by the Company’s management based on its evaluation of the market conditions and other factors. The stock repurchase program was and will continue to be funded from existing cash and future cash flows from operations and may be discontinued at any time.
During the year ended December 31, 2008, the Company repurchased approximately 2,435,000 shares of its common stock for an aggregate purchase price, including broker commissions, of $89.3 million at an average price per share of $36.68. During the years ended December 31, 2009 and 2010, the Company did not repurchase any shares of its common stock. See additional discussion in Note 19 entitled Subsequent Events.
Equity compensation plan
The Company has an equity compensation plan under which the Company may grant stock options, restricted stock and other types of stock-based awards to its employees and directors. Total shares authorized for grant under this plan are 29.6 million. The exercise price of each option granted is equal to the market price of the Company’s common stock on the date of grant and the maximum exercise term of each option granted does not exceed ten years. Options are granted upon approval of the Compensation Committee of the board of directors. The majority of the Company’s options vest ratably over a period of three years. The options expire on the earlier of ten years from the date of grant or within specified time limits following termination of employment. Shares are issued from the Company’s authorized but unissued stock. The Company does not pay dividends on unexercised options. As of December 31, 2010, there were 6.8 million shares of common stock remaining available for grant under the plan.
For the years ended December 31, 2008, 2009 and 2010, stock-based compensation cost totaled $21.7 million, $16.2 million and $15.5 million, respectively. The associated future income tax benefit recognized was $7.8 million, $5.8 million and $5.6 million for the years ended December 31, 2008, 2009 and 2010, respectively.
For the years ended December 31, 2008, 2009 and 2010, the amount of cash received from the exercise of stock options was $16.2 million, $2.3 million and $6.5 million, respectively. In connection with these exercises, the actual excess tax benefit realized for the tax deductions by the Company for the years ended December 31, 2008, 2009 and 2010 were $3.1 million, $0.2 million and $0.3 million, respectively.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
10. Shareholders’ Equity
Stock options
A summary of the option activity under the plan as of December 31, 2008, 2009 and 2010, and changes during the years, is presented below:
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
10. Shareholders’ Equity
The following table summarizes information about the Plan’s stock options as of December 31, 2010:
All options granted during the years ended December 31, 2008, 2009 and 2010 were granted with an exercise price equal to the fair value of the Company’s common stock on the grant date. The fair value of the Company’s common stock on the grant date is equal to the Nasdaq closing price of the Company’s stock on the date of grant. The weighted-average grant date fair value per share of options granted during the years ended December 31, 2008, 2009 and 2010 was $9.16, $6.28 and $5.16, respectively. The aggregate fair value of options granted during the years ended December 31, 2008, 2009 and 2010 was $25.1 million, $12.1 million and $16.7 million, respectively. The total intrinsic value (the amount by which the market value of the Company’s common stock exceeded the exercise price of the options on the date of exercise) of options exercised during the years ended December 31, 2008, 2009 and 2010 was $15.4 million, $2.0 million and $2.8 million, respectively.
As a result of adjustments under the Company’s equity compensation plan triggered by the Furiex spin-off, the Company issued options to purchase approximately 415,200 shares. The per share exercise price of the majority of the outstanding options was adjusted to be equal to the product of the pre-distribution option exercise price multiplied by a fraction, the numerator of which was the Company’s closing price of its stock on the day of distribution and the denominator of which was the closing price of the Company’s stock plus the closing price of Furiex’s stock on the day of distribution. Following this adjustment to the per share exercise price, the number of shares subject to each outstanding option were adjusted to ensure that the intrinsic value of each option was the same on the day after the distribution as it was on the day of the distribution.
A summary of the status of unvested options as of December 31, 2010, and changes during the year then ended, is presented below:
As of December 31, 2010, the total unrecognized compensation cost related to unvested stock options was approximately $21.2 million. The Company expects to recognize this cost over a weighted-average period of 1.7 years in accordance with the vesting periods of the options. The total fair value of shares vested during the years ended December 31, 2008, 2009 and 2010 was $4.9 million, $19.0 million and $9.5 million, respectively.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
10. Shareholders’ Equity
The Company estimates fair value of each option award on the grant date using the Black-Scholes option-pricing model. The following table indicates the assumptions used in estimating fair value for the years ended December 31, 2008, 2009 and 2010.
The expected term represents an estimate of the period of time the Company expects the options to remain outstanding based on historical exercise and termination data. The dividend yield equals the most recent dividend payment over the market price of the stock at the beginning of the period. The risk-free interest rate is the rate at the date of grant for a zero-coupon U. S. Treasury bond with a term that approximates the expected term of the option. Expected volatilities are based on the historical volatility of the Company’s stock price over the expected term of the options.
Restricted stock
The Company also awards shares of restricted stock to members of senior management and the Company’s non-employee directors under the plan. The shares awarded to members of senior management are generally subject to a three-year linear vesting schedule with one third of the grant vesting on each of the first, second and third anniversaries of the grant date. The Company determines compensation cost based on the market value of shares on the date of grant, and records compensation expense on these shares on a straight-line basis over the vesting period. The restricted stock shares granted to the Company’s non-employee directors vest over a three-year period, with ninety percent of the shares vesting on the first anniversary of the grant and five percent vesting on each of the second and third anniversary dates. The Company records compensation expense on these shares according to this vesting schedule.
During the years ended December 31, 2008, 2009 and 2010, the Company awarded 11,116 shares, 65,694 shares and 16,794 shares of restricted stock, respectively, with a fair value of $0.5 million, $1.6 million and $0.4 million, respectively. The weighted-average grant date fair value of each share was $40.92, $24.24 and $23.22 for the years ended December 31, 2008, 2009 and 2010, respectively. Total compensation expense recorded during the years ended December 31, 2008, 2009 and 2010 for restricted stock shares granted was $0.8 million, $0.8 million and $0.8 million, respectively. The associated future income tax benefit recognized was $0.3 million, $0.3 million and $0.3 million for the years ended December 31, 2008, 2009 and 2010, respectively. As of December 31, 2010, the total unrecognized compensation cost related to the 70,396 shares of unvested restricted stock was approximately $0.8 million. The Company expects to recognize this cost over a weighted-average period of 2.1 years in accordance with the vesting periods of the restricted stock. The total fair value of restricted stock shares vested during the year ended December 31, 2010 was $0.7 million.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
10. Shareholders’ Equity
Employee stock purchase plan
The board of directors and shareholders have reserved 4.5 million shares of the Company’s common stock for issuance under the Employee Stock Purchase Plan (the “ESPP”). The ESPP has two six-month offering periods (each an “Offering Period”) each year, beginning January 1 and July 1, respectively. Eligible employees can elect to make payroll deductions from 1% to 15% of their base pay during each payroll period of an Offering Period. None of the contributions made by eligible employees to purchase the Company’s common stock under the ESPP are tax-deductible to the employees. The purchase price is 90% of the lesser of (a) the reported closing price of the Company’s common stock for the first day of the Offering Period or (b) the reported closing price of the common stock for the last day of the Offering Period. As of December 31, 2010, there were 0.8 million shares of common stock available for purchase by ESPP participants, after giving effect to shares purchased for the second Offering Period of 2010 that were issued in January 2011.
Employees eligible to participate in the ESPP include employees of the Company and most of its operating subsidiaries, except employees who customarily work less than 20 hours per week or five months in a year. Because the eligible employee criteria determine both participation in and contributions to the ESPP, it is not possible to determine the benefits and amounts that would be received by an eligible participant or group of participants in the future.
The fair value of each ESPP share is estimated using the Black-Scholes option-pricing model. The following table indicates the assumptions used in estimating fair value for the years ended December 31, 2008, 2009 and 2010.
The compensation costs for the ESPP, as determined based on the fair value of the discount and option feature of the underlying ESPP grant were $2.1 million, $2.1 million and $1.8 million for years ended December 31, 2008, 2009 and 2010, respectively. The income tax benefit recognized was $0.1 million, $0.1 million and $0.1 million for the years ended December 31, 2008, 2009 and 2010, respectively. The weighted-average grant date fair value per share during the years ended December 31, 2008, 2009 and 2010 was $6.37, $4.73 and $4.41, respectively. As of December 31, 2010, there was no unrecognized compensation cost related to ESPP shares.
For the years ended December 31, 2008, 2009 and 2010, the value of stock issued for ESPP purchases was $9.2 million, $9.9 million and $8.5 million, respectively. In connection with disqualifying dispositions, the tax benefits realized by the Company for the years ended December 31, 2008, 2009 and 2010 were $0.1 million, $17,000 and $25,000.
During the years ended December 31, 2008, 2009 and 2010, employees contributed $10.0 million, $9.3 million and $8.3 million, respectively, to the ESPP for the purchase of approximately 330,000, 449,000 and 399,000 shares, respectively. The aggregate fair value of shares purchased during the years ended December 31, 2008, 2009 and 2010 was $13.8 million, $11.7 million and $9.3 million, respectively. Contributions for the second Offering Period of 2010 were not used to purchase shares until January 2011.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
11. Income Taxes
The components of income before provision for income taxes were as follows:
The components of the provision for income taxes were as follows:
Taxes computed at the statutory U.S. federal income tax rate of 35% are reconciled to the provision for income taxes as follows:
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
11. Income Taxes
Components of the current deferred tax assets were as follows:
The current deferred tax liabilities, which are included in other accrued expenses, of $0.8 million and $0.1 million at December 31, 2009 and 2010, respectively, relate to various expenses deducted for tax purposes, not book purposes.
Components of the long-term deferred tax assets were as follows:
Components of the long-term deferred tax liabilities, which are included in other long-term liabilities, were as follows:
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
11. Income Taxes
The Company has recorded a deferred tax asset for foreign and state net operating losses and credits that are subject to either 5-year, 15-year, 20-year or indefinite carryforward periods. The Company has recorded a valuation allowance of $3.1 million against the net operating loss for amounts that it does not believe are more likely than not to be utilized.
The Company also recorded a deferred tax asset related to U.S. net operating losses received in acquisitions in 2003 and 2009. Although the net operating losses are subject to annual limitation under IRC Section 382, management expects all losses to be utilized during the 20-year carryforward period.
The Company has also established a deferred tax asset for federal, state and foreign tax related to unrealized investment losses and state tax on realized capital losses. The Company has recorded a valuation allowance of $0.6 million for the tax benefit that it does not believe is more likely than not to be realized. The federal valuation allowance for unrealized and realized investment losses has been fully released.
In 2010, the total valuation allowance increased by $0.7 million primarily due to an increase in valuation allowance related to the tax benefit of the write-off of the Leicester facility in the United Kingdom.
The Company records current and deferred income tax expense related to its foreign operations to the extent those earnings are taxable. Historically, the Company has made no provision for the additional taxes that would result from the distribution of earnings of foreign subsidiaries because the Company expected to invest them indefinitely. Although the Company repatriated certain foreign earnings in the prior year, the Company’s overall strategy is to maintain liquidity overseas for other foreign acquisitions. As a result, the Company considers that the remainder of its foreign earnings will remain indefinitely invested overseas. The cumulative amount of undistributed earnings for which no U.S. tax liability has been recorded was $267.0 million and $353.0 million for December 31, 2009 and 2010, respectively.
As of December 31, 2009, the Company had total gross unrecognized tax benefits of approximately $31.9 million. Of this total, $14.9 million, net of the federal benefit on state taxes, was the amount that, if recognized, would result in a reduction of the Company’s effective tax rate. As of December 31, 2010, the Company had total gross unrecognized tax benefits of $30.0 million. Of this total, $14.5 million, net of the federal benefit of state taxes, was the amount that, if recognized, would reduce the Company’s effective tax rate. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by up to $1.7 million within the next 12 months due to the settlement of audits and the expiration of the statutes of limitations.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
11. Income Taxes
Roll-forward of gross unrecognized tax positions:
The Company’s policy for recording interest and penalties associated with tax audits is to record them as a component of provision for income taxes. During 2009, the Company recognized $1.6 million and $0.1 million, respectively, of interest and penalties as an expense to the statement of income. As of December 31, 2009, the Company accrued $5.4 million of interest and $1.1 million of penalties. During 2010, the Company recognized $1.8 million and $0.1 million, respectively, of interest and penalties as an expense to the statement of income. As of December 31, 2010, the Company accrued $4.1 million of interest and $0.9 million of penalties. To the extent interest and penalties are not assessed with respect to uncertain tax positions, the Company will reduce amounts reflected as a reduction of the overall income tax provision.
The Company has analyzed its filing positions in all significant federal, state and foreign jurisdictions where it is required to file income tax returns, as well as open tax years in these jurisdictions. The only periods subject to examination by the major tax jurisdictions where the Company does business are the 2007 through 2010 tax years. Various foreign and state income tax returns are under examination by taxing authorities. The Company does not believe that the outcome of any examination will have a material impact on its financial condition, results of operations or cash flows.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
12. Employee Savings and Pension Plans
Savings plan
The Company provides a 401(k) Retirement Savings Plan to its U.S. employees. The Company matches 50% of an employee’s savings up to 6% of pay and these contributions vest ratably over a four-year period. Company matching contributions, net of forfeitures, for all U.S. employees for the years ended December 31, 2008, 2009 and 2010 were $8.3 million, $8.6 million and $12.5 million, respectively.
Following closure of the pension plan to new participants, the Company set up a new defined contribution plan for qualifying U.K. employees employed by the Company’s U.K. subsidiaries. The employees can contribute between 3% and 6% of their annual compensation and the Company matches those contributions with 5% to 8% of the employees’ annual compensation. Company matching contributions for the U.K. defined contribution plan for the years ended December 31, 2008, 2009 and 2010 were $2.2 million, $3.0 million and $3.5 million, respectively.
Non-qualified deferred compensation plans
The Company maintains non-qualified, unfunded deferred compensation plans that permit members of the board of directors and certain highly paid executive employees who are employed in the United States to defer current income for future financial and retirement needs. Eligible employees may defer up to 25% of their base salary on a pretax basis. Eligible employees may also defer all or a portion of their annual bonus on a pretax basis depending on their position. Directors may defer up to 100% of their annual retainer and meeting fees on a pretax basis. Participants also have the opportunity to defer receipt of restricted stock. There are no Company contributions to these plans, and other than accruals for interest or dividend equivalents, all amounts credited to these plans are derived from elective deferrals of compensation otherwise payable to participants.
Cash amounts deferred each quarter will accrue interest based upon the three-month LIBOR plus 1.5%. Shares of restricted stock that are deferred are held as restricted stock units, payable as shares of common stock if and when the units become distributable. The restricted stock units remain subject to the same vesting conditions as applicable to the shares of restricted stock. In addition, restricted stock units provide for cash dividend equivalents that are payable as cash at the time the units become vested or when the units become distributable, depending on the participant’s election.
The plans offer a number of account distribution options providing flexibility for financial and retirement planning. Employee participants elect with each set of annual deferrals to have the deferrals payable on a date specified by the employee that is at least two years after the deferral election is made, but not later than age 65 or the date of separation from service. The amount deferred will be payable either in a lump sum or installments over 10, 20 or 30 semi-annual installments as elected by the participant at the time of deferral. Separate payment elections are made for each year’s cash and restricted stock deferrals, as applicable. Changes to payment elections are permitted in limited circumstances. However, these changes only become effective if the employee participant retires after age 55 with 10 years of service. Otherwise, the deferrals are payable in a lump sum following termination of employment, although participants may request unplanned in-service distributions in limited emergency situations. The board of directors may elect to pay out employee participants in the event of a change of control of the Company.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
12. Employee Savings and Pension Plans
Director participants may elect to have the deferrals payable on a date specified by the director that is at least two years after the deferral election is made, but not more than 10 years after termination of service as a director. Alternatively, the director may elect to have the deferrals payable on a specified date or the date of termination of service of the director if earlier. Board of director participants may choose to have deferrals payable either in a lump sum or installments over a period of five years. Separate payment elections are made for each year’s cash and restricted stock deferrals, as applicable. Changes to payment elections are permitted in limited circumstances. Directors may request unplanned in-service distributions in limited emergency situations. The board of directors may elect to pay out director participants in the event of a change of control of the Company.
As of December 31, 2009 and 2010, 209,243 and 224,769 shares of restricted stock granted to members of management and the board of directors were deferred under this plan and had not been issued. At December 31, 2009 and 2010, the Company recorded a deferred compensation liability under this plan of $3.0 million and $3.7 million in the consolidated balance sheets as a component of other accrued expenses.
Pension plans
The Company has a defined benefit plan for its qualifying United Kingdom, or U.K., employees employed by the Company’s U.K. subsidiaries. This pension plan was closed to new participants as of December 31, 2002. In December 2009, the Company closed the plan to additional contributions effective January 1, 2010. As amended, participants are entitled to receive benefits previously accrued, which are based on the expected pay at retirement and number of years of service through January 1, 2010, but will receive no additional credit for future years of service. Plan assets consist principally of equities, bonds and cash in a managed investment fund.
The Company anticipates contributing approximately $3.0 million to fund this plan during 2011.
Pension costs and other amounts recognized in other comprehensive income for the U.K. Plan included the following components:
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
12. Employee Savings and Pension Plans
Weighted-average assumptions used to determine net periodic pension cost for years ending December 31 were as follows:
The discount rate is determined using a yield curve based on an index of AA corporate bonds for the appropriate maturity of the cash-flow being discounted. The expected long-term rate of return on assets assumption is based on future expectations for yields on investments weighted in accordance with the asset allocation of the pension plan’s invested funds.
The change in benefit obligation, change in plan assets, funded status and amounts recognized for the defined benefit plan were as follows:
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
12. Employee Savings and Pension Plans
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets were as follows:
Weighted-average assumptions used to determine benefit obligations at end of plan year were as follows:
Plan assets
The Company’s pension plan weighted-average allocations by asset category are as follows:
An independent third party manages the plan assets and tracks the return on a benchmark portfolio matching the above strategic asset allocation. Based on advice from the Company’s financial advisors, the trustees of the plan have selected the above mix of asset types in order to meet the investment objectives of the pension plan.
The plan assets are valued using the net asset value that is reported by the investment funds used by the pension plan and is deemed to be a Level 1 input. The fair value measurements of the plan assets as of December 31, 2009, included equity securities in the amount of $32.4 million, debt securities in the amount of $7.8 million and cash in the amount of $2.6 million. As of December 31, 2010, the fair value measurements of the plan assets included equity securities in the amount of $36.7 million, debt securities in the amount of $8.9 million and cash in the amount of $2.7 million.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
12. Employee Savings and Pension Plans
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Expected benefit payments for fiscal year ending:
The estimated amounts that will be amortized from the estimated portion of net loss expected to be recognized within other comprehensive income as a component of net periodic benefit cost during the year ending December 31, 2011 is approximately $0.8 million.
13. Commitments and Contingencies
The Company currently maintains insurance for risks associated with the operation of its business, provision of professional services and ownership of property. These policies provide coverage for a variety of potential losses, including loss or damage to property, bodily injury, general commercial liability, professional errors and omissions and medical malpractice. The Company’s retentions and deductibles associated with these insurance policies range in amounts up to $5.0 million.
The Company is self-insured for health insurance for the majority of its employees located within the United States, but maintains stop-loss insurance on a “claims made” basis for expenses in excess of $0.4 million per member per year. As of December 31, 2009 and 2010, the Company maintained a reserve of approximately $2.9 million for both years, included in other accrued expenses on the consolidated balance sheets, to cover open claims and estimated claims incurred but not reported.
As of December 31, 2010, the Company had commitments to invest up to an aggregate additional $10.8 million in four venture capital funds, $1.7 million in other investments and $70.0 million in an equity method investment. For further details, see Note 3.
In 2010, the Company entered into a non-revolving line of credit agreement to loan Celtic Pharma Development Services Bermuda Ltd., a subsidiary of Celtic Pharmaceutical Holdings L.P., up to $18.0 million to finance trade payables in connection with a specified drug candidate. Celtic Pharma Development Services Bermuda Ltd. has appointed the Company to conduct certain clinical studies on the drug candidate. Principal and interest are due and payable no later than June 30, 2013 and are secured by a guarantee of an affiliate of the borrower. As of December 31, 2010, the Company had advanced $9.2 million to the borrower and recorded this as a component of other assets.
The Company sold a noncontrolling interest in its BioDuro Biologics Pte. Ltd. subsidiary. During the 183-day period commencing in December 2015, the minority equity holders have the right to require the Company to repurchase the noncontrolling interest at fair value.
Under most of the agreements for services, the Company typically agrees to indemnify and defend the sponsor against third-party claims based on the Company’s negligence or willful misconduct. Any successful claims could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
13. Commitments and Contingencies
In the normal course of business, the Company is a party to various claims and legal proceedings. The Company records a reserve for pending and threatened litigation matters when an adverse outcome is probable and the amount of the potential liability is reasonably estimable. Although the ultimate outcome of pending and threatened litigation is currently not determinable and litigation costs can be material, management of the Company, after consultation with legal counsel, does not believe that the resolution of these matters will have a material effect upon the Company’s financial condition, results of operations or cash flows.
14. Fair Value of Financial Instruments:
The Company’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with the accounting standards. See “Fair Value” under Note 1 for a discussion of the Company’s policies regarding this hierarchy.
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis:
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
14. Fair Value of Financial Instruments:
The following table provides a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2010:
Accounts receivable, accounts payable and accrued liabilities
The carrying amount approximates fair value because of the short maturity of these items.
Letters of credit
From time to time, the Company causes letters of credit to be issued to provide credit support for guarantees, contractual commitments and insurance policies. The fair values of the letters of credit reflect the amount of the underlying obligation and are subject to fees payable to the issuers of the letters of credit competitively determined in the marketplace. As of December 31, 2010, the Company had four letters of credit outstanding for a total of $1.8 million.
Non-recurring Fair Value Measurements
The following table presents information about the Company’s assets and liabilities measured at fair value on a nonrecurring basis using unobservable inputs (Level 3):
As discussed in Note 3, during the years ended December 31, 2009 and 2010, the Company recognized $2.1 million and $5.0 million, respectively, related to other-than-temporary declines in fair value based on the overall market conditions and financial performance of the investments.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
15. Related Party Transactions
The Company provides services to and owns 56.8% of Celtic Therapeutics Holdings, L.P. which is accounted for on the equity method. Celtic paid the Company revenue for the years ended December 31, 2008, 2009 and 2010 of $0, $0, and $2.7 million, respectively. As of December 31, 2009 and 2010, Celtic owed the Company $0 and $0.1 million, respectively, for services rendered by the Company. Additionally, the Company loaned Celtic $8.0 million, which is expected to be repaid in the first quarter of 2011.
The Company provided services to several companies in which three members of the Company’s Board of Directors and two executive officers hold board positions. Revenue received from these companies for the years ended December 31, 2008, 2009 and 2010 were $4.2 million, $10.0 million and $26.8 million, respectively. As of December 31, 2009 and 2010, these companies owed the Company $1.3 million and $6.5 million, respectively, for services rendered by the Company. The Company owed these companies $1.2 million and $1.7 million, respectively, as of December 31, 2009 and 2010.
16. Business Segment Data
In the third quarter of 2010, the Company re-organized its operations into the following two new business segments:
•
Clinical Development Services, which includes Phase II-IV clinical trial management services consisting of project management, clinical trial management, monitoring, data management, biostatistics, regulatory affairs, pharmacovigilance and related services; and
•
Laboratory Services, which includes Phase I, clinical chemistry assay testing and various pre-clinical and clinical laboratory services, including discovery services, central laboratory services, vaccines and biologics testing, bioanalytical services and product analysis.
Previously the Company operated under the Development and Discovery Sciences segments. The Development segment was split into the Clinical Development Services and Laboratory Services segments. Prior period amounts have been reclassified to conform to the new segment presentation. Substantially all of the operating business components of the Company’s Discovery Sciences segment were included in the spin-off of the Company’s compound partnering business in June 2010. Data for that segment is shown below solely for historical information. The Company reclassified its cost-method investments from the Discovery Sciences segment to the Clinical Development Services segment effective July 1, 2009 because of a change in management’s assessment of the strategic value of those investments which are now evaluated in the financial results of the Clinical Development Services segment by the Company’s chief operating decision maker.
The Company evaluates segment performance and allocates resources based on net revenue and operating income (loss). Depreciation and amortization expense is allocated to the business unit based on various operational metrics, such as headcount and space allocation. In addition, net revenue and operating income (loss) by segment exclude reimbursed revenue. The Company has a global infrastructure supporting its business segments, and therefore, assets are not identified by reportable segment.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
16. Business Segment Data
Net revenue and operating income (loss) by business segment were as follows as of the dates set forth below:
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
17. Operations by Geographic Area
Geographic information for net revenue and operating income by country is determined by the location where the services are provided for the client. Geographic information for identifiable assets by country is determined by the physical location of the assets.
The following table presents information about the Company’s operations by geographic area:
(a) Principally consists of operations in 42 countries, 23 of which are located in Europe, none of which comprises more than 6% of net revenue, income from operations or identifiable assets.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
18. Spin-off of Furiex Pharmaceuticals, Inc.
On June 14, 2010, the Company spun off its compound partnering business. The Company contributed substantially all of the assets and liabilities of the Discovery Sciences segment and $100.0 million of cash and cash equivalents to Furiex Pharmaceuticals, Inc. The Company then distributed all outstanding shares of Furiex to the Company’s shareholders of record as of June 1, 2010 as a pro-rata, tax-free dividend of one share of Furiex common stock for every twelve shares of the Company’s common stock.
In connection with the spin-off, the Company and Furiex entered into a series of agreements, including a separation and distribution agreement, transition services agreement, sublease and license agreements, employee matters agreement, tax sharing agreement and a master development services agreement.
The total value of the Furiex stock dividend was $146.7 million, based on the net book value of the net assets that were contributed to Furiex in connection with the spin-off, as follows:
Furiex’s historical results of operations have been presented as continuing operations in the consolidated statements of income because the Company believes that this transaction does not qualify for discontinued operations treatment due to the ongoing master development services agreement between PPD and Furiex.
19. Subsequent Events:
Stock repurchase program
In 2008, our board of directors approved a stock repurchase program authorizing us to repurchase up to $350.0 million of our common stock from time to time in the open market. As of December 31, 2010, $260.7 million remained available for share repurchases under the stock repurchase program. On February 14, 2011, the Company entered into an accelerated share repurchase arrangement with Barclays Capital Inc. under which the Company used $200.0 million of the remaining amount to repurchase additional shares of the Company’s common stock.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(dollars in tables in thousands, except per share data)
20. Quarterly Financial Data (unaudited)
(a) The second quarter of 2009 includes a gain on the sale of Piedmont Research Center of $19.5 million, net of tax. The fourth quarter of 2009 includes a gain on the sale of Biomarker of $2.0 million, net of tax and an impairment of intangible of $10.4 million relating to in-process R&D obtained in the Magen acquisition.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
S-1