ITEM 1. BUSINESS
ClinTrials Research Inc. (the "Company" or "ClinTrials") is a full service contract research organization ("CRO") serving the pharmaceutical, biotechnology and medical device industries. The Company designs, monitors and manages preclinical and clinical trials, provides clinical data management and biostatistical services, and offers product registration services throughout the United States, Canada and Europe. The Company generates substantially all of its revenue from preclinical and clinical testing of new pharmaceutical and biotechnology products. At December 31, 1997, the Company had contracts in backlog to perform clinical research services in multiple countries worldwide. To date, the Company has performed services for approximately 300 clients including the ten largest pharmaceutical companies in the world. Net service revenue increased 8.7% to $103.0 million in 1997 from $94.7 million in 1996.
New pharmaceutical and biotechnology products must undergo extensive testing and regulatory review to determine their relative safety and effectiveness. Companies seeking approval for these products are responsible for performing and analyzing the results of preclinical and multi-phase clinical trials. Preclinical trials typically last for up to three years and involve animal testing. Clinical trials are conducted over a period typically lasting five to seven years and involve hundreds or thousands of human subjects. These trials were historically performed almost exclusively by inhouse personnel at the major pharmaceutical companies. In recent years, pharmaceutical companies have begun to outsource clinical trials management to CROs, which has resulted in significant growth in the CRO industry. The Company believes worldwide research and development expenditures by the pharmaceutical and biotechnology industries reached an estimated $36 billion in 1997, approximately $12 billion of which was spent on preclinical and clinical trials, with approximately $3.5 billion being outsourced to CROs. Research and development expenditures in 1997 for the top 50 pharmaceutical companies in the world increased approximately 11% from the previous year. The Company believes that certain industry trends have led pharmaceutical and biotechnology companies to increase research and development for proprietary new drugs, conduct increasingly complex clinical trials, and develop multinational clinical trial capability, while seeking to control internal fixed costs. These trends include the increased emphasis on finding treatments for chronic disorders and infectious diseases, the desire by manufacturers to market pharmaceutical and biotechnology products simultaneously in several countries, and cost containment pressures from certain governments, managed care organizations and other payors. By providing experienced clinical and database management personnel to conduct complex trials on a contract basis, CROs have enabled pharmaceutical and biotechnology companies to respond to cost containment pressures by turning the fixed costs of internal research into variable costs.
ClinTrials Research Inc. is an international research services organization headquartered in Nashville, Tennessee, with offices in Research Triangle Park, North Carolina; Lexington, Kentucky; Chicago, Illinois; Maidenhead, U.K.; Glasgow, Scotland; Brussels, Belgium; Paris, France; Melbourne, Australia; Jerusalem, Israel; Milan, Italy; Santiago, Chile; and Montreal, Canada.
BACKGROUND
New Drug Development -- An Overview. Before a new drug may be marketed, it must generally undergo extensive testing and regulatory review to determine that it is safe and effective. This development process consists of two stages, preclinical and clinical. In the preclinical stage, the sponsor of the new drug conducts laboratory analyses and animal tests, generally over a one to three year period, to determine the basic biological activity and safety of the drug. Upon successful completion of the preclinical phase, the drug undergoes a series of clinical tests in humans, including healthy volunteers as well as patients with the targeted disease, generally over a five to seven year period. In the United States, preclinical and clinical testing must comply with the requirements of Good Clinical Practice ("GCP") and other standards promulgated by the Food and Drug Administration (the "FDA") and other federal and state governmental authorities. GCP stipulates procedures designed to ensure the quality and integrity of data obtained from clinical testing and to protect the rights and safety of clinical subjects. The FDA pioneered the use of clinical trials in the regulation of new drug development, and the agency's approval process has shaped much drug regulation worldwide. In recent years, the FDA and corresponding regulatory agencies of the major industrial countries (Canada, Japan and the European Community ("EC")) commenced discussions for the purpose of developing common standards for both the conduct of preclinical and clinical
studies and the format and content of applications for new drug approvals. Data from multi-national studies adhering to GCP are now generally acceptable to the FDA and the governments within the EC.
In the United States, a drug sponsor must file an Investigational New Drug Application ("IND") with the FDA before the commencement of human testing of a drug. The IND includes preclinical testing results and sets forth the sponsor's plans for conducting human clinical trials. The design of these plans, also referred to as the study protocol, is critical to the success of the drug development effort because the protocol must correctly anticipate the data and results that the FDA will require before approving the drug. In the absence of any comments from the FDA, human clinical trials may begin 30 days after the IND is filed.
Clinical trials usually start on a small scale to assess safety and then expand to larger trials to test efficacy. Trials are usually grouped into four phases, with multiple trials generally conducted within each phase.
Phase I. Phase I trials are conducted on healthy volunteers, typically 20 to 80 persons, to develop basic safety data relating to toxicity, metabolism, absorption and other pharmacological actions. These trials last an average of six months to one year.
Phase II. Phase II trials are conducted on a small number of subjects, typically 100 to 400 patients, who suffer from the drug's targeted disease or condition. Phase II trials offer the first evidence of clinical efficacy, as well as additional safety data. These trials last an average of two years.
Phase III. Phase III trials are conducted on a significantly larger population of several hundred to several thousand patients, some of whom suffer from the targeted disease or condition and some of whom are healthy. Phase III trials are designed to measure efficacy on a large scale as well as long-term side effects. These trials involve numerous sites and generally last two to three years.
Phase IV. As a condition of granting marketing approval, the FDA may require that a sponsor continue to conduct additional clinical trials, known as Phase IV trials, to monitor long-term risks and benefits, study different dosage levels, or evaluate different safety and efficacy parameters in target patient populations. With the increasing importance of Phase IV trials has also come increased complexity in the scope of the trials (i.e., the number of patients tested) and the manner in which they are conducted (i.e., the number of sites at which testing is performed). Phase IV trials generally last one to four years.
Clinical trials often represent the most expensive and time-consuming part of the overall drug development process. The information generated during these trials is critical for gaining marketing approval from the FDA or other regulatory agencies. After the successful completion of Phase III trials, the sponsor of a new drug must submit a New Drug Application ("NDA") to the FDA. The NDA is a comprehensive filing that includes, among other things, the results of all preclinical and clinical studies, information about the drug's composition and the sponsor's plans for producing, packaging and labeling the drug. Most of the clinical data contained in an NDA is generated during the Phase II and III trials. The FDA's review of an NDA can last from several months to several years, with the average review lasting two years. Drugs that successfully complete this review may be marketed in the United States, subject to the conditions imposed by the FDA in its approval. The FDA has been subject to increasing pressure to allow drugs to reach the public more quickly. As a result, in some instances the FDA has expedited the review process by granting conditional approval of lifesaving drugs or those for conditions for which there is no current treatment so that they can be marketed while Phase IV trials are being conducted. In recent years, the FDA has encouraged the use of computer assisted NDAs ("CANDAs") in an effort to expedite the approval process.
INDUSTRY TRENDS
The contract research industry derives substantially all of its revenue from the research and development ("R&D") expenditures of pharmaceutical, biotechnology and medical device companies. The Company believes that certain industry trends have led pharmaceutical and biotechnology companies to increase the use of CROs for preclinical and clinical trials. These trends include the following:
Increasing Cost Containment Pressures. The increasing pressure to control rising health care costs, and the penetration of managed health care and health care reform have caused the following changes in the pharmaceutical industry:
- Managed Care Organizations. Managed care organizations have become major participants in the delivery of pharmaceuticals. These organizations limit the selection of drugs from which affiliated physicians may prescribe, thus increasing the competition among pharmaceutical companies to develop more effective products in a shorter time frame.
- Consolidation. As pharmaceutical companies seek to create economies of scale, there have been several large mergers within the pharmaceutical industry, and as a result of these mergers, the pharmaceutical industry has experienced large scale employee lay-offs and other cutbacks.
- Other Factors. Factors such as competition from generic drugs following patent expiration, more stringent regulatory requirements and the increasing complexity of clinical trials have resulted in increasing market pressure on profit margins.
In response to these cost containment pressures, a number of United States pharmaceutical companies have publicly committed to hold net effective price increases generally in line with inflation. In the area of clinical development, many pharmaceutical and biotechnology companies are seeking to reduce the high fixed costs associated with peak-load staffing by reducing internal clinical staff and relying on a combination of internal resources and external resources such as CROs, thereby shifting fixed costs to variable costs.
Globalization of Clinical Research and Development. Due to the increasing cost of new drug development, many projects that are not expected to achieve sufficient annual worldwide revenue are abandoned. Pharmaceutical companies are increasingly attempting to maximize returns from a given drug by pursuing regulatory approvals in multiple countries simultaneously rather than sequentially. A pharmaceutical company seeking approval in a country in which it lacks experience or internal resources will frequently turn to a CRO for assistance in interacting with regulators or in organizing and conducting clinical trials. The Company believes that the globalization of clinical research and development activities has increased the demand for CRO services.
Increasingly Complex and Stringent Regulation; Need for Technological Capabilities. Increasingly complex and stringent regulatory requirements throughout the world have increased the volume of data required for regulatory filings and escalated the demand for data collection and analysis during the drug development process. Additionally, in the five years ended 1992, the average number of clinical trials per new drug application approximately doubled, and the average number of patients participating in those trials increased approximately 25%. In recent years, the FDA and corresponding regulatory agencies of Canada, Japan and the EC have commenced discussions to develop common standards for preclinical and clinical studies and the format and content of applications for new drug approvals. Further, the FDA encourages the use of computer-assisted filings in an effort to expedite the approval process. As regulatory requirements have become more complex, the pharmaceutical and biotechnology industries are increasingly outsourcing to CROs to take advantage of their data management expertise, technological capabilities and global presence.
Escalating Research and Development Expenditures. Research and development expenditures in 1997 for the top 50 pharmaceutical companies in the world (as measured by such expenditures) increased approximately 11% from the previous year. Such expenditures have resulted from an increased emphasis on developing effective products for the treatment of chronic disorders and life threatening acute conditions such as infectious diseases. The cost of developing therapies for chronic disorders, such as arthritis, Alzheimer's disease and osteoporosis is higher because the treatments must be studied for a longer period to demonstrate their effectiveness in curbing the chronic disorder and to determine any possible long-term side effects.
Reducing Drug Development Time Requirements. Pharmaceutical and biotechnology companies face increased pressure to bring new drugs to market in the shortest possible time, thereby reducing costs, maintaining market share and accelerating realization of revenue. Currently, total development of a new drug takes approximately eight to twelve years, a significant portion of a drug's seventeen-year period for protection under United States patent laws. Certain clients of the Company have initiated plans to reduce this time to approximately five to seven years. Pharmaceutical and biotechnology companies are attempting to increase the speed of new product development, and thereby maximize the period of marketing exclusivity and economic returns for their products, by outsourcing development activities to CROs. The Company believes that CROs are often able to perform the needed services with a higher level of expertise or specialization, and more quickly, than a pharmaceutical or biotechnology company could perform such services internally. In addition, some pharmaceutical and biotechnology companies are beginning to contract with large full-service CROs to conduct preclinical and all phases of clinical trials for new product programs lasting several years, rather than separately contracting specific phases of drug development to several different CROs. The Company believes this approach may result in shorter overall development times. In anticipation of this trend, the Company has established itself as a firm capable of taking a pharmaceutical from its initial testing through its licensing for commercialization.
New Drug Development Pressures. The Company believes that R&D expenditures have increased as a result of the constant pressure to develop and patent products, and to respond to the demand for products for an aging population and for the treatment of chronic disorders and life-threatening conditions. In response to this pressure, pharmaceutical and biotechnology companies are outsourcing preclinical and clinical trials in order to use their own resources to develop additional drugs.
Growth of Biotechnology Industry. The biotechnology industry and the number of drugs produced by it which require FDA approval have grown substantially over the past decade. Many biotechnology companies have chosen not to expend resources to develop sufficient staff or expertise to conduct clinical trials in-house, but rather have utilized providers such as CROs to perform these services.
As the use of CROs increases, so do the demands placed upon CROs like ClinTrials that provide a broad range of services in multiple countries for larger clients. For example, larger CROs generally remain competitive by sustaining internal growth and by opening offices in additional countries in order to have a presence near either a client or a large test site. Increasingly, large clients require CROs to meet certain credit-worthiness standards. As a result of these factors, CROs such as ClinTrials have experienced an increasing demand for working capital and strong balance sheets in order to maintain their competitive standing within the industry.
BUSINESS STRATEGY
The trend toward outsourcing the clinical testing process for pharmaceutical, biotechnology and medical device products is accelerating. The CRO industry is highly fragmented with many small, limited-service providers as well as in-house research departments, universities and teaching hospitals, and other CROs, many of which have substantially greater resources than the Company. However, the Company believes it is well positioned to take advantage of the trend toward outsourcing as a result of its demonstrated ability to provide a broad range of professional, cost-effective clinical research and development services worldwide. The Company's strategy is comprised of the following elements:
Provide Comprehensive Preclinical and Clinical Research Services. The Company offers a broad range of clinical research services and believes that its knowledge and experience in all stages of clinical research enhance its credibility with prospective clients. The Company has the capability to provide a full range of preclinical and clinical services on a turnkey basis, which the Company believes can be especially important to clients without significant relevant regulatory expertise, such as biotechnology companies and international pharmaceutical companies seeking to enter new geographic markets. To meet the needs of specific clients, the Company offers its services separately or as an integrated package. This allows a client to use the Company to design a protocol, conduct a trial, analyze the results of one or more trials, prepare and submit a new drug application or computer-assisted filing to the FDA, or for any combination of these services. This approach enables the Company to respond to clients' requirements with flexibility and also allows it to establish a relationship with a new client with a particular service that may in turn lead to larger, more comprehensive projects. In addition, the Company believes its preclinical capabilities will increase the prospect of being awarded contracts for later stage testing after satisfactory completion of the preclinical tests.
Pursue Strategic Alliances. In these arrangements, the client agrees to provide the Company with a minimum level of volume and is guaranteed adequate staffing over a multi-year period. The Company believes this type of arrangement results in more predictable pricing to the client and more efficient management of the Company's resources, and potentially increases the amount of work outsourced to the Company by the strategic partner. In the past three years, the Company has entered into strategic alliances with Baxter Healthcare Corporation, Novartis Pharmaceuticals Corporation, SmithKline Beecham Corporation and Glaxo Wellcome. In addition, the Company's preclinical subsidiary has "preferred provider" relationships, which, in contrast to strategic alliances, are noncontractual, informal relationships in which the client makes the Company among its first choices of testing service providers.
Expand International Presence. The Company provides clinical research and development services to major United States and European pharmaceutical and biotechnology companies. The Company conducts multi-national clinical trials designed to pursue concurrent regulatory approvals in multiple countries. The Company believes that this experience is a competitive advantage, as pharmaceutical and biotechnology companies increasingly are pursuing regulatory approvals simultaneously in multiple countries. The Company has recently increased its European management team and added a data management facility in Glasgow, Scotland to provide more comprehensive services to its United States clients doing business abroad and to better market its services to existing and potential European clients. During 1996, the Company expanded its geographic reach by opening trials management offices in Australia, France, Israel and Chile, and has delivered services in over 30 countries.
Develop Capabilities in Emerging Areas. The Company attempts to establish study protocols and expertise in a therapeutic area prior to the formal announcement of a new product by a pharmaceutical or biotechnology company. Manufacturers prefer to outsource to CROs that already have knowledge and have developed testing models in the relevant area and that can therefore more quickly begin the new drug application process. The Company learns of promising research and potential new products by attending conferences, reading scientific literature and by networking with industry experts, academics, manufacturers' representatives and others.
Invest in Information Systems Technology. The Company maintains a commitment to investment in technology with a focus on management information systems. The Company has invested heavily in improving its standard operating procedures, in continuous reengineering of the workflow processes and in the infrastructure required to support the creation, maintenance and statistical analysis of highly sophisticated databases. 1996 information systems investments expanded the Company's capacity to process data in a standard unified format and 1997's investments provided value added software which expedited the delivery process for data and enabled real time integrated interpretation of multiple complex data sets. Information technology tools currently being utilized include (i) an integrated voice response system which allows investigators to enroll patients into a trial, control drug utilization and distribution and have access to patient diary information through use of a touch tone telephone, (ii) clinical integrated data review tools which enable the sponsor to have real time access to data sets in order to create statisical data sets and graphs based upon patient selection criteria, (iii) an automated facsimile system which allows investigators to fax a patient Case Report Form ("CRF") directly into the Company's system and thus expedite data collection and processing and (iv) a clinical trial management system which integrates various levels of the trial process to provide a real time review of the full clinical study cycle from protocol creation to database lock. The Company intends to continue to improve its management information systems with significant capital expenditures anticipated in 1998.
Broaden Therapeutic Expertise. Prior working knowledge in specific therapeutic areas is a highly valued criterion by which many decisions to work with a CRO are made. ClinTrials has experience in a broad range of therapeutic areas and is continuing to expand its ability and experience in more therapeutic areas. ClinTrials has demonstrated depth and high quality performance in the following areas: anti-viral and other infectious diseases, cardiology, central nervous system, gastroenterology, endocrinology, respiratory and urology, osteoporosis evaluation, cardiovascular pharmacology, biomaterials testing, bio-marker assays and infusion delivery. The Company is a leader in the investigation of blood substitutes and protease inhibitors and in the conducting of megatrials (trials involving more than 1,000 participants).
Increase Client Base and Number of Contracts. ClinTrials' strategy is to seek contracts with new clients and new contracts with existing clients in different therapeutic areas and to cross-sell other services to existing clients.
Pursue Selected Acquisitions. The Company plans to pursue strategic acquisitions of selected CROs or related businesses that provide one or more of the following: complementary services, expanded geographic presence, new therapeutic expertise or complementary client bases.
SERVICES
The Company's services and related products include preclinical and clinical trials management services, clinical data management and biostatistical services, and product registration services. The Company's services can be provided separately or as an integrated package. Services from each of these categories can be utilized for the development and execution of a turnkey NDA.
Preclinical Trials. The Company designs and conducts preclinical research programs, based principally upon animal models, that generate the data required to establish safe starting dosages and the potential efficacy of a product in humans, and to determine organ toxicity and other potential risks of human usage. Preclinical trial reports are submitted to regulatory authorities in support of an application to initiate clinical testing in humans. The Company also offers analytical laboratory services including assessment of product concentration in suspensions, solutions, animal feed and plasma radiometric determination in metabolite profiling of biological tissues, and radiopurity assessment of dose solution.
Clinical Trials Management Services. The Company offers complete services for the design, placement, performance and management of clinical trial programs, a critical element in obtaining regulatory approval for drugs and medical devices. The Company has performed services in connection with trials in many therapeutic areas. The Company's multi-disciplinary clinical trials group has the ability to examine a product's existing preclinical and clinical data for the purposes of designing protocols for clinical trials in order to ascertain evidence of the product's safety and efficacy.
The Company manages every aspect of trials in Phases I through IV, including design of operations manuals, identification and recruitment of trial investigators, initiation of sites, monitoring for strict adherence to GCP, site visits to ensure compliance with protocol procedures and proper collection of data, interpretation of trial results and report preparation. Substantially all of the Company's current clinical projects involve Phase II, III or IV clinical trials, which, in most cases, are significantly larger and more complex than Phase I trials.
In the CRO industry, trials involving tests on over 1,000 patients over a period of several years at multiple sites are becoming more routine. These trials have resulted from the drug companies' emphasis on treating and curing chronic disorders and the resulting need to thoroughly test large numbers of patients for long-term side effects of new drugs. The Company is experienced in managing such trials and actively markets its abilities in this area.
Clinical trials are monitored for strict adherence to GCP. Efficient data collection, form design, detailed operations manuals and site visits by the Company's clinical research associates ("CRA") are employed to determine whether clinical investigators and their staffs follow established protocols and accurately record the findings of the trials.
The Company assists clients with one or more of the following steps of clinical trials:
- Study Protocol. The protocol defines the medical issues the study seeks to examine and the statistical tests that will be conducted. Accordingly, the protocol defines: (i) the frequency and type of laboratory and clinical measures that are to be tracked and analyzed; (ii) the number of patients required to produce a statistically valid result; (iii) the period of time over which they must be tracked; and (iv) the frequency and dosage of drug administration.
- Case Report Forms. Once the study protocol has been finalized, special forms for recording the desired information must be developed. These forms are called Case Report Forms ("CRFs"). The CRF may change at different stages of a trial. The CRF for one patient in a given study may consist of as many as 100 pages or more.
- Site and Investigator Recruitment. The drug is administered to patients by investigators, at hospitals, clinics or other locations, referred to as sites. Potential investigators may be identified by the drug sponsor or the CRO, which then solicits the investigators' participation in the study. Generally, the investigators contract directly with the Company. The trial's success depends on the successful identification and recruitment of investigators with proper expertise and an adequate base of patients who satisfy the requirements of the study protocol.
- Patient Enrollment. The investigators find and enroll patients suitable for the study according to the study protocol. Prospective patients are required to review information about the drug and its possible side effects and sign an informed consent to record their knowledge and acceptance of potential side effects. Patients also undergo a medical examination to determine whether they meet the requirements of the study protocol. Patients then receive the drug and are examined by the investigator as specified by the study protocol.
- Study Monitoring and Data Collection. As patients are examined and tests are conducted in accordance with the study protocol, data are recorded on CRFs and laboratory reports. The data are collected from study sites by specially trained CRAs. CRAs visit sites regularly to ensure that the CRFs are completed correctly and that all data specified in the protocol are collected. CRFs are reviewed for consistency and accuracy before their data are entered into an electronic database.
- Medical Affairs. Throughout the course of a clinical trial, the Company may provide various medical research and services including medical monitoring of clinical trials, interpretation of clinical trial results and preparation of clinical study reports.
- Report Writing. The results of statistical analysis of data collected during the trial together with other clinical data are included in a final report generated for inclusion in a regulatory document.
Clinical Data Management and Biostatistical Services. The Company's data management professionals assist in the design of protocols and CRFs, as well as training manuals and training sessions for investigational staff, to ensure that data are collected in an organized and consistent format. Databases are designed according to the analytical specifications of the project and the particular needs of the client. Prior to data entry, the Company's personnel screen the data to detect errors, omissions and other deficiencies in completed CRFs. The Company provides clients with data abstraction, data review and coding, data entry, database verification and editing, and problem data resolution.
The Company's biostatistics professionals provide biostatistical consulting, database design, data analysis and statistical reporting. The Company's biostatisticians provide clients with assistance in all phases of drug development. These professionals develop and review protocols, design appropriate analysis plans and design report formats to address the objectives of the study protocol as well as the client's individual objectives. Working with the programming staff, biostatisticians perform appropriate analyses and produce tables, graphs, listings and other applicable displays of results according to the analysis plan. Additionally, biostatisticians assist clients before panel hearings at the FDA.
The Company believes that its data management and biostatistical services capabilities can be utilized by a client more effectively when packaged as part of its total clinical trials management services and used to monitor Phases I through IV rather than just one phase. This packaging permits technology transfer resulting in a faster and less costly clinical trial process, as the data are collected and analyzed more rapidly and the decision to move to the next phase can be made more quickly.
Product Registration Services. The Company provides comprehensive product registration services throughout Europe and the United States. The Company provides regulatory strategy formulation, document preparation, Good Manufacturing Practice consultation and acts as liaison with the FDA and other regulatory agencies. Although these services have not generated material revenue to date, the Company offers these services in order to provide the full range of services necessary to remain competitive in the CRO industry.
The Company works closely with clients to devise regulatory strategies and comprehensive product development programs. The Company's regulatory affairs experts review existing published literature, assess the scientific background of a product, assess the competitive and regulatory environment, identify deficiencies and define the steps necessary to obtain registration in the most expeditious manner. Through this service, the Company helps its clients determine the feasibility of developing a particular product or product line.
The Company's regulatory affairs professionals have experience in the analysis, preparation and submission of FDA regulatory documents covering a wide range of products, including drugs and over-the-counter products. The Company also has experience with preparing regulatory documentation for submission to European regulatory authorities.
Pharmacoeconomic Services. The Company now provides enhanced pharmacoeconomic and registry services through its merger in June 1997 with Chicago-based Ovation Healthcare. Such services are growing increasingly important for determining economic and quality of life factors in the total cost and outcomes of many diseases.
CLIENTS AND MARKETING
The Company has served many of the leading pharmaceutical companies in the United States and the EC. The Company's clients include the ten largest pharmaceutical companies in the world. The Company's clients also include companies in the biotechnology and medical device industries. For the year ended December 31, 1997, the Company recognized revenue on contracts with 194 clients. During 1997, approximately 75% of the Company's net service revenue was derived from pharmaceutical companies, 23% from biotechnology companies and 2% from medical device companies. In 1996, such companies contributed 83%, 15% and 2% of net service revenue, respectively.
The Company has had, and will continue to have, certain clients from which at least 10% of the Company's overall revenue is generated over multiple contracts. Such concentrations of business are not uncommon within the CRO industry. During 1997, the Company generated approximately 13% of its net service revenue from multiple contracts with a major pharmaceutical company. No other client represented 10% or more of the Company's net revenue in 1997. The Company's contracts are entered into with numerous therapeutic areas or divisions within each client and frequently involve different decision makers. Thus, there is a reduced likelihood that the Company would simultaneously lose all contracts with any single client.
Marketing activities are conducted by the Company's business development personnel based in each of the Company's locations. In response to the highly technical nature of the Company's business, most business development personnel have scientific backgrounds. Additionally, the Company runs an extensive advertising program in trade journals and publications and, from time to time, employs direct mailings of information to existing and potential clients. The Company also attends and exhibits at selected trade shows in the United States and Europe.
CONTRACTUAL ARRANGEMENTS
The Company generally is awarded contracts based, among other things, upon its response to requests for proposal ("RFP") received from pharmaceutical, biotechnology and medical device companies. The contract may require the Company to design a protocol, conduct the trial, analyze the results of one or more of the trials, prepare and submit an IND, NDA or CANDA to the FDA, or perform any combination of these services. After negotiating a letter of intent or definitive contract for clinical studies, the Company, and in many cases the client, will coordinate the selection of clinical investigators and conduct pre-study site visits. The clinical investigators, in conjunction with the Company, are then responsible for enrolling participants in the trial, which may include persons with a given disorder or disease, healthy persons and persons within defined populations. Informed consents, in accordance with FDA and institutional regulations, are obtained from all participants. Change orders to existing contracts are typically generated at the request of the client based on the results of the trial to date and include changes in the scope of the trial and in the services to be provided by the Company. The Company may record additional revenue or reduce backlog as a result of change orders.
Most contracts are fixed priced, multi-year contracts that require a portion of the contract amount to be paid at or near the time the trial is initiated. The Company generally bills its clients upon the completion of negotiated performance requirements and, to a lesser extent, on a date certain basis. The Company's contracts generally may be terminated with or without cause. In the event of termination, the Company is typically entitled to all sums owed for work performed though the notice of termination and all costs associated with termination of the study. In addition, some of the Company's contracts provide for an early termination fee, the amount of which usually declines as the trial progresses. Termination or delay in the performance of a contract occurs for various reasons, including, but not limited to, unexpected or undesired results, inadequate patient enrollment or investigator recruitment,
production problems resulting in shortages of the drug, adverse patient reactions to the drug, or the client's decision to deemphasize a particular trial.
The Company's strategic alliance agreements, although larger in size and covering several projects over multiple years, are generally the same as the contracts described above.
BACKLOG
Backlog consists of anticipated net service revenue from letters of intent and contracts that have not been completed. Once work under a letter of intent or contract commences, net service revenue is recognized over the life of the contract using the percentage-of-completion method of accounting. Since it is common for clients to authorize projects and the Company to commence providing services before a contract is signed, the Company believes reported backlog should consist of anticipated net revenue from uncompleted projects which have been authorized by a client, through a written contract or otherwise. At December 31, 1995, 1996 and 1997, the Company's backlog was $90.2 million, $140.7 million and $101.3 million, respectively. The decrease in backlog is primarily attributable to the cancellations of contracts aggregating approximately $37 million in backlog which occurred in the fourth quarter of 1996 and first quarter of 1997. None of the cancellations were related to service or quality problems. The Company believes that backlog is not a consistent indicator of future results because backlog can be affected by a number of factors, including the variable size and duration of projects, many of which are performed over several years. Additionally, projects may be terminated by the client or delayed by regulatory authorities for many reasons, including unexpected test results. Moreover, the scope of a project can change during the course of a study.
COMPETITION
The Company competes primarily against pharmaceutical companies' own in-house research departments, other CROs, universities and teaching hospitals. The CRO industry is still fragmented, with approximately 20 full-service CROs and many small, limited-service providers. In recent years, several large, full-service competitors have emerged, some of which have substantially greater capital and other resources, are better known and have more experienced personnel than the Company. The Company's largest competitors include Covance (formerly a division of Corning, Inc.), PPD Pharmaco, Inc., Parexel International Corp., and Quintiles Transnational Corp. The recent trend toward industry consolidation is likely to result in heightened competition among the larger CROs. The larger CROs are increasingly required to have substantial amounts of working capital in order to sustain internal growth and international expansion, and to meet the credit-worthiness standards of their larger clients. The Company believes that clients choose a CRO based on several factors, the most important of which is the quality of the work performed for existing clients. Other important factors include references from existing clients, trials management experience in and scientific knowledge of specific therapeutic areas, the price for the services performed, the ability to organize and manage large-scale trials on a global basis, the ability to manage large and complex medical databases, and the ability to hire and retain qualified investigators. The Company believes that it competes favorably in these areas.
GOVERNMENT REGULATION
The clinical investigation of new pharmaceutical, biotechnology and medical device products is highly regulated by governmental agencies. The purpose of United States federal regulations is to ensure that only those products which have been proven to be safe and effective are made available to the public. The FDA has set forth regulations and guidelines that pertain to applications to initiate trials of products, approval and conduct of studies, report and record retention, informed consent, applications for the approval of new products, and post-marketing requirements. Pursuant to FDA regulations, CROs that assume obligations of a drug sponsor are required to comply with applicable FDA regulations and are subject to regulatory action for failure to comply with such regulations. In the United States, the historical trend has been in the direction of increased regulation by the FDA. The Company believes that many pharmaceutical, biotechnology and medical device companies do not have the staff and/or the available expertise to comply with all of the regulations and standards, and this has contributed and will continue to contribute to the growth of the CRO industry.
The services provided by the Company are ultimately subject to FDA regulation in the United States and comparable agencies in other countries, although the level of applicable regulation in other countries is generally less comprehensive than regulation present in the United States. The Company is obligated to comply with FDA regulations governing such activities as selecting qualified investigators, obtaining required forms from investigators, verifying that patient informed consent is obtained, monitoring the validity and accuracy of data, verifying drug/device accountability, and instructing investigators to maintain records and reports. The Company must also maintain records for each study for specified periods for inspection by the study sponsor and the FDA during audits. If such audits document that the Company has failed to adequately comply with Federal regulations and guidelines, it could have a material adverse effect on the Company. In addition, the Company's failure to comply with applicable regulations could possibly result in termination of ongoing research or the disqualification of data, either of which could also have a material adverse effect on the Company, including, without limitation, damage to the Company's reputation.
POTENTIAL LIABILITY AND INSURANCE
The Company monitors the testing of new drugs on human volunteers pursuant to study protocols in clinical trials. Clinical research involves a risk of liability for personal injury or death to patients from adverse reactions to the study drug, many of whom are seriously ill and are a great risk of further illness or death as a result of factors other than their participation in a trial. Additionally, although the Company's employees do not have direct contact with the participants in a clinical trial, the Company, on behalf of its clients, contracts with physicians who render professional services, including the administration of the substance being tested, to such persons. As a result, the Company could be held liable for bodily injury, death, pain and suffering, loss of consortium, other personal injury claims and medical expenses arising from any professional malpractice of such physicians. The Company maintains insurance to cover malpractice liability of physicians who are employees or consultants of the Company. To date, the Company has not received any claims resulting from either the testing of new drugs or professional malpractice.
The Company believes that the risk of liability to patients in clinical trials is mitigated by various regulatory requirements, including the role of institutional review boards ("IRBs") and the need to obtain each patient's informed consent. The FDA requires each human clinical trial to be reviewed and approved by the IRB at each study site. An IRB is an independent committee that includes both medical and non-medical personnel and is obligated to protect the interests of patients enrolled in the trial. After the trial begins, the IRB monitors the protocol and the measures designed to protect patients, such as the requirement to obtain informed consent.
To reduce its potential liability, the Company seeks to obtain indemnity provisions in its contracts with clients and, in some cases, with investigators contracted by the Company on behalf of its clients. These indemnities generally do not, however, protect the Company against certain of its own actions such as those involving negligence or misconduct. Moreover, these indemnities are contractual arrangements that are subject to negotiation with individual clients, and the terms and scope of such indemnities vary from client to client and from trial to trial. The Company also, in some circumstances, indemnifies and holds harmless its clients and investigators against liabilities incurred by such parties due to the actions or inactions of the Company. Finally, since the financial performance of these indemnities is not secured, the Company bears the risk that an indemnifying party may not have the financial ability to fulfill its indemnification obligations. The Company could be materially and adversely affected if it were required to pay damages or incur defense costs in connection with a claim that is outside the scope of an indemnity or where the indemnity, although applicable, is not performed in accordance with its terms.
The Company currently maintains an errors and omissions professional liabilities insurance policy in amounts it believes to be sufficient. There can be no assurance that this insurance coverage will be adequate, or that insurance coverage will continue to be available on terms acceptable to the Company.
INTELLECTUAL PROPERTY
The Company believes that factors such as its ability to attract and retain highly-skilled professional and technical employees and its project management skills and experience are significantly more important to its performance than are any intellectual property rights developed by it. The Company has developed, and continually develops and updates, certain computer software related methodologies. The Company seeks to maintain its rights in the software it develops through a combination of contract, copyright and
trade secret protection. While the Company does not consider any of this software or methodology to be material to the Company's business, the Company believes its software capabilities provide important benefits to its clients.
EMPLOYEES
At December 31, 1997, the Company had approximately 1500 employees and contractors, of which 53 held Ph.D. or M.D. degree, 12 held D.V.M. degrees and 123 others held masters degrees. Approximately 40% of the Company's employees are located in the United States, 42% are located in Canada and the remaining 18% are located in Europe. The Company believes that its relations with its employees are good.
The Company's performance depends on its ability to attract and retain a qualified management, professional, scientific and technical staff. Competition from both the Company's clients and competitors for skilled personnel is high. While the Company has not experienced any significant problems in attracting or retaining qualified staff to date, there can be no assurance the Company will be able to avoid these problems in the future.
RISK FACTORS
Information contained or incorporated by reference in this Form 10-K may contain "forward-looking statements". The following matters constitute cautionary statements identifying important factors with respect to any such forward-looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from those reflected in any such forward-looking statements.
Fluctuation in Quarterly Operating Results. The Company's quarterly operating results have fluctuated as a result of factors such as delays experienced in implementing or completing particular clinical trials, termination of clinical trials and the costs associated with integrating acquired operations. Since a high percentage of the Company's operating costs are relatively fixed while revenue recognition is subject to fluctuation, minor variations in the timing of contracts or the progress of trials may cause significant variations in quarterly operating results. Results of one quarter are not necessarily indicative of results for the next quarter.
Dependence on Certain Industries and Clients. The Company provides services primarily to the pharmaceutical and biotechnology industries. Accordingly, the Company's net service revenue is substantially dependent on these industries' expenditures on research and development. Although these expenditures are large, the number of potential CRO clients is relatively limited and it is not uncommon for a CRO to derive over 10% of its revenue from multiple contracts with a single client. The Company has in the past derived and may in the future derive a significant portion of its net service revenue from a relatively limited number of clients. The loss of any such client could materially adversely affect the Company's results of operations. In 1997, one client accounted for approximately 13% of the Company's net service revenue. No other client accounted for more than 10% of the Company's net service revenue during 1997. The Company's operations could be materially and adversely affected by, among other factors, any economic downturn in the pharmaceutical or biotechnology industries, any decrease in their research and development expenditures, or a change in the governmental regulations pursuant to which these industries operate. Furthermore, management believes that the Company has benefitted to date from the increasing tendency of pharmaceutical and biotechnology companies to outsource the performance and analysis of large clinical research projects to independent parties. Should this tendency be reduced or halted entirely, the Company's operations would be materially and adversely affected.
Loss of Clinical Research Contracts. Clients of the Company generally have the right to terminate a contract at any time during a clinical trial, potentially causing periods of excess capacity and reductions in net service revenue and net income. Trials may be terminated for various reasons, including unexpected or undesired results, inadequate patient enrollment or investigator recruitment, production problems resulting in shortages of the drug, adverse patient reactions to the drug or the client's decision to de-emphasize a particular trial. The termination of any one trial would typically not have a material adverse impact on the Company. The loss of a large trial or the simultaneous loss of multiple trials, however, could result in unplanned periods of excess capacity and adversely affect the Company's backlog, future revenue and profitability. In most instances, if a contract is terminated, the Company is entitled to receive revenue earned to date as well as, at times, a termination fee. However, because the Company's contracts are predominately fixed price contracts, the Company bears the risk of cost overruns.
Health Care Industry Reform. The health care industry is subject to changing political, economic and regulatory influences that may affect the pharmaceutical and biotechnology industries. In recent years, several comprehensive health care reform proposals were introduced in the United States Congress. The intent of the proposals was, generally, to expand health care coverage for the uninsured and reduce the growth of total health care expenditures. While none of the proposals were adopted, health care reform may again be addressed by the United States Congress. In addition, foreign governments may also undertake health care reforms in their respective countries. Implementation of government health care reform may adversely affect research and development expenditures by pharmaceutical and biotechnology companies, which could decrease the business opportunities available to the Company. The Company is unable to predict the likelihood of such or similar legislation being enacted into law or the effect such legislation would have on the Company.
Exchange Rate Fluctuations. The Company conducts business in several foreign countries and as a result exposure exists to potentially adverse movement in foreign currency rates. The Company uses foreign exchange contracts to hedge the risk of changes in foreign currency exchange rates associated with contracts in which the expenses for providing services are incurred in one currency and paid for by the client in another currency. The objective of these contracts is to reduce the effect of foreign exchange rate fluctuations on the Company's operating results.
No Assurance of Successful Integration of Acquisitions. A significant component of the Company's historical growth has come through acquisitions of other CROs, and the Company's growth strategy includes possible additional acquisitions. Any acquisitions which the Company may pursue will involve risks, including the possible inability to integrate the operations and services of the acquired business, the expenses incurred in connection with the acquisition, the diversion of management's attention from other business concerns and the potential loss of key employees of the acquired business. Acquisitions of foreign companies also may involve the additional risks of, among others, integration of foreign business practices and overcoming language barriers. There can be no assurance that any such acquisitions will not have a material adverse effect upon the Company's results of operations, financial condition or business prospects.
Volatility of Stock Market Price. From time to time, there may be significant volatility in the market price for the Company's Common Stock. If revenues, earnings or new contract orders fail to meet expectations of the investment community, then there could be an immediate and significant impact on the trading price for the Company's Common Stock. Additionally, changes in earnings estimated by analysts, general conditions in the economy, the financial markets or the health care, pharmaceutical, biotechnology or CRO industries, implementation of proposed healthcare reforms or other developments affecting the Company could cause the market price of the Common Stock to fluctuate substantially. In recent years the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance.
ITEM 2.
ITEM 2. PROPERTIES
The Company both owns and leases its facilities. The Company's headquarters are located in Nashville, Tennessee. Additionally, the Company has offices in Research Triangle Park, North Carolina; Lexington, Kentucky; Chicago, Illinois; Maidenhead, U.K.; Glasgow, Scotland; Brussels, Belgium; Melbourne, Australia; Milan, Italy; Santiago, Chile; Paris, France; and Jerusalem, Israel. The Company utilizes both owned and leased laboratory and office space in Senneville, Quebec.
The Company believes that the space leased is adequate for the Company's operations and that the leases generally reflect market rates in their respective geographic areas. The expiration dates of the leases range from 1998 to 2013.
In 1997, the Company moved its Nashville operations and corporate headquarters into a new building. The Company leases approximately 53,000 square feet of this building.
In 1996, the Company agreed to lease approximately 151,000 square feet in a building to be constructed in Cary, North Carolina. Upon its completion in mid-1998, the Company will move its Research Triangle Park operations into the new building.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time subject to claims and suits arising in the ordinary course of business. In the opinion of management, there are currently no proceedings to which the Company is a party that will have a material adverse effect upon its operations or financial condition.
In 1991, a customer commenced legal action against the predecessor of the Company's preclinical subsidiary claiming damages resulting from statistical errors in carrying out two clinical research studies. Judgment was rendered in February 1997 by the Superior Court of Montreal against the Company's subsidiary in the amount of approximately $560,000 plus interest to accrue from September 1991. The Company's preclinical subsidiary, now responsible for this action, has reserves adequate to cover the current judgment amount. The Company's preclinical subsidiary has appealed the amount of the judgment and the subsidiary's insurance company has appealed the portion of the judgment which obligates the insurance company to pay the insurance claim related to this litigation. The Company believes it is entitled, subject to certain limitations, to indemnification from a former owner of the predecessor for a portion of this claim. In the opinion of management, the ultimate resolution of such pending legal proceedings will not have a material effect on the Company's financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq Stock Market ("Nasdaq") under the symbol "CCRO". On March 16, 1998, the last reported sale price for the Common Stock on Nasdaq was $7.56. As of December 31, 1997, the Company had approximately 229 holders of record of the Common Stock and the Company estimates an additional 5,450 beneficial owners. The following table shows the high and low sales prices for the Common Stock as reported by Nasdaq for the periods indicated, as adjusted for a 3-for-2 stock split on November 25, 1996:
The Company has paid no dividends since inception.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Information concerning this Item is incorporated herein by reference to page 5 of the Company's Annual Report to its stockholders for the fiscal year ended December 31, 1997.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information concerning this Item is incorporated herein by reference to pages 6 through 9 of the Company's Annual Report to its stockholders for the fiscal year ended December 31, 1997.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information concerning this Item is incorporated herein by reference to pages 10 through 20 of the Company's Annual Report to its stockholders for the fiscal year ended December 31, 1997.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information concerning this Item is incorporated herein by reference to the Company's definitive proxy materials for the Company's 1998 Annual Meeting of stockholders.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning this Item is incorporated herein by reference to the Company's definitive proxy materials for the Company's 1998 Annual Meeting of stockholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning this Item is incorporated herein by reference to the Company's definitive proxy materials for the Company's 1998 Annual Meeting of stockholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements of the Company and its subsidiaries required to be included in Part II, Item 8 are incorporated by reference to the Company's Annual Report to stockholders for the fiscal year ended December 31, 1997.
(a)(2) and (d) Schedule II -- Valuation and Qualifying Accounts (filed as Exhibit 99 hereto).
(a)(3) and (c) Exhibits.
(b) No reports on Form 8-K were filed during the quarter ended December 31, 1997.
SIGNATURES
Pursuant to the requirements 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.
CLINTRIALS RESEARCH INC.
By: /s/ JERRY R. MITCHELL -------------------------------- Jerry R. Mitchell, M.D., Ph.D. President and Chief Executive Officer, Director
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.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ JERRY R. MITCHELL - ------------------------------ President and Chief Executive March 27, 1998 Jerry R. Mitchell, M.D., Ph.D. Officer, Director
/s/ WILLIAM C. O'NEIL, JR. - ------------------------------ Executive Chairman of the March 27, 1998 William C. O'Neil, Jr. Board
/s/ MARY A. CHAPUT - ------------------------------ Chief Financial Officer and March 27, 1998 Mary A. Chaput Secretary (Principal Financial and Accounting Officer)
/s/ EDWARD G. NELSON - ------------------------------ Director March 27, 1998 Edward G. Nelson
/s/ THOMAS G. CIGARRAN - ------------------------------ Director March 27, 1998 Thomas G. Cigarran
/s/ RICHARD J. ESKIND - ------------------------------ Director March 27, 1998 Richard J. Eskind
/s/ IRWIN B. ESKIND - ------------------------------ Director March 27, 1998 Irwin B. Eskind, M.D.
/s/ ROSCOE R. ROBINSON - ------------------------------ Director March 27, 1998 Roscoe R. Robinson, M.D.
INDEX TO EXHIBITS