| COVANCE INC Item 1A Risk Factors This section discusses various risk factors that are attendant with our business and the provision of our services |
| If the events outlined below were to occur individually or in the aggregate, our business, results of operations, financial condition, and cash flows could be materially adversely affected |
| Changes in government regulation or in practices relating to the pharmaceutical industry could decrease the need for the services we provide |
| Governmental agencies throughout the world, but particularly in the United States, strictly regulate the drug development process |
| Our business involves helping pharmaceutical and biotechnology companies navigate the regulatory drug approval process |
| Changes in regulation, such as a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, or an increase in regulatory requirements that we have difficulty satisfying or that make our services less competitive, could eliminate or substantially reduce the demand for our services |
| Also, if government efforts to contain drug costs and pharmaceutical and biotechnology company profits from new drugs, our customers may spend less, or reduce their growth in spending on research and development |
| If health insurers were to change their practices with 9 _________________________________________________________________ respect to reimbursements for pharmaceutical products, our customers may spend less, or reduce their growth in spending on research and development |
| Failure to comply with existing regulations could result in a loss of revenue or earnings or in increased costs |
| Any failure on our part to comply with applicable regulations could result in the termination of on-going research or the disqualification of data for submission to regulatory authorities |
| For example, if we were to fail to verify that patient participants were fully informed and have fully consented to a particular clinical trial, the data collected from that trial could be disqualified |
| If this were to happen, we could be contractually required to repeat the trial at no further cost to our customer, but at substantial cost to us |
| We may bear financial losses because most of our contracts are of a fixed price nature and may be delayed or terminated or reduced in scope for reasons beyond our control |
| Many of our contracts provide for services on a fixed price or fee-for-service with a cap basis and they may be terminated or reduced in scope either immediately or upon notice |
| Cancellations may occur for a variety of reasons, including: • the failure of products to satisfy safety requirements; • unexpected or undesired results of the products; • insufficient patient enrollment; • insufficient investigator recruitment; • the clientapstas decision to terminate the development of a product or to end a particular study; and • our failure to perform properly our duties under the contract |
| The loss, reduction in scope or delay of a large contract or the loss or delay of multiple contracts could materially adversely affect our business, although our contracts frequently entitle us to receive the costs of winding down the terminated projects, as well as all fees earned by us up to the time of termination |
| Some contracts also entitle us to a termination fee |
| We may bear financial risk if we under price our contracts or overrun cost estimates |
| Since our contracts are often structured as fixed price or fee-for-service with a cap, we bear the financial risk if we initially under price our contracts or otherwise overrun our cost estimates |
| Such under pricing or significant cost overruns could have a material adverse effect on our business, results of operations, financial condition, and cash flows |
| We may not be able to successfully develop and market or acquire new services |
| We may seek to develop and market new services that complement or expand our existing business or expand our service offerings through acquisition |
| If we are unable to develop new services and/or create demand for those newly developed services, or expand our service offerings through acquisition, our future business, results of operations, financial condition, and cash flows could be adversely affected |
| Our operating results may vary significantly from quarter to quarter and are influenced by factors over which we have little control such as: • exchange rate fluctuations; • the commencement, completion or cancellation of large contracts; • the progress of ongoing contracts; • the timing of and charges associated with completed acquisitions or other events; and • changes in the mix of our services |
| 10 _________________________________________________________________ We believe that operating results for any particular quarter are not necessarily a meaningful indication of future results |
| While fluctuations in our quarterly operating results could negatively or positively affect the market price of our common stock, these fluctuations may not be related to our future overall operating performance |
| We depend on the pharmaceutical and biotechnology industries |
| Our revenues depend greatly on the expenditures made by the pharmaceutical and biotechnology industries in research and development |
| Accordingly, economic factors and industry trends that affect our clients in these industries also affect our business |
| If companies in these industries were to reduce the number of research and development projects they outsource, our business could be materially adversely affected |
| We operate in a highly competitive industry |
| Competitors in the contract research organization industry range from small, limited-service providers to full service global contract research organizations |
| Our main competition consists of in-house departments of pharmaceutical companies, full-service contract research organizations, and universities and teaching hospitals, although to a lesser degree |
| We compete on a variety of factors, including: • reputation for on-time quality performance and regulatory compliance; • expertise and experience in specific areas; • scope of service offerings; • strengths in various geographic markets; • price; • technological expertise and efficient drug development processes; • quality of facilities; • ability to acquire, process, analyze and report data in an accurate manner; • ability to manage large-scale clinical trials both domestically and internationally; • expertise and experience in market access services; and • size |
| For instance, our clinical development services have from time to time experienced periods of increased price competition which had a material adverse effect on Covanceapstas late-stage development profitability and consolidated net revenues and net income |
| There is competition among the larger contract research organizations for both clients and potential acquisition candidates |
| Additionally, small, limited-service entities considering entering the contract research organization industry will find few barriers to entry, thus further increasing possible competition |
| These competitive pressures may affect the attractiveness of our services and could adversely affect our financial results |
| We may expand our business through acquisitions |
| We review many acquisition candidates and, in addition to acquisitions which we have already made, we are continually evaluating new acquisition opportunities |
| Factors which may affect our ability to grow successfully through acquisitions include: • difficulties and expenses in connection with integrating the acquired companies and achieving the expected benefits; • diversion of managementapstas attention from current operations; • the possibility that we may be adversely affected by risk factors facing the acquired companies; • acquisitions could be dilutive to earnings, or in the event of acquisitions made through the issuance of our common stock to the shareholders of the acquired company, dilutive to the percentage of ownership of our existing stockholders; 11 _________________________________________________________________ • potential losses resulting from undiscovered liabilities of acquired companies not covered by the indemnification we may obtain from the seller; • risks of not being able to overcome differences in foreign business practices, language and other cultural barriers in connection with the acquisition of foreign companies; and • loss of key employees of the acquired companies |
| We may be affected by potential health care reform |
| In recent years the United States Congress and state legislatures have considered various types of health care reform in order to control growing health care costs |
| We are unable to predict what legislative proposals will be adopted in the future, if any |
| Similar reform movements have occurred in Europe and Asia |
| Implementation of health care reform legislation that contain costs could limit the profits that can be made from the development of new drugs |
| This could adversely affect research and development expenditures by pharmaceutical and biotechnology companies which could in turn decrease the business opportunities available to us both in the United States and abroad |
| In addition, new laws or regulations may create a risk of liability, increase our costs or limit our service offerings |
| We rely on third parties for important services |
| We depend on third parties to provide us with services critical to our business |
| For instance, we have entered into an agreement with IBM to manage our information technology infrastructure including our computer and telephone network, e-mail system, help desks, computer support and data centers worldwide |
| The failure of any of these third parties to adequately provide the needed services could have a material adverse effect on our business |
| Our revenues and earnings are exposed to exchange rate fluctuations |
| We derive a large portion of our net revenues from international operations |
| For the year ended December 31, 2005, we derived approximately 36prca of our net revenues from outside the United States |
| Our financial statements are denominated in US dollars |
| As a result, factors associated with international operations, including changes in foreign currency exchange rates, could significantly affect our results of operations, financial condition and cash flows |
| The loss of our key personnel could adversely affect our business |
| Our success depends to a significant extent upon the efforts of our senior management team and other key personnel |
| The loss of the services of such personnel could adversely affect our business |
| Also, because of the nature of our business, our success is dependent upon our ability to attract and retain technologically qualified personnel |
| There is substantial competition for qualified personnel, and an inability to recruit or retain qualified personnel may impact our ability to grow our business and compete effectively in our industry |
| Contract research services create a risk of liability |
| In contracting to work on drug development trials, we face a range of potential liabilities, for example: • errors or omissions that create harm during a trial to study volunteers or after a trial to consumers of the drug after regulatory approval of the drug; • general risks associated with clinical pharmacology facilities, including negative consequences from the administration of drugs to clinical trial participants or the professional malpractice of clinical pharmacology medical care providers; • errors or omissions from tests conducted for the agrochemical and food industries; 12 _________________________________________________________________ • risks that animals in our breeding facilities may be infected with diseases that may be harmful and even lethal to themselves and humans despite preventive measures contained in our company policies for the quarantine and handling of imported animals; and • errors and omissions during a trial that may undermine the usefulness of a trial or data from the trial |
| We also contract with physicians, also referred to as investigators, to conduct the clinical trials to test new drugs on human volunteers |
| These tests can create a risk of liability for personal injury or death to volunteers, resulting from negative reactions to the drugs administered or from professional malpractice by third party investigators, particularly to volunteers with life-threatening illnesses |
| We believe that our risks in this area are generally reduced by the following: • contract provisions entitling us to be indemnified or entitling us to a limitation of liability; • insurance maintained by our clients, investigators, and by us; and • various regulatory requirements we must follow in connection with our business |
| Contractual indemnifications generally do not protect us against liability arising from certain of our own actions, such as negligence or misconduct |
| We could be materially and adversely affected if we were required to pay damages or bear the costs of defending any claim which is not covered by a contractual indemnification provision or in the event that a party who must indemnify us does not fulfill its indemnification obligations or which is beyond the level of our insurance coverage |
| There can be no assurance that we will be able to maintain such insurance coverage on terms acceptable to us |
| Reliance on air transportation |
| Our central laboratories and certain of our other businesses are heavily reliant on air travel for transport of clinical trial kits and other material, products and people, and a significant disruption to the air travel system, or our access to it, could have a material adverse effect on our business |
| Certain service offerings and research products are dependent on limited sources of supply of services or products which if interrupted could affect our business |
| We depend on a limited number of suppliers for certain services and for one of our large animal populations |
| Disruptions to the continued supply of these services or products may arise from export import restrictions or embargoes, foreign political or economic instability, or otherwise |
| Disruption of supply could have a material adverse effect on our business |
| Actions of animal rights extremists may affect our business |
| Our early development services utilize animals (predominantly rodents) in preclinical testing of the safety and efficacy of drugs and also breed and sell animals for biomedical research |
| Such activities are required for the development of new medicines and medical devices under regulatory regimes in the United States, Europe, Japan and other countries |
| Acts of vandalism and other acts by animal rights extremists who object to the use of animals in drug development could have a material adverse effect on our business |
| Our animal populations may suffer diseases that can damage our inventory, harm our reputation, result in decreased sales of research products or result in other liability to us |
| It is important that our research products be free of diseases, including infectious diseases |
| The presence of diseases can distort or compromise the quality of research results, can cause loss of animals in our inventory, can result in harm to humans or outside animal populations if the disease is not contained to animals in inventory, or can result in other losses |
| Such results could harm our reputation or have a material adverse effect on our financial condition, results of operations, and cash flows |