| PRA International ITEM 1A RISK FACTORS If any of the following risks materialize, our business, financial condition, or results of operations could be materially harmed |
| In that case, the market price of our common stock could decline |
| Risks Related to Our Business Our contracts are generally terminable on little or no notice |
| Termination of a large contract for services or multiple contracts for services could adversely affect our revenue and profitability |
| Clients terminate or delay contracts for various reasons |
| We have experienced termination or cancellation by certain customers in the ordinary course of business |
| The reasons more frequently given for termination include: • the failure of the product being tested to satisfy safety or efficacy requirements; • unexpected or undesired clinical results of the product; and • the client’s decision to forego a particular study |
| Less frequently, terminations occur because of: • insufficient patient enrollment or investigator recruitment; • the client’s decision to downsize its product development portfolios; 18 _________________________________________________________________ • the client’s dissatisfaction with our performance, including the quality of data provided and our ability to meet agreed upon schedules; and • production problems resulting in shortages of the drug or required clinical supplies |
| The loss or delay of a program or large contract or the loss or delay of multiple smaller contracts could harm our business because such terminations could lower our level of staff utilization, which would reduce our profitability |
| In addition, the terminability of our contracts puts increased pressure on our quality control efforts, since not only can our contracts be terminated by clients as a result of poor performance, but any such termination also may affect our ability to obtain future contracts from the client involved and, possibly, others among the companies that sponsor trials |
| Because the contracts included in our backlog are generally terminable without cause, we do not believe that our backlog as of any date is necessarily a meaningful predictor of future results |
| Our quarterly operating results may vary, which could negatively affect the market price of our common stock |
| Our quarterly operating results have been and will continue to be subject to variation, depending on factors such as the commencement, completion, or cancellation of significant contracts, the timing of acquisitions, the mix of contracted services, foreign exchange rate fluctuations, the timing of start-up expenses for new offices and services, and the costs associated with integrating acquisitions |
| We have experienced, and expect to continue experiencing, some variations in our revenue due to our customers’ budgetary cycles |
| As a result, we believe that quarterly comparisons of our financial results should not be relied upon as an indication of our future performance |
| In addition, quarterly volatility in our operating results could cause declines in the market price of our common stock |
| We depend on a limited number of clients and a loss of or significant decrease in business from them could affect our business |
| We have in the past and may in the future derive a significant portion of our service revenue from a relatively limited number of clients that vary from year to year |
| Our relationships with these customers involve a substantial number of individual arrangements detailing the particulars of a given clinical development project and often implicate different entities, departments, or companies under common control |
| Nevertheless, the loss of, or a significant decrease in business from, one or more of these clients could harm our business |
| Because most of our clinical development service revenue is from long-term fixed-fee contracts, we would lose money in performing these contracts if our costs of performing them were to exceed the fixed fees payable to us |
| Because most of our clinical development service revenue is from long-term fixed price contracts, we bear the risk of cost overruns under these contracts |
| If the costs of completing these projects exceed the fixed fees for these projects, our business, financial condition, and operating results could be adversely affected |
| Our business depends on our senior management team, and the loss of any member of the team may harm our business |
| We believe our success will depend on the continued employment of our senior management team |
| “Directors and Executive Officers of the Registrant — Executive Officers |
| ” This management team has significant experience in the administration of a CRO If one or more members of our senior management team were unable or unwilling to continue in their present positions, those persons could be difficult to replace and our business could be harmed |
| We do not currently maintain key person life insurance policies on any of our employees |
| If any of our key employees were to join a competitor or to form a competing company, some of our clients might choose to use the services of that competitor or new company instead of our own |
| Furthermore, clients or other companies seeking to develop in-house capabilities may hire away some of our senior management or key employees |
| In addition, although we have amended our senior management team’s employment agreements in response to a prior challenge of our non-competition provisions we cannot assure you that a court would enforce the non-competition provisions in the amended employment agreements |
| 19 _________________________________________________________________ If we are unable to recruit and retain qualified personnel, we may not be able to expand our business or remain competitive |
| Because of the specialized scientific nature of our business, we are highly dependent upon qualified scientific, technical and managerial personnel |
| At the present time, approximately 28prca of our workforce holds at least a master’s degree |
| There is intense competition for qualified personnel in the pharmaceutical and biotechnology fields |
| In the future, we may not be able to attract and retain the qualified personnel necessary for the conduct and further development of our business |
| The loss of the services of existing personnel, as well as the failure to recruit additional key scientific, technical, and managerial personnel in a timely manner, could harm our ability to expand our business and to remain competitive in the CRO industry |
| Our business could be harmed if we are unable to manage our growth effectively |
| We have experienced rapid growth throughout our operations |
| We believe that sustained growth places a strain on operational, human, and financial resources |
| To manage our growth, we must continue to improve our operating and administrative systems and to attract and retain qualified management, professional, scientific, and technical operating personnel |
| We believe that maintaining and enhancing both our systems and personnel at reasonable cost are instrumental to our success in the CRO industry |
| We cannot assure you that we will be able to enhance our current technology or obtain new technology that will enable our systems to keep pace with developments and the sophisticated needs of our clients |
| The nature and pace of our growth introduces risks associated with quality control and client dissatisfaction due to delays in performance or other problems |
| In addition, foreign operations involve the additional risks of assimilating differences in foreign business practices, hiring and retaining qualified personnel, and overcoming language barriers |
| It is also possible that with any future acquisitions, we will assume the problems of the acquired entity |
| Although past acquisitions have not resulted in any significant integration problems, we anticipate additional growth in the future and we may face these types of issues |
| Our exposure to exchange rate fluctuations could negatively impact our results of operations |
| We derived approximately 42prca of our consolidated service revenue in 2005 from our operations outside of the United States, primarily from our operations in Europe and Canada, where significant amounts of our revenues and expenses are recorded in local currency |
| Our financial statements are presented in US dollars |
| Accordingly, changes in currency exchange rates, particularly among the Euro, British pound, and the Canadian dollar, and the US dollar, may cause fluctuations in our reported financial results that could be material |
| In addition, a portion of our contracts with our clients are denominated in currencies other than the currency in which we incur expenses related to those contracts |
| In Canada, our contracts generally provide for invoicing clients in US dollars, but our expenses are generally incurred in Canadian dollars |
| Where expenses are incurred in currencies other than those in which contracts are priced, fluctuations in the relative value of those currencies could harm our results of operations |
| In January, 2006, we entered into multiple foreign currency hedging transactions to mitigate exposure to movements between the US dollar and the British pound and the US dollar and Euro |
| We are subject to certain risks associated with our foreign operations |
| We have offices and conduct business on six continents |
| Certain risks are inherent in these international operations |
| The risks related to our foreign operations that we more often face in the normal course of business include: • tax rates in certain foreign countries may exceed those in the United States and foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls, or other restrictions, including restrictions on repatriation; and • general economic and political conditions in countries where we operate may have an adverse effect on our operations in those countries |
| 20 _________________________________________________________________ Less frequently, we encounter the following risks: • foreign customers may have longer payment cycles than customers in the United States; • we may have difficulty complying with a variety of foreign laws and regulations, some of which may conflict with United States law; • the difficulty of enforcing agreements and collecting receivables through certain foreign legal systems; and • the difficulties associated with managing a large organization spread throughout various countries |
| While we have not experienced any major problems to date with the acquisition or operation of our foreign entities, we may in the future encounter certain limitations inherent in the carrying out of clinical development trials internationally, including establishing effective communications, operating in various time zones, and dealing with incompatible technology |
| As we continue to expand our business globally, our success will be dependent, in part, on our ability to anticipate and effectively manage these and other risks associated with foreign operations |
| We cannot assure you that these and other factors will not have a material adverse effect on our international operations or our business, financial condition, or results of operations as a whole |
| We provide services to emerging companies which may be unable to pay us |
| We incur costs in providing drug development services to our clients before we are paid |
| We provide drug development services to biotechnology companies, many of which are early-stage companies with relatively limited financial resources |
| If any of these companies were to cease operations before paying us for our services, or are otherwise unable to pay, our results of operations could suffer |
| We have a significant amount of goodwill on our balance sheet, and a downturn in our business or industry could require us to take a charge to earnings, which may negatively affect the market price of our common stock |
| Our balance sheet reflects a significant amount of goodwill, which represents dlra106dtta7 million, or approximately 32dtta4prca of our total assets as of December 31, 2005 |
| We review the amount of our goodwill whenever events or changes in circumstances indicate that the carrying amount of the goodwill may not be fully recoverable |
| To determine recoverability, we annually compare the fair value of our reporting unit (which is our company) to its carrying value |
| Although no event has occurred to date impairing our goodwill, there is a possibility that the carrying amount of the goodwill could be impaired if there is a downturn in our business or our industry or other factors affect the fair value of our business, in which case a charge to earnings would become necessary |
| Our business depends significantly on the continued effectiveness of our information technology infrastructure, and failures of such technology could harm our operations |
| To remain competitive in our industry, we must employ information technologies that capture, manage, and analyze the large streams of data generated during our clinical trials in compliance with applicable regulatory requirements |
| In addition, because we provide services on a global basis, we rely extensively on our technology to allow the concurrent conduct of studies and work sharing around the world |
| As with all information technology, our system is vulnerable to potential damage or interruptions from fires, blackouts, telecommunications failures, and other unexpected events, as well as to break-ins, sabotage, or intentional acts of vandalism |
| Given the extensive reliance of our business on this technology, any substantial disruption or resulting loss of data that is not avoided or corrected by our backup measures could harm our business and operations |
| Our business could be harmed if we cannot successfully integrate future acquisitions |
| We review acquisition candidates in the ordinary course of our business |
| Acquisitions involve numerous risks, including the expenses incurred in connection with the acquisition, the difficulties in assimilating operations, the diversion of management’s attention from other business concerns, and the potential loss of key employees of the acquired company |
| Acquisitions of foreign companies involve the additional risks of assimilating differences in 21 _________________________________________________________________ foreign business practices, hiring and retaining qualified personnel, and overcoming language barriers |
| We cannot assure you that we will successfully integrate future acquisitions into our operations |
| We compete in a highly competitive market and if we do not compete successfully our business could be harmed |
| We compete against other CROs, in-house development at large pharmaceutical companies, and, to a lesser extent, universities and teaching hospitals |
| Our principal competitors are traditional CROs, including Charles River Laboratories International, Inc, Covance Inc, ICON plc, INC Research, Inc, Kendle International Inc, MDS Pharma Services, PAREXEL International Corporation, Pharmaceutical Product Development, Inc, SFBC International, Inc, Quintiles Transnational Corp, United BioSource Corporation, and United HealthCare Corporation |
| Some of these competitors have greater capital and other resources than we do at the present time |
| As a result of competitive pressures and the potential for economies of scale, the industry continues to experience consolidation |
| This trend, as well as a trend by pharmaceutical companies and other clients to limit outsourcing to fewer organizations, in some cases through preferred vendor relationships, is likely to result in increased worldwide competition among the larger CROs for clients and acquisition candidates |
| We believe that major pharmaceutical and biotechnology companies have been developing preferred vendor relationships with full-service CROs, effectively excluding other CROs from the bidding process |
| Our preferred vendor relationships are not contractual and are subject to change at any time |
| We may find reduced access to certain potential clients due to preferred vendor arrangements with other competitors |
| In addition, the CRO industry has attracted the attention of the investment community, and increased potential financial resources are likely to lead to increased competition among CROs |
| There are few barriers to entry for small, limited-service entities entering the CRO industry, and these entities also may compete with established CROs for clients |
| We address the competition in our industry by continuing to focus on the quality of our services, maintaining our therapeutic expertise, and investing in our quality management system |
| Nevertheless, increased competition may lead to price and other forms of competition that could harm our business |
| Risks Related to Our Industry Our business could be harmed if the companies in the pharmaceutical and biotechnology industries to whom we offer our services reduce their research and development activities or reduce the extent to which they outsource clinical development |
| Our business depends upon the ability and willingness of companies in the pharmaceutical and biotechnology industries to continue to spend on research and development at rates close to or at historical levels and to outsource the services we provide |
| We are therefore subject to risks, uncertainties, and trends thataffect companies in these industries |
| For example, we have benefited to date from the increasing tendency of pharmaceutical and biotechnology companies to outsource both small and large clinical development projects |
| Conversely, mergers and acquisitions in the pharmaceutical and biotechnology industries could have an impact on a company’s continued ability to outsource such projects to CROs |
| Any general downturn in the pharmaceutical or biotechnology industries, any reduction in research and development spending by companies in these industries, or any expansion of their in-house development capabilities could materially harm our business, financial condition, and operating results |
| Our business and the businesses of our customers are subject to extensive regulation, and our results of operations could be harmed if regulatory standards change significantly or if we fail to maintain compliance with evolving, complex regulations |
| Laws and regulations regarding the development and approval of drug and biological products have become increasingly stringent in both the United States and foreign jurisdictions, resulting in a need for more complex and often larger clinical studies |
| We believe that these trends have created an increased demand for CRO services from which our business benefits |
| Human pharmaceutical products and biological products are subject to rigorous regulation by the US government (principally by the Food and Drug Administration, or FDA), and by foreign governments if products are tested or marketed abroad |
| A relaxation of the scope of regulatory requirements, such as 22 _________________________________________________________________ the introduction of simplified marketing applications for pharmaceuticals and biologics, could decrease the business opportunities available to us |
| In addition, because we offer services relating to the conduct of clinical trials and the preparation of marketing applications, we are required to comply with applicable regulatory requirements governing, among other things, the design, conduct, performance, monitoring, auditing, recording, analysis, and reporting of these trials |
| In the United States, the FDA governs these activities pursuant to the agency’s Good Clinical Practice, or GCP, regulations |
| A failure to maintain compliance with the GCP or other applicable regulations could lead to a variety of sanctions, including, among other things, and depending on the nature of the violation and the type of product involved, the suspension or termination of a clinical study, civil penalties, criminal prosecutions, or debarment from assisting in the submission of new drug applications, or NDAs |
| While we monitor our clinical trials to test for compliance with applicable laws and regulations in the United States and foreign jurisdictions in which we operate, and have adopted standard operating procedures that are designed to satisfy regulatory requirements, our business spans multiple regulatory jurisdictions with varying, complex regulatory frameworks, and therefore we cannot assure you that our systems will ensure compliance in every instance in the future |
| Circumstances beyond our control could cause the CRO industry to suffer reputational or other harm that could result in an industry-wide reduction in demand for CRO services, which could harm our business |
| Demand for our services may be affected by perceptions of our customers regarding the CRO industry as a whole |
| For example, other CROs could engage in conduct that could render our customers less willing to do business with us or any CRO Although to date no event has occurred causing industry-wide reputational harm, one or more CROs could engage in or fail to detect malfeasance, such as inadequately monitoring sites, producing inaccurate databases or analysis, falsifying patient records, and performing incomplete lab work, or take other actions that would reduce the confidence of our customers in the CRO industry |
| As a result, the willingness of pharmaceutical and biotechnology companies to outsource research and development services to CROs could diminish and our business could thus be harmed materially by events outside our control |
| If we incur liability for hazardous material contamination, our business would be harmed |
| Our clinical pharmacology unit conducts activities that have involved, and may continue to involve, the controlled use of hazardous materials and the creation of hazardous substances, including medical waste and other highly regulated substances |
| Although we believe that our safety procedures for handling the disposal of such materials comply with the standards prescribed by state and federal laws and regulations, our operations nevertheless pose the risk of accidental contamination or injury from these materials and the creation of hazardous substances, including medical waste and other highly regulated substances |
| In the event of such an accident, we could be held liable for damages and cleanup costs which, to the extent not covered by existing insurance or indemnification, could harm our business |
| In addition, other adverse effects could result from suchliability, including reputational damage resulting in the loss of additional business from certain clients |
| Our business could be materially harmed if we were required to pay damages beyond the level of any insurance coverage that may be in effect |
| To date, we have not been the subject of any investigations or claims related to the controlled use of hazardous materials and the creation of hazardous substances |
| Our services are subject to evolving industry standards and rapid technological changes |
| The markets for our services are characterized by rapidly changing technology, evolving industry standards and frequent introduction of new and enhanced services |
| To succeed, we must continue to introduce new services on a timely and cost-effective basis to meet evolving customer requirements, while achieving market acceptance for these new services |
| Additionally, we must continue to enhance our existing services and to successfully integrate new services with those already being offered |
| It is imperative that we respond to emerging industry standards and other technological changes |
| If we fail to make the necessary enhancements to our business, systems and products to keep pace with evolving industry standards, our competitive position and results of operations may suffer |
| 23 _________________________________________________________________ Our clinical research services create a risk of liability and, if we are required to pay damages or to bear the costs of defending any claim not covered by contractual indemnity or insurance, this could cause material harm to our business |
| Clinical research services involve the testing of new drugs, biologics, and devices on human volunteers |
| This testing creates risks of liability for personal injury, sickness or death of patients resulting from their participation in the study |
| These risks include, among other things, unforeseen adverse side effects, improper application or administration of a new drug, biologic, or device, and the professional malpractice of medical care providers |
| Many volunteer patients already are seriously ill and are at heightened risk of future illness or death |
| In connection with our provision of contract research services, we contract with physicians to serve as investigators in conducting clinical trials on human volunteers |
| Although we do not believe we are legally accountable for the medical care rendered by third party investigators, it is possible that we could be held liable for the claims and expenses arising from any professional malpractice of the investigators with whom we contract in the event of personal injury to or death of persons participating in clinical trials |
| We also could be held liable for errors or omissions in connection with the services we perform or for the general risks associated with our Phase I facility including, but not limited to, adverse reactions to the administration of drugs |
| Our business could be materially harmed if we were required to pay damages or bear the costs of defending any claim outside the scope of, or in excess of, the contractual indemnification provided by our customer that is beyond the level of any insurance coverage that may be in effect, or if an indemnifying party does not fulfill its indemnification obligations |
| Health care industry reform could reduce or eliminate our business opportunities |
| 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 |
| In addition, foreign governments may also undertake health care reforms in their respective countries |
| These reforms, if adopted, would make the development of new drugs less profitable for our customers, and could reduce their research and development budgets |
| Business opportunities available to us could decrease materially if the implementation of government health care reform adversely affects research and development expenditures by pharmaceutical and biotechnology companies |
| Risks Related to Our Common Stock The price of our common stock may fluctuate significantly, and you could lose all or part of your investment |
| The trading price of our common stock is likely to be volatile, and such volatility could prevent you from being able to sell your shares at or above the price you paid for your shares |
| The stock market, and the stock of companies in our industry in particular, has experienced volatility, and this volatility has often been unrelated to the operating performance of particular companies |
| Wide fluctuations in the trading price or volume of our shares of common stock could be caused by many factors, including factors relating to our business or to investor perception of our business (including changes in financial estimates and recommendations by financial analysts who follow us), but also factors relating to (or relating to investor perception of) the drug development services industry, the pharmaceutical and biotechnology industries, or the economy in general |
| Thus, the price of our common stock could fluctuate based upon factors that have little or nothing to do with our company, and the fluctuations could result in a material reduction in our stock price |
| The sale of a substantial number of our shares of common stock in the public market could reduce the market price of our shares, which in turn could negatively impact your investment in us |
| Future sales of a substantial number of shares of our common stock in the public market (or the perception that such sales may occur) could reduce our stock price and could impair our ability to raise capital through future sales of our equity securities |
| As of January 31, 2006, we have 22cmam934cmam871 shares of common stock issued and outstanding, of which 14cmam071cmam373 shares of our common stock are available for sale in the public market and an 24 _________________________________________________________________ additional 8cmam863cmam498 are available for sale in the public market at various times (subject, in some cases, to volume limitations under Rule 144) |
| In addition, stockholders that collectively own 3cmam591cmam718 shares of our common stock have registration rights with respect to their shares that may be exercised at any time, subject to certain limitations |
| We and our stockholders are able to sell our shares in the public market, subject to restrictions on shares held by affiliates |
| Sales of a substantial number of such shares (or the perception that such sales may occur) could cause our share price to fall |
| Our principal stockholders hold shares of our common stock in which they have a very large unrealized gain, and these stockholders may wish, to the extent they may permissibly do so, to realize some or all of that gain relatively quickly by selling some or all of their shares |
| We may also issue shares of our common stock from time to time as consideration for future acquisitions and investments |
| If any such acquisition or investment is significant, the number of shares that we may issue may in turn be significant |
| In addition, we may grant registration rights covering those shares in connection with any such acquisitions and investments |
| In addition, we may sell, or register to sell on a delayed or continuous basis under Rule 415, additional shares of our common stock or other securities to raise capital |
| We cannot predict the size of future issuances or the effect, if any, that they may have on the market price of our common stock |
| The issuance and sales of substantial amounts of common stock or other securities, or the perception that such issuances and sales may occur, could adversely affect the market price of our common stock |
| We have implemented certain provisions that could make any change in our board of directors or in control of our company more difficult |
| Our certificate of incorporation, our bylaws and Delaware law contain provisions, such as provisions authorizing, without a vote of stockholders, the issuance of one or more series of preferred stock, that could make it difficult or expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and board of directors even if such a transaction would be beneficial to our stockholders |
| We also have a staggered board of directors that could make it more difficult for stockholders to change the composition of our board of directors in any one year |
| These anti-takeover provisions could substantially impede the ability of public stockholders to change our management and board of directors |
| Our largest stockholders continue to have significant influence over us, and they may make decisions with which you disagree |
| Genstar Capital Partners III, LP, Baron Capital Group, Inc, Wasatch Advisors, Inc, FMR Corporation, Artisan Investment Corporation, and Waddell & Reed Financial beneficially own approximately 45dtta1prca of the outstanding shares of common stock (or approximately 43dtta1prca of the shares of common stock on a diluted basis) |
| If these stockholders choose to act in concert on any action requiring stockholder approval, they could have a significant influence on the outcome of such action |
| The interests of these current stockholders may conflict with your interests, and we cannot assure you that they will resolve any such conflict in a manner with which you agree |
| In addition, this concentration of ownership could have the effect of discouraging potential takeover attempts and may make attempts by stockholders to change our management more difficult |
| Because we typically have not paid dividends and do not anticipate paying dividends on our common stock for the indefinite future, you should not expect to receive dividends on shares of our common stock |
| We have no present plans to pay cash dividends to our stockholders and, for the indefinite future, intend to retain all of our earnings for use in our business |
| The declaration of any future dividends by us is within the discretion of our board of directors and will be dependent on our earnings, financial condition, and capital requirements, as well as any other factors deemed relevant by our board of directors |
| Although we paid a special dividend to our stockholders in January 2004, the dividend was an unusual event that we do not expect to recur |
| Accordingly, you should not expect to receive dividends on shares of our common stock |