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Quintiles Q2
Conference Call

Part 2

By Dale Wettlaufer (TMF Ralegh)

ALEXANDRIA, VA (August 27, 1999) -- This is part two of the Quintiles Transnational (Nasdaq: QTRN) Q2 conference call. The following are my notes from the conference call. Be aware that I do switch from direct quotations to paraphrasing or note-taking format.

The first part is the conclusion of remarks made by Chairman Dennis Gillings and the second part of the call is the opening remarks and beginning of financial details from the company's CFO.

Dennis Gillings, Ph.D.
Chairman & CEO

"Our third Quinternet development is the progress of Envoynet. We are seeing very positive response to our Web-enabled Envoynet offering. We have announced a substantial agreement with VHA this morning [July 21, 1999]... Envoynet allows VHA's 1,850 community-owned member organizations and more than 175,000 affiliated physicians to securely submit electronic claims, referral authorizations, and real-time verifications of patient eligibility to healthcare insurance companies and other payors. This agreement illustrates not only our Quinternet technology platform's strength, but also our payor connectivity, which is second to none and continues to expand. Also of significance, we have signed eight dental software vendors to Envoynet. These agreements give Envoy the exclusive right to process all of the vendors' dental Internet claims. In addition, Envoy has signed contracts with a specialty practice management organization having over 200 locations and also with a specialty payor having 1.4 million covered lives. These are brand new relationships."

"In addition to these three milestones regarding our Quinternet, I'd like to talk also about how our Quinternet drives our informatics capabilities. We have several developments that are gaining momentum. First, we have won a number of stand-alone informatics contracts. For example, one in antibiotic market share, another in drug utilization in managed care plans, another regarding concomitant medication use, and another in co-mobility accompanying the diagnosis for which a drug is prescribed. Second in this informatics feature of our Quinternet platform is our cross-selling into CRO [contract research organizations] and CSO [contract sales organizations] using informatics has gathered momentum extraordinarily quickly and may be explaining why our new business of over $1 billion is so strong. Currently, 14 specific contracts of total value of $150 million to $180 million in drug development and commercialization services are being driven by the informatics we can deliver to add value. This estimate of $150-180 million is not included in our $1 billion in new business."

"Third, Quintiles' medical communications service group has had a very successful first half of the year. We are benefiting here from the increasing trend I mentioned earlier of pharma companies realizing that an integrated program prepared by a single expert group beats buying the services separately. This is also driven by our strong informatics. Fourth in this informatics arena, several customers have great interest in our market research services. We are aware of four customers that are contemplating switching to Scott-Levin. This is an unusually large number at any one time... We do not know of any customers switching away from us. In addition, we have been awarded our largest market research contract to date which covers a wide range of market research activities and directly uses our Quinternet informatics platform as a feed-in."

"In summary, regarding the overall business climate, which I believe to be very fast-moving, we have two emerging but extraordinarily strong factors that are delivering ever-growing competitive advantages for us. The first is outsourcing in the pharma industry is fast becoming a strategic decision about partnering rather than a tactical one about one-off projects. Second, our Quinternet technology platform has made enormous progress and is driving our customers to the strategic decision of partnering with Quintiles. This is because our Quinternet technology provides a very broad base of service and information throughout healthcare and pharma. It is worldwide, it has the widest connectivity to physicians, payors, and pharma, and it is built on the combination of strong relationships enhanced by technology, and that connectivity relationships technology is vital to the healthcare sector."

Rachel R. Selisker, CFO

31% of the reported 34% increase in revenues for the quarter was internally generated rather than coming from acquisitions. Growth across all business segments.

Revenue and margin breakdown by segment:

Product development group: 43% revenue growth -- revenues of $243 million from $170 million in Q2 1998. Operating margin: 12.5%

Commercialization group: 19% revenue growth -- revenues of $147 million from $124 million in Q2 1998. Quintiles expects growth in this group to continue to accelerate over the rest of the year. Expect H2 1999 growth rate of 25% or more. Of new business signings that Dennis talked about, a big part of that did come from the commercialization group. Their new business signings were up 52% year-over-year during H1. 9.3%

Quinternet Group: 44% revenue growth -- revenues of $67 million from $46 million in Q2 1998. Of that 44% growth, Envoy itself grew 28% in revenues. Transaction growth during that period was 21%. 22.3%

Overall operating margin was 12.9% for Q2 1999. These are fully loaded operating margins. For the Quinternet group, this was the first quarter of including the Scott-Levin Group in this segment. The 22.3% margin reflects a combination of margins of SMG, Synergy, Envoy, and Scott-Levin. Also, the Scott-Levin transaction was a purchase and includes a good deal of goodwill amortization. Overall an "outstanding quarter" in terms of growth and margins. Noted Y2K spending for the quarter was $3.8 million. $2.7 million of which was internal spending and $1.1 million was external. They believe they are on-target and on-budget on Y2K.

Transaction costs during the quarter were $3.5 million, compared with $470,000 in Q2 98. Excluding transaction costs, tax rate was 35.7% compared with 36.4% last quarter.

Pro-formas for quarter reflect a dilutive EPS effect for the conversion of convertible securities. 3.5 million shares added to the sharecount, whereas in the past, conversion of shares underlying convertible securities would be an accretive event and therefore this hasn't shown up in diluted EPS calculations. Add back $1.1 million in interest, net of tax, for earnings attributable to common stock in diluted EPS calculation.

Cash flow statement items:

  • Acquired cash of $1 million through acquisitions
  • Generated net cash from operations of $9 million
  • Cap ex of $34 million
  • Generated $9 million in proceeds from stock issuances
  • $23 million in transaction costs relating to Envoy and PMSI transactions
Ending cash balance $354 million.

Q2-end balance sheet: Excel format, HTML format
Q1-end balance sheet: Excel format, HTML format

Have a good weekend -- continued on Monday.

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