| PDI INC ITEM 1A RISK FACTORS In addition to the other information provided in this report, you should carefully consider the following factors in evaluating our business, operations and financial condition |
| Additional risks and uncertainties not presently known to us, that we currently deem immaterial or that are similar to those faced by other companies in our industry or business in general, such as competitive conditions, may also impair our business operations |
| The occurrence of any of the following risks could have a material adverse effect on our business, financial condition or results of operations |
| Changes in outsourcing trends in the pharmaceutical and biotechnology industries could materially adversely affect our business, financial condition, results of operations and growth rate |
| Our business and growth depend in large part on demand from the pharmaceutical and life sciences industries for outsourced marketing and sales services |
| The practice of many companies in these industries has been to hire outside organizations like us to conduct large sales and marketing projects |
| However, companies may elect to perform these services internally for a variety of reasons, including the rate of new product development and FDA approval of those products, number of sales representatives employed internally in relation to demand for or the need to promote new and existing products, and competition from other suppliers |
| Recently, there has been a slow-down in the rate of approval of new products by the FDA and this trend may continue |
| If the pharmaceutical and life sciences industries reduce their tendency to outsource these projects, our business, financial condition, results of operations and growth rate could be materially adversely affected |
| 9 _________________________________________________________________ PDI, INC Annual Report on Form 10-K (Continued) Our service businesses depend on expenditures by companies in the life sciences industries |
| Our service revenues depend on promotional, marketing and sales expenditures by companies in the life sciences industries, including the pharmaceutical, MD&D and biotechnology industries |
| Promotional, marketing and sales expenditures by pharmaceutical manufacturers have in the past been, and could in the future be, negatively impacted by, among other things, governmental reform or private market initiatives intended to reduce the cost of pharmaceutical products or by governmental, medical association or pharmaceutical industry initiatives designed to regulate the manner in which pharmaceutical manufacturers promote their products |
| Furthermore, the trend in the life sciences industries toward consolidation may result in a reduction in overall sales and marketing expenditures and, potentially, a reduction in the use of contract sales and marketing services providers |
| Most of our service revenue is derived from a limited number of clients, the loss of any one of which could materially adversely affect our business, financial condition or results of operations |
| Our revenue and profitability depend to a great extent on our relationships with a limited number of large pharmaceutical companies |
| In 2005, we had three major clients that accounted for approximately 33dtta6prca, 21dtta7prca and 15dtta0prca, respectively, or a total of approximately 70dtta3prca of our service revenue |
| In 2004, our two major clients accounted for a total of approximately 63dtta0prca of our service revenue |
| We are likely to continue to experience a high degree of client concentration, particularly if there is further consolidation within the pharmaceutical industry |
| The loss or a significant reduction of business from any of our major clients could have a material adverse effect on our business, financial condition or results of operations |
| For example, in December 2004, we announced a reduction in the aggregate number of representatives that we deployed for AstraZeneca |
| This reduction decreased revenue generated from AstraZeneca in 2005 by approximately dlra45dtta8 million from revenues generated in 2004 |
| Further, as announced on February 28, 2006, AstraZeneca is terminating its contract sales force arrangement with us effective April 30, 2006 |
| The termination affects approximately 800 field representatives |
| The revenue impact is projected to be approximately dlra65 to dlra70 million in 2006 |
| Our service contracts are generally short-term agreements and are cancelable at any time, which may result in lost revenue and additional costs and expenses |
| Our service contracts are generally for a term of one to three years (certain of our operating entities have contracts of shorter duration) and many may be terminated by the client at any time for any reason |
| Additionally, certain of our clients have the ability to significantly reduce the number of representatives we deploy on their behalf |
| For example, as discussed above, as a result of the reduction in the number of representatives we deployed for AstraZeneca, we generated approximately dlra45dtta8 million less revenue from our AstraZeneca relationship in 2005 than we realized in 2004 |
| Further, as announced on February 28, 2006, AstraZeneca is terminating its contract sales force arrangement with us effective April 30, 2006 |
| The revenue impact is projected to be approximately dlra65 to dlra70 million in 2006 |
| The termination or significant reduction of a contract by one of our major clients not only results in lost revenue, but also typically causes us to incur additional costs and expenses |
| All of our sales representatives are employees rather than independent contractors |
| Accordingly, when a contract is significantly reduced or terminated, unless we can immediately transfer the related sales force to a new program, if permitted under the contract, we must either continue to compensate those employees, without realizing any related revenue, or terminate their employment |
| If we terminate their employment, we may incur significant expenses relating to their termination |
| The loss, termination or significant reduction of a large contract or the loss of multiple contracts could have a material adverse effect on our business, financial condition or results of operations |
| Product liability claims could harm our business |
| We could face substantial product liability claims in the event any of the pharmaceutical or medical device products we market now or in the future are alleged to cause negative reactions or adverse side effects or in the event any of these products causes injury, is alleged to be unsuitable for its intended purpose or is alleged to be otherwise defective |
| For example, we have been named in numerous lawsuits as a result of our detailing of Baycolâ on behalf of Bayer Corporation (Bayer) |
| Product liability claims, regardless of their merits, could be costly and divert managementapstas attention, or adversely affect our reputation and the demand for our services or products |
| We rely on contractual indemnification provisions with our clients to protect us against certain product liability related claims |
| There is no assurance that these provisions will be fully enforceable or that they will provide adequate protection against claims intended to be covered |
| We currently have product liability insurance in the aggregate amount of dlra5dtta0 million but we cannot assure that our insurance will be sufficient to cover fully all potential claims for which the aforementioned indemnification provisions do not protect against |
| Also, adequate insurance coverage might not be available in the future at acceptable costs, if at all |
| 10 _________________________________________________________________ PDI, INC Annual Report on Form 10-K (Continued) If we do not meet performance goals set in our incentive-based and revenue sharing arrangements, our profits could suffer |
| We sometimes enter into incentive-based and revenue sharing arrangements with pharmaceutical companies |
| Under incentive-based arrangements, we are typically paid a fixed fee and, in addition, have an opportunity to increase our earnings based on the market performance of the products being detailed in relation to targeted sales volumes, sales force performance metrics or a combination thereof |
| Additionally, certain of our service contracts may contain penalty provisions pursuant to which our fees may be significantly reduced if we do not meet certain performance metrics, for example number and timing of sales calls, physician reach, territory vacancies and/or sales representative turnover |
| Under revenue sharing arrangements, our compensation is based on the market performance of the products being detailed, usually expressed as a percentage of product sales |
| These types of arrangements transfer some market risk from our clients to us |
| In addition, these arrangements can result in variability in revenue and earnings due to seasonality of product usage, changes in market share, new product introductions, overall promotional efforts and other market related factors |
| If we pursue a strategy that includes copromotion and exclusive distribution arrangements, and/or licensing and brand ownership of products, we cannot assure you that we can successfully develop this business |
| We may in the future pursue a strategy which includes copromotion, distribution arrangements, and/or licensing and brand ownership of products |
| These types of arrangements can significantly increase our operating expenditures in the short-term |
| Typically, these agreements require significant “upfront” payments, minimum purchase requirements, minimum royalty payments, payments to third parties for production, inventory maintenance and control, distribution services and accounts receivable administration, as well as sales and marketing expenditures |
| In addition, particularly where we license or acquire products before they are approved for commercial use, we may be required to incur significant expense to gain and maintain the required regulatory approvals |
| However, regulatory approval does not ensure commercial success |
| As a result, our working capital balance and cash flow position could be materially and adversely affected until the products in question become commercially viable, if ever |
| The risks that we face in developing this segment of our business, if we choose to pursue it, may increase in proportion with: · the number and types of products covered by these types of agreements; · the applicable stage of the drug regulatory process of the products at the time we enter into these agreements; · the incidence of adverse patent and other intellectual property developments relating to our product portfolio; and · our control over the manufacturing, distribution and marketing processes |
| In the event that we pursue a strategy which includes the copromotion, distribution, and/or licensing and brand ownership of products, there is no assurance that we will be able to successfully implement this strategy |
| We may make acquisitions in the future which may lead to disruptions to our ongoing business |
| Historically, we have made a number of acquisitions and will continue to review new acquisition opportunities |
| If we are unable to successfully integrate an acquired company, the acquisition could lead to disruptions to our business |
| The success of an acquisition will depend upon, among other things, our ability to: · assimilate the operations and services or products of the acquired company; · integrate new personnel due to the acquisition; · retain and motivate key employees; · retain customers; and · minimize the diversion of management’s attention from other business concerns |
| In the event that the operations of an acquired business do not meet our performance expectations, we may have to restructure the acquired business or write-off the value of some or all of the assets of the acquired business, including goodwill and other intangible assets identified at time of acquisition |
| For example, during 2005, we wrote down goodwill and intangible assets associated with our MD&D business unit in the amount of dlra8dtta2 million and goodwill for our Select Access business unit in the amount of dlra3dtta3 million, both of which were acquired businesses |
| 11 _________________________________________________________________ PDI, INC Annual Report on Form 10-K (Continued) We, a current officer, and a former officer are defendants in a class action shareholder lawsuit which could divert our time and attention from more productive activities |
| Beginning on January 24, 2002, several purported class action complaints were filed in the US District Court for the District of New Jersey, against us and certain of our officers on behalf of persons who purchased our common stock during the period between May 22, 2001 and August 12, 2002 |
| On May 23, 2002 the court consolidated these suits into a single class action lawsuit and on August 22, 2005, in response to our motion, the court dismissed the complaint without prejudice |
| On October 21, 2005, the lead plaintiff filed a third consolidated and amended complaint |
| On December 21, 2005, we filed a motion to dismiss the third amended and consolidated complaint |
| On February 24, 2006, the lead plaintiff filed a memorandum of law in opposition to our motion to dismiss |
| We believe that meritorious defenses exist to the allegations asserted in this lawsuit and we intend to vigorously defend this action |
| Although we currently maintain director and officer liability insurance coverage, there is no assurance that we will continue to maintain such coverage or that any such coverage will be adequate to offset potential damages |
| Our failure, or that of our clients, to comply with applicable healthcare regulations could limit, prohibit or otherwise adversely impact our business activities |
| Various laws, regulations and guidelines established by government, industry and professional bodies affect, among other matters, the provision of, licensing, labeling, marketing, promotion, sale and distribution of healthcare services and products, including pharmaceutical products |
| In particular, the healthcare industry is governed by various federal and state laws pertaining to healthcare fraud and abuse, including prohibitions on the payment or acceptance of kickbacks or other remuneration in return for the purchase or lease of products that are paid for by Medicare or Medicaid |
| Sanctions for violating these laws include civil and criminal fines and penalties and possible exclusion from Medicare, Medicaid and other federal or state healthcare programs |
| Although we believe our current business arrangements do not violate these federal and state fraud and abuse laws, we cannot be certain that our business practices will not be challenged under these laws in the future or that a challenge would not have a material adverse effect on our business, financial condition or results of operations |
| Our failure, or the failure of our clients, to comply with these laws, regulations and guidelines, or any change in these laws, regulations and guidelines may, among other things, limit or prohibit our business activities or those of our clients, subject us or our clients to adverse publicity, increase the cost of regulatory compliance and insurance coverage or subject us or our clients to monetary fines or other penalties |
| Our industry is highly competitive and our failure to address competitive developments promptly will limit our ability to retain and increase our market share |
| Our primary competitors for sales and marketing services include in-house sales and marketing departments of pharmaceutical companies, other CSOs and medical education and marketing research providers |
| There are relatively few barriers to entry in the businesses in which we compete and, as the industry continues to evolve, new competitors are likely to emerge |
| Many of our current and potential competitors are larger than we are and have substantially greater capital, personnel and other resources than we have |
| Increased competition may lead to competitive practices that could have a material adverse effect on our market share, our ability to source new business opportunities, our business, financial condition or results of operations |
| Our stock price is volatile and could be further affected by events not within our control |
| In 2005, our stock traded at a low of dlra11dtta12 and a high of dlra22dtta26 |
| In 2004, our stock traded at a low of dlra18dtta84 and a high of dlra33dtta23 |
| The market for our common stock is volatile |
| The trading price of our common stock has been and will continue to be subject to: · volatility in the trading markets generally; · significant fluctuations in our quarterly operating results; · announcements regarding our business or the business of our competitors; · industry and/or regulatory developments; · changes in revenue mix; · changes in revenue and revenue growth rates for us and for our industry as a whole; and · statements or changes in opinions, ratings or earnings estimates made by brokerage firms or industry analysts relating to the markets in which we operate or expect to operate |
| 12 _________________________________________________________________ PDI, INC Annual Report on Form 10-K (Continued) Our quarterly revenues and operating results may vary, which may cause the price of our common stock to fluctuate |
| Our quarterly operating results may vary as a result of a number of factors, including: · commencement, delay, cancellation or completion of programs; · regulatory developments; · uncertainty related to compensation based on achieving performance benchmarks; · mix of services provided and /or mix of programs, ie, contract sales, medical education, marketing research; · timing and amount of expenses for implementing new programs and accuracy of estimates of resources required for ongoing programs; · timing and integration of acquisitions; · changes in regulations related to pharmaceutical companies; and · general economic conditions |
| In addition, in the case of revenue related to service contracts, we recognize revenue as services are performed, while program costs, other than training costs, are expensed as incurred |
| As a result, during the first two to three months of a new contract, we may incur substantial expenses associated with implementing that new program without recognizing any revenue under that contract |
| This could have a material adverse impact on our operating results and the price of our common stock for the quarters in which these expenses are incurred |
| For these and other reasons, we believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of future performance |
| Fluctuations in quarterly results could materially adversely affect the market price of our common stock in a manner unrelated to our long-term operating performance |
| We may require additional funds in order to implement our evolving business model |
| We may require additional funds in order to pursue other business opportunities or meet future operating requirements; develop incremental marketing and sales capabilities; and/or acquire other services businesses |
| We may seek additional funding through public or private equity or debt financing or other arrangements with collaborative partners |
| If we raise additional funds by issuing equity securities, further dilution to existing stockholders may result |
| In addition, as a condition to providing us with additional funds, future investors may demand, and may be granted, rights superior to those of existing stockholders |
| We cannot be sure, however, that additional financing will be available from any of these sources or, if available, will be available on acceptable or affordable terms |
| If adequate additional funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our growth strategies |
| If we are unable to attract key employees, we may be unable to support the growth of our business |
| Successful execution of our business strategy depends, in large part, on our ability to attract and retain qualified management, marketing and other personnel with the skills and qualifications necessary to fully execute our programs and strategy |
| Competition for talent among companies in the pharmaceutical industry is intense and we cannot assure you that we will be able to continue to attract or retain the talent necessary to support the growth of our business |
| Our business will suffer if we are unable to hire and retain key management personnel to fill critical vacancies |
| The success of our business also depends on our ability to attract and retain qualified senior management, and experienced financial executives who are in high demand and who often have competitive employment options |
| Currently, we have two significant vacancies in our senior management |
| Charles T Saldarini, our former chief executive officer and vice chairman of our board of directors resigned effective October 21, 2005 and has been replaced as chief executive officer on an interim basis by Larry Ellberger |
| Also, in August 2005, Bernard C Boyle, our chief financial officer, announced his intention to retire effective March 31, 2006 |
| We are currently engaged in an active search to fill these vacancies |
| Our failure to fill these positions with qualified individuals could have a material adverse effect on our business, financial condition or results of operations |
| 13 _________________________________________________________________ PDI, INC Annual Report on Form 10-K (Continued) Our business may suffer if we fail to attract and retain qualified sales representatives |
| The success and growth of our business depends on our ability to attract and retain qualified pharmaceutical sales representatives |
| There is intense competition for pharmaceutical sales representatives from CSOs and pharmaceutical companies |
| On occasion, our clients have hired the sales representatives that we trained to detail their products |
| We cannot be certain that we can continue to attract and retain qualified personnel |
| If we cannot attract and retain qualified sales personnel, we will not be able to expand our teams business and our ability to perform under our existing contracts will be impaired |
| Our controlling stockholder continues to have effective control of us, which could delay or prevent a change in corporate control that may otherwise be beneficial to our stockholders |
| John P Dugan, our chairman, beneficially owns approximately 35prca of our outstanding common stock |
| Dugan will be able to exercise substantial control over the election of all of our directors, and to determine the outcome of most corporate actions requiring stockholder approval, including a merger with or into another company, the sale of all or substantially all of our assets and amendments to our certificate of incorporation |
| We have anti-takeover defenses that could delay or prevent an acquisition and could adversely affect the price of our common stock |
| Our certificate of incorporation and bylaws include provisions, such as providing for three classes of directors, which are intended to enhance the likelihood of continuity and stability in the composition of our board of directors |
| These provisions may make it more difficult to remove our directors and management and may adversely affect the price of our common stock |
| In addition, our certificate of incorporation authorizes the issuance of "e blank check "e preferred stock |
| This provision could have the effect of delaying, deterring or preventing a future takeover or a change in control, unless the takeover or change in control is approved by our board of directors, even though the transaction might offer our stockholders an opportunity to sell their shares at a price above the current market price |