Wednesday, February 20, 2013

Quintiles Files to Go Public: The Details Matter

Quintiles Files to Go Public:  The Details Matter

As you drive east on I-40 toward the RDU airport, you pass the headquarters of Quintiles, the world’s largest biopharmaceutical development services and commercial outsourcing company.  The company moved into the new building in 2009 and has been busy ever since preparing to issue its shares to the public.   A draft of the prospectus was filed with the SEC last week.  While it’s still missing some key information, the first draft has some interesting tidbits.

When it comes to corporate existence, Quintiles has experienced a bit of everything.  The company first went public in 1994.  Its stock soared on the back of a series of acquisitions and a rising over-the-counter market, and the company sold additional shares in 2005 and 2007.  After the NASDAQ collapsed in 2000, Quintile’s fortunes soured, and the company and its stock languished.  In 2003, the company’s Chairman and founder, Dennis Gillings, led a buyout of the company along with Equity One, now the private equity affiliate of JP Morgan.  After the transaction was completed, Equity One sold down a part of its investment to TPG and Temesak, the investment arm of Singapore. 

A New Music Man (2009)

Then in 2008, the company’s equity was restructured again.  Equity One’s interest was sold to a new consortium of private equity investors, including Bain Capital and 3i.  Throughout this period, Quintiles repeatedly refinanced its balance sheet and became ever more leveraged.  Nonetheless, Quintiles has become a substantially larger company than it was 10 years ago when it went private. 

In order to go public, Quintiles has taken a series of steps to prepare for the event.  Some of these actions are normal, albeit slightly disturbing to the average investor.  As we’ll see, at least a few of the activities are rather bizarre.  First and foremost, Quintiles has been paying out hefty dividends to the private equity investors to the tune of $924 million in the last three years.  If you invest in the public company, you shouldn’t expect any dividends.  According to the preliminary prospectus, Quintiles has incurred too much debt to warrant paying a dividend.

Second, the company has paid out $15.7 million in consulting fees to its equity owners in the past three years, including an estimated $3.7 million to Dr. Gillings.  There’s a blank in the preliminary prospectus, because the owners are going to get a multi-million dollar slug for terminating this arrangement.   It’s a bit weird for Dr. Gillings to be getting consulting fees, while at the same time drawing a $1million salary, plus bonuses, stock options, and all the other perquisites of a senior executive.

Third, a couple of the old pieces of the company will not be part of Quintiles.  The private equity investors and Dr. Gillings decided to separate Pharma Bio, which had entered into various financial and service arrangements with some of Quintile’s customers.  The revenues from these deals are highly variable, but also very profitable.  However, they won’t be part of the public company. In addition, Quintiles’ venture capital capability, Novaquest, was spun out of the company, although Quintiles is still on the hook for about $50 million in commitments.  The executives involved in these businesses were cashed out of Quintiles.  Dr. Gillings and the private equity investors will own these businesses outright.

Finally, there’s a bunch of personal business that had to be dealt with.  Dr. Gillings founded the business with his wife Joan, although her name does not appear anywhere in the prospectus.  She’s obliquely referred to as his “co-founder.”  The Gillings underwent a contentious divorce in 2010-2011 and the former Mrs. Gillings might have an interest in the outcome of the Quintiles IPO, as it appears that existing investors will be selling shares (this section of the prospectus is still blank).

Joan wasn’t the only family member involved in the business.  Dr. Gillings’ brother left the company at the end of the year with a $1.3 million termination settlement, after being paid about $400,000 per year as a senior vice president for digital products.  Meanwhile, Dr. Gillings’ son-in-law and his former stepson remain on the payroll.   Dr. Gillings has one more close relation involved in the business.  He will continue get $13,502 per hour for use of his aircraft.  In 2012, these payments amounted to $4.3 million.

Finally, there’s the bizarre relationship between Quintiles and HUYA, a biopharmaceutical company focused on China.  About a year before Dr. Gillings’ divorce proceeding, Quintiles made a $5 million investment for a 10% position in HUYA.  With the divorce looming, Quintiles entered into a $2.3 million cooperation agreement with HUYA.  Then as the Gillingses entered into a settlement, Quintiles sold the HUYA investment to Pharma Bio for $5 million, despite significant growth at HUYA.  Why is all of this so strange?  Last September, Dr. Gillings married Mireille Gingris, the chairman of HUYA.  Dr. Gillings, in addition to being Chairman of Quintiles, is a significant owner of HUYA.  To cap off this little escapade, Ms. Gingris was appointed to the Quintiles board just this month. 

While the dollar amounts are small, the HUYA transaction raises questions about the judgment of Dr. Gillings and the Quintiles board.  Whose interest will the board be serving?  The public investors or the private investors and Dr. Gillings.  There’s more to come.

CORRECTION:  This post mistakenly identified Dr. Gillings as President and CEO of HUYA.  In fact, his wife holds these positions.

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