Quintiles IPO would end millions in consulting fees for large shareholders

dranii@newsobserver.comFebruary 26, 2013 

The controlling shareholders of Quintiles, including co-founder and executive chairman Dennis Gillings, have gotten into the habit of paying themselves millions of dollars in consulting fees in recent years, including a total of $5.3 million in 2012.

Those fees will end if the world’s largest pharmaceutical services company successfully completes its plans for an initial public offering of common stock. But the large shareholders will receive a “termination fee” when that happens, according to documents filed with the Securities and Exchange Commission.

“I would think they charge termination fees because they can,” said Andy Silton, a retired money manager and former chief investment advisor for the North Carolina state pension fund. He also writes a blog called Meditations on Money Management.

The size of that termination fee hasn’t been disclosed. The SEC filing by the Durham-based company includes a blank space where the amount should go, but it should be revealed in a subsequent filing before the company goes public.

The shareholders, which includes five private equity firms and Quintiles, have collected a total of $15.7 million in “management service” fees over the past three years, according to the filing.

Approximately $3.6 million was paid during that three-year span to GF Management Co., which is controlled by Gillings.

It’s business as usual for private shareholders to charge consulting fees and then get a termination fee when the company goes public, with the termination fee typically amounting to “a small multiple” of the annual fee, Silton said. It’s all part of their formula for generating maximum returns on their investment.

The consulting fees to the large shareholders were in addition to $1.5 billion in dividends that have been issued to shareholders since 2008. Much of that money was borrowed. The bulk of those dividend payments went to Gillings and four private equity firms that collectively own about 94 percent of the business.

Gillings, who stepped aside as CEO in April but remains executive chairman, also received $6.4 million in salary, bonus and stock options in 2012.

Company spokesman Phil Bridges said he couldn’t comment on the consulting fees or other matters because the company’s pending IPO puts it in a “quiet period” under securities regulations.

Earlier this month Quintiles, which generated $3.7 billion in revenue last year, filed plans to raise $600 million from investors by going public. The company, which has more than 2,000 employees in the Triangle and 27,000 worldwide, is best-known for helping pharmaceutical and biotechnology companies test experimental drugs.

Even after it goes public, Gillings and the private equity firms would continue to own a majority of the company’s stock, which would make it a “controlled company.” That would exempt Quintiles from certain corporate governance requirements designed to protect shareholders, such as ensuring that a majority of the company’s board of directors are so-called independent directors.

Gillings family employment

Quintiles’ controlled-company status and its track record with regard to the controlling shareholders will be factored into the company’s stock price when it goes public, said John Fitzgibbon Jr., who tracks new stock offerings for IPOScoop.com.

“This is pretty straightforward,” Fitzgibbon said. “It’s out there. It’s in the open.”

Also in the open, courtesy of the company’s SEC filing, is Quintiles’ employment of Gillings’ relatives.

His former stepson, Paul Casey, is global head of cardiac safety services and received $532,348 in total compensation last year, not counting an annual bonus for 2012 that hasn’t yet been approved. And Dustin Gross, Gillings’ son-in-law and an associate investment director at the company, received $99,643 in salary last year and also will receive a not-yet-determined bonus for 2012.

Les Gillings, Dennis Gillings’ brother, received $356,383 in compensation last year as senior vice president of the digital patient unit. His employment was terminated in December, and in January he received $1.3 million in severance.

In addition, as previously reported, Gillings’ new wife, Mireille Gillings, just joined the board of directors this month. She is the founder and CEO of HUYA Bioscience International, a San Diego company focused on accelerating the development of drugs that originate in China.

Silton said the Gillings family connections and the money doled out in the past to the controlling shareholders raise an important question for prospective investors: “How is this company going to be governed?”

Ranii: 919-829-4877

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