10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2005.

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from              to             .

Commission File Number 0-27570

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.

(Exact name of registrant as specified in its charter)

North Carolina	56-1640186
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

3151 South Seventeenth Street

Wilmington, North Carolina

(Address of principal executive offices)

28412

(Zip Code)

Registrant’s telephone number, including area code: (910) 251-0081

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 56,850,581 shares of common stock, par value $0.10 per share, as of April 25, 2005.

INDEX

	Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations for the Three Months Ended March 31, 2004 and 2005 (unaudited)	3
Consolidated Condensed Balance Sheets as of December 31, 2004 and March 31, 2005 (unaudited)	4
Consolidated Condensed Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2005 (unaudited)	5
Notes to Consolidated Condensed Financial Statements (unaudited)	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3. Quantitative and Qualitative Disclosures about Market Risk	31
Item 4. Controls and Procedures	33
Part II. OTHER INFORMATION
Item 6. Exhibits	34
Signatures	35

2

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

	Three Months Ended March 31,
	2004		2005
Net Revenue:
Development revenue	$	174,714	$	212,921
Discovery sciences revenue		7,548		12,860
Reimbursed out-of-pockets		13,018		18,273
Total net revenue		195,280		244,054
Direct Costs:
Development		88,210		108,330
Discovery sciences		1,566		1,765
Reimbursable out-of-pocket expenses		13,018		18,273
Total direct costs		102,794		128,368
Research and development expenses		1,286		8,821
Selling, general and administrative expenses		45,159		55,432
Depreciation		6,717		8,359
Amortization		325		288
Gain on exchange of assets		—		(5,144	)
Restructuring charges		505		—
Total operating expenses		156,786		196,124
Income from operations		38,494		47,930
Interest income, net		192		1,275
Other income, net		312		(95	)
Income before provision for income taxes		38,998		49,110
Provision for income taxes		14,234		13,489
Net income	$	24,764	$	35,621
Net income per share:
Basic	$	0.44	$	0.63
Diluted	$	0.44	$	0.62
Weighted average number of common shares outstanding:
Basic		56,155		56,758
Dilutive effect of stock options		434		771
Diluted		56,589		57,529

The accompanying notes are an integral part of these consolidated condensed financial statements.

3

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands)

	December 31, 2004		March 31, 2005
			(unaudited)
Assets
Current assets
Cash and cash equivalents	$	144,348	$	236,358
Short-term investments		105,020		—
Accounts receivable and unbilled services, net		265,067		268,408
Income tax receivable		6,321		—
Investigator advances		15,251		13,712
Prepaid expenses and other current assets		28,189		26,782
Deferred tax asset		10,867		11,597
Total current assets		575,063		556,857
Property and equipment, net		136,501		194,353
Goodwill		179,781		211,300
Investments		66,658		42,468
Intangible assets		3,895		3,607
Other assets		929		1,150
Long-term deferred tax asset		12,374		9,065
Total assets	$	975,201	$	1,018,800
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	12,863	$	15,029
Payables to investigators		43,726		49,847
Accrued income taxes		5,118		12,822
Other accrued expenses		101,714		95,047
Deferred tax liability		770		76
Unearned income		153,170		146,301
Current maturities of long-term debt and capital lease obligations		599		2,028
Total current liabilities		317,960		321,150
Long-term debt and capital lease obligations, less current maturities		6,371		7,323
Deferred rent and other		5,267		6,355
Accrued additional pension liability		9,923		9,779
Long-term deferred tax liability		370		1,108
Total liabilities		339,891		345,715
Shareholders’ equity
Common stock		5,662		5,681
Paid-in capital		293,200		298,763
Retained earnings		325,269		360,890
Accumulated other comprehensive income		11,179		7,751
Total shareholders’ equity		635,310		673,085
Total liabilities and shareholders’ equity	$	975,201	$	1,018,800

The accompanying notes are an integral part of these consolidated condensed financial statements.

4

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Three Months Ended March 31,
	2004			2005
Cash flows from operating activities:
Net income	$	24,764		$	35,621
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,042			8,647
Restructuring charges		505			—
Gain on exchange of assets		—			(5,144	)
Loss on disposition of property and equipment, net		520			85
Provision for doubtful accounts		50			50
(Benefit) provision for deferred income taxes		(2,410	)		2,695
Change in operating assets and liabilities, net of acquisitions		405			5,458
Net cash provided by operating activities		30,876			47,412
Cash flows from investing activities:
Purchases of property and equipment		(13,256	)		(58,432	)
Proceeds from sale of property and equipment		66			18
Purchases of available–for-sale investments		(182,864	)		(24,720	)
Maturities and sales of available-for-sale investments		182,476			129,740
Purchases of investments		(5,900	)		(5,101	)
Cash refunded related to business acquired		1,450			—
Net cash (used in) provided by investing activities		(18,028	)		41,505
Cash flows from financing activities:
Principal repayments of long-term debt		(85	)		(94	)
Repayment of capital leases obligation		(308	)		(423	)
Proceeds from exercise of stock options and employee stock purchase plan		3,636			4,835
Net cash provided by financing activities		3,243			4,318
Effect of exchange rate changes on cash and cash equivalents		467			(1,225	)
Net increase in cash and cash equivalents		16,558			92,010
Cash and cash equivalents, beginning of the period		60,677			144,348
Cash and cash equivalents, end of the period	$	77,235		$	236,358

The accompanying notes are an integral part of these consolidated condensed financial statements.

5

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies followed by Pharmaceutical Product Development, Inc. and its subsidiaries (collectively the “Company”) for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. We prepared these unaudited consolidated condensed financial statements in accordance with Rule 10-01 of Regulation S-X and, in management’s opinion, we have included all adjustments of a normal recurring nature necessary for a fair presentation. The accompanying consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The results of operations for the three-month period ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year or any other period. We derived the amounts on the December 31, 2004 consolidated condensed balance sheet from the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Use of estimates in the preparation of financial statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of consolidation

The accompanying unaudited consolidated condensed financial statements include the accounts and results of operations of the Company. All intercompany balances and transactions have been eliminated in consolidation.

Earnings per share

The computation of basic income per share information is based on the weighted average number of common shares outstanding during the period. The computation of diluted income per share information is based on the weighted average number of common shares outstanding during the period plus the effects of any dilutive common stock equivalents.

Reclassification

The Company has reclassified certain 2004 financial statement amounts to conform to the 2005 financial statement presentation.

6

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock-based compensation

The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” and Statement of Financial Accounting Standards No. 148, “Accounting for Stock Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123”, which require compensation expense to be disclosed in the notes based on the fair value of the options granted at the date of the grant. Had compensation cost for the Company’s stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method required by SFAS No. 123, the Company’s net income and diluted net income per common share would have been the pro forma amounts indicated below.

	Three Months Ended March 31,
(in thousands, except per share data)	2004			2005
Net income, as reported	$	24,764		$	35,621
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,311	)		(2,740	)
Pro forma net income	$	23,453		$	32,881
Net income per share:
Basic – as reported	$	0.44		$	0.63
Basic – pro forma	$	0.42		$	0.58
Diluted – as reported	$	0.44		$	0.62
Diluted – pro forma	$	0.41		$	0.57

Restructuring charges

In the first and second quarter of 2004, the Company recorded a $0.5 million and a $2.1 million restructuring charge, respectively, associated with exiting the Company’s chemistry facility in Research Triangle Park, North Carolina. These charges include lease payments and termination costs, net of sublease rentals, of approximately $2.1 million and a loss on sale of assets used in the chemistry services business of approximately $0.5 million. The lease termination liability will be paid over the remaining life of the lease, which terminates in 2015. During the three months ended March 31, 2004 and 2005, lease payments and related expenses of $0 and $0.3 million were paid, respectively. At March 31, 2005, the Company recorded the remaining restructuring liability of $0.9 million in the consolidated condensed balance sheet as a component of other accrued expenses and deferred rent and other. The loss on sale of assets was a non-cash item and was charged to expense during the three months ended March 31, 2004.

Inventory

Inventories, which consist principally of laboratory supplies, are valued at the lower of cost (first-in, first-out method) or market. Inventories totaling $2.2 million and $2.4 million as of December 31, 2004 and March 31, 2005, respectively, were included in prepaid expenses and other current assets.

7

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent accounting pronouncements

In November 2003, during discussions on Emerging Issues Task Force, or EITF 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, the EITF reached a consensus that requires quantitative and qualitative disclosures for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. In September 2004, FASB Staff Position EITF Issue 03-1-1 was issued to delay the effective date for the measurement and recognition guidance. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The Company has adopted the disclosure requirements of EITF 03-01.

In October 2004, the EITF finalized its consensuses on EITF 04-01, “Accounting for Preexisting Relationships between the Parties to a Business Combination”. The consensuses in EITF 04-01 provide guidance on how to account for the settlement of a preexisting relationship and how it affects the accounting of the business combination. EITF 04-01 is effective for business combinations consummated and goodwill impairment tests performed in reporting periods beginning after October 13, 2004. In February 2005, the Company recorded a gain on the termination of a preexisting lease arrangement as part of the acquisition of SurroMed, Inc.’s biomarker business in accordance with the guidance in EITF 04-01. See Note 2.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share-Based Payment” that will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the fair value on the date of grant of the equity or liability instruments issued. In addition, liability instruments will be remeasured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. In March 2005, the SEC issued Staff Accounting Bulletin 107 which describes the SEC staff’s expectations in determining the assumptions that underlie the fair value estimates and discusses the interaction of SFAS No. 123 (Revised) with certain existing SEC guidance. In April 2005, the SEC deferred the effective date for SFAS No. 123 (Revised) to the beginning of the first fiscal year that begins after June 15, 2005. The Company is currently evaluating the impact of the adoption of this statement on the Company’s financial statements.

In December 2004, the FASB issued SFAS No. 153, “Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29”. SFAS No. 153 replaces the exception from fair value measurement included in APB Opinion No. 29 for nonmonetary exchanges of similar productive assets with a general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement will be applied prospectively and is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe adoption of this statement will have a material impact on the Company’s financial statements.

In October 2004, the EITF finalized its consensuses on EITF 04-10, “Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds”. This consensus states that operating segments that do not meet the quantitative thresholds can be aggregated only if aggregation is consistent with the objective and basic principles of SFAS No. 131, the segments have similar economic characteristics, and the segments share sufficient other aggregation criteria. EITF 04-10 is effective for fiscal years ending after October 13, 2004. The adoption of this consensus did not have a material impact on the Company’s financial statements.

8

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

2. ACQUISITIONS

In February 2005, the Company completed its acquisition of substantially all of the assets of SurroMed, Inc.’s biomarker business. The assets acquired by the Company consist of equipment, fixtures, leasehold improvements, intellectual property and contracts. The biomarker business supports drug discovery and drug development by identifying biomarkers using biological, chemical and bioinformatics expertise and technologies. The acquisition expands the Company’s business by adding biomarker discovery and patient sample analysis capability to the services offered by the Company. In exchange for the assets, the Company surrendered to SurroMed all shares of preferred stock of SurroMed it held. As additional consideration for the acquisition, the Company assumed approximately $3.4 million of SurroMed liabilities under capital leases and certain additional operating liabilities and agreed to guarantee repayment of up to $1.5 million under a SurroMed bank loan. In accordance with the requirements of FASB Statement No. 5, “Accounting for Contingencies”, as clarified by FASB Interpretation No. 45, the Company has recorded a liability in the amount of $150,000 for the estimated fair value of the obligation it has assumed under this guarantee. The Company recognized a pre-tax gain on exchange of assets of $5.1 million, primarily related to the $4.9 million gain on the termination of a preexisting facility lease arrangement with SurroMed in accordance with EITF 04-01, “Accounting for Preexisting Relationships between the Parties to a Business Combination”. The fair value of the leasing arrangement was determined based on the discounted cash flows of the difference between the future required rental payments under the lease agreement and the current market rate for similar facilities. The results of operations are included in the Company’s consolidated condensed statement of operations as of and since February 1, 2005, the effective date of the acquisition. This biomarker business is now part of the Discovery Sciences segment of the Company.

This acquisition was accounted for using the purchase method of accounting, utilizing appropriate fair value techniques to allocate the purchase price based on the estimated fair values of the assets acquired and liabilities assumed. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in the Company’s consolidated condensed balance sheet as of the effective date of the acquisition.

The total purchase price for the acquisition was allocated to the estimated fair value of assets acquired and liabilities assumed as set forth in the following table:

(in thousands)
Condensed balance sheet:
Current assets	$	196
Property and equipment, net		8,891
Deferred rent and other		(742	)
Current liabilities		(3,485	)
Long-term liabilities		(2,267	)
Value of identifiable intangible assets:
Goodwill		32,853
Total	$	35,446

These purchase price allocations for the acquisition were based on preliminary estimates, using available information and making assumptions management believed were reasonable. The purchase price allocations have not been finalized as the Company is still obtaining and validating information relating to certain operating assets and liabilities. Goodwill will be evaluated annually as required by SFAS 142. Goodwill related to SurroMed is expected to be deductible for tax purposes.

9

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

2. ACQUISITIONS (continued)

The unaudited pro forma results from operations for the Company assuming the acquisition was consummated as of January 1, 2004 and 2005 were as follows:

	Three Months Ended March 31,
(in thousands, except per share data)	2004		2005
Total revenue	$	197,155	$	244,716
Net income	$	23,489	$	35,419
Net income per share:
Basic	$	0.42	$	0.62
Diluted	$	0.42	$	0.62

The above amounts are based upon certain assumptions and estimates. The Company believes these assumptions and estimates are reasonable, but they do not reflect any benefit from economies that might be achieved from combined operations. Pro forma adjustments were made to income tax benefit, increasing net income by $0.7 million and $0.1 million for the three-month periods ended March 31, 2004 and 2005, respectively. These adjustments are reflected in the above table. The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisition taken place at the beginning of the period indicated or of future results of operations of the Company.

3. ACCOUNTS RECEIVABLE AND UNBILLED SERVICES

Accounts receivable and unbilled services consisted of the following:

(in thousands)	December 31, 2004			March 31, 2005
Billed	$	183,765		$	176,761
Unbilled		85,404			95,582
Provision for doubtful accounts		(4,102	)		(3,935	)
	$	265,067		$	268,408

4. PROPERTY AND EQUIPMENT

Property and equipment, stated at cost, consisted of the following:

(in thousands)	December 31, 2004			March 31, 2005
Land	$	7,392		$	10,221
Buildings and leasehold improvements		45,493			48,260
Construction in progress and software under development		21,649			34,226
Furniture and equipment		99,778			137,139
Computer equipment and software		86,367			94,305
		260,679			324,151
Less accumulated depreciation and amortization		(124,178	)		(129,798	)
	$	136,501		$	194,353

In February 2005, the Company acquired a Dassault Falcon 900EX aircraft for $30.5 million in cash. The Company intends to use the aircraft for corporate purposes. The Company financed the acquisition from available cash.

10

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

4. PROPERTY AND EQUIPMENT (continued)

Property and equipment under capital leases, stated at cost, consisted of the following:

(in thousands)	March 31, 2005
Leasehold improvements	$	824
Computer equipment and software		656
Furniture and equipment		1,849
		3,329
Less accumulated depreciation and amortization		(55	)
	$	3,274

As of December 31, 2004, the Company did not have any property and equipment under capital lease. The property and equipment under capital lease as of March 31, 2005 was acquired by the Company in the acquisition of SurroMed’s biomarker business.

5. GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for the twelve months ended December 31, 2004 and the three months ended March 31, 2005, by operating segment, were as follows:

(in thousands)	Development			Discovery		Total
Balance as of January 1, 2004	$	157,461		$	20,615	$	178,076
Changes in goodwill recorded during the period for prior year acquisitions (finalization of purchase price adjustments)		(699	)		—		(699	)
Translation adjustments		2,404			—		2,404
Balance as of December 31, 2004		159,166			20,615		179,781
Goodwill recorded during the period for current year acquisitions		—			32,853		32,853
Translation adjustments		(1,334	)		—		(1,334	)
Balance as of March 31, 2005	$	157,832		$	53,468	$	211,300

Information regarding the Company’s other intangible assets follows:

	As of December 31, 2004						As of March 31, 2005
(in thousands)	Carrying Amount		Accumulated Amortization		Net		Carrying Amount		Accumulated Amortization		Net
Backlog and customer relationships	$	2,733	$	2,381	$	352	$	2,733	$	2,423	$	310
Patents		280		271		9		263		257		6
License and royalty agreements		5,000		1,466		3,534		5,000		1,709		3,291
Total	$	8,013	$	4,118	$	3,895	$	7,996	$	4,389	$	3,607

The Company amortizes all intangible assets on a straight-line basis, based on estimated useful lives of three to five years for backlog and customer relationships, five years for patents and three to ten years for license and royalty agreements. The weighted average amortization period is 4.1 years for backlog, 5.0 years for patents, approximately 6.4 years for license and royalty agreements and approximately 6.1 years for all intangibles collectively.

11

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

5. GOODWILL AND INTANGIBLE ASSETS (continued)

Amortization expense for the three months ended March 31, 2004 and 2005 was $0.3 million. Estimated amortization expense for the next five years is as follows:

(in thousands)
2005 (remaining 9 months)	$	833
2006		606
2007		362
2008		333
2009		300

6. SHORT-TERM INVESTMENTS AND INVESTMENTS

Short-term investments, which are composed of available-for-sale securities, and Investments consisted of the following:

(in thousands)	December 31, 2004		March 31, 2005
Short-term investments:
Preferred stock	$	48,225	$	—
State and municipal securities		51,850		—
Other debt securities		4,945		—
Total short-term investments	$	105,020	$	—
Cost-basis investments:
SurroMed, Inc.	$	29,007	$	—
Syrrx, Inc.		25,000		25,000
Accentia Biopharmaceuticals, Inc.		4,771		9,707
Spotlight Health, Inc.		1,230		1,230
Oriel Therapeutics, Inc.		1,800		1,800
Other equity investments		250		415
Total cost-basis investments		62,058		38,152
Marketable equity securities:
BioDelivery Sciences International, Inc.		2,850		2,498
Chemokine Therapeutics Corp.		1,750		1,818
Total marketable equity securities		4,600		4,316
Total investments	$	66,658	$	42,468

Short-term investments

At December 31, 2004, the Company’s short-term investments consisted of Auction Rate Securities, or ARS. ARS generally have long-term stated maturities of 20 to 30 years. However, these securities have economic characteristics of short-term investments due to a rate-setting mechanism and the ability to liquidate them through a Dutch auction process that occurs on pre-determined intervals of less than 90 days. As such, these investments are classified as short-term investments. The Company’s short-term investments were classified as available-for-sale securities due to management’s intent regarding these securities. As of December 31, 2004, there were no unrealized gains or losses associated with these investments and the fair market value equaled the adjusted cost. At March 31, 2005, the Company no longer had any short-term investments.

The gross realized (losses)/gains on available-for-sale securities were $42,000 and $(17,000) in the three months ended March 31, 2004 and 2005, respectively, determined on a specific identification basis.

12

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

6. SHORT-TERM INVESTMENTS AND INVESTMENTS (continued)

Investments

The Company has equity investments in publicly traded entities. Investments in publicly traded entities are classified as available-for-sale securities and are measured at market value. The Company records net unrealized gains or losses associated with investments in publicly traded entities as a component of shareholders’ equity until they are realized or an other-than-temporary decline has occurred. The market value of the Company’s equity investments in publicly traded entities is based on the closing price as quoted by the applicable stock exchange or market at the end of the reporting period. As of December 31, 2004 and March 31, 2005, gross unrealized gains were $1.6 million and $1.3 million, respectively, and there were no gross unrealized losses for both periods. The Company’s equity investments are classified as long-term assets due to management’s intent to hold these securities for more than 12 months.

The Company also has investments in privately held entities in the form of equity and convertible debt instruments that are not publicly traded and for which fair values are not readily determinable. The Company records all of its investments in private entities under the cost method of accounting. The Company assesses the net realizable value of these entities on a quarterly basis to determine if there has been a decline in the fair value of these entities, and if so, if the decline is other than temporary. This quarterly review includes an evaluation of, among other things, the market condition of the overall industry, historical and projected financial performance, expected cash needs and recent funding events. The impairment analysis requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the fair value of the investment.

In January 2004, the Company purchased 5.0 million shares of Accentia Biopharmaceuticals, Inc. Series E convertible preferred stock for $5.0 million. At that time, the Company also received a Class A and Class B warrant, each to purchase up to an additional 5.0 million shares of Series E convertible preferred stock for $1.00 per share. The Company received dividends on its Series E convertible preferred stock in excess of Accentia’s earnings in the first quarter of 2005 and for the full year of 2004 and thus recorded these as a reduction of cost of the investment in Accentia. In January 2005, the Company exercised the Class A warrant for the purchase of an additional 5.0 million shares of Series E convertible preferred stock for $5.0 million. The Class B warrant will expire on the earlier of January 7, 2006 or the effective date of a registration statement for the public sale of Accentia common stock in a qualifying initial public offering. The Company owned approximately 13.4% of the outstanding capital stock of Accentia as of March 31, 2005. Accentia is a privately held, specialty biopharmaceutical company that focuses on commercializing targeted therapeutics in the respiratory, oncology and critical care areas. In February 2005, Accentia filed a registration statement with the SEC for its proposed initial public offering of common stock. Accentia proposes to sell in this public offering, in addition to shares for its own account, up to $12.0 million of common stock issuable to the Company upon conversion of 5.0 million shares of the Series E convertible preferred stock held by the Company.

In November 2003, the Company became a limited partner in A. M. Pappas Life Science Ventures III, LP, a venture capital fund. The Pappas Fund was established for the purpose of making investments in equity securities of privately held companies in the life sciences, healthcare and technology industries. The Company has committed to invest up to an aggregate of approximately $2.5 million in the Pappas Fund. No capital call can exceed 10% of the Company’s aggregate capital commitment, and no more than two-thirds of the Company’s commitment could be called prior to May 2005. As such, the Company anticipates that its aggregate investment will be made through a series of future capital calls over the next several years. Capital calls through March 31, 2005 were $165,000. The Company’s capital commitment will expire in May 2009.

In March 2005, Takeda Pharmaceutical Company Limited completed its acquisition of 100% of the equity of Syrrx, Inc. The Company owned $25.0 million in preferred stock of Syrrx. Takeda paid the Company $25.0 million in April 2005 for this preferred stock. Syrrx is now known as Takeda San Diego, Inc.

13

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

7. COMPREHENSIVE INCOME

Comprehensive income consisted of the following:

(in thousands)	Three Months Ended March 31,
	2004			2005
Net income, as reported	$	24,764		$	35,621
Other comprehensive income (loss):
Cumulative translation adjustment		(440	)		(2,992	)
Change in fair value of hedging transaction, net of taxes of $0 and $48, respectively		(912	)		(89	)
Reclassification adjustment for hedging results included in direct costs, net of taxes of $0 and $29, respectively		(480	)		(63	)
Unrealized gain (loss) on investments, net of taxes of $0		662			(284	)
Total other comprehensive loss		(1,170	)		(3,428	)
Comprehensive income	$	23,594		$	32,193

Accumulated other comprehensive income consisted of the following:

(in thousands)	December 31, 2004			March 31, 2005
Translation adjustment	$	14,903		$	11,911
Minimum pension liability, net of tax		(5,753	)		(5,753	)
Fair value on hedging transaction, net of tax		413			261
Unrealized gain on investment		1,616			1,332
	$	11,179		$	7,751

8. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In January 2004, the Company began entering into foreign exchange forward and option contracts that are designated and qualify as cash flow hedges under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”. Changes in the fair value of the effective portion of these outstanding forward and option contracts are recognized in accumulated other comprehensive income, or OCI. These amounts are reclassified from OCI and recognized in earnings when either the forecasted transaction occurs or it becomes probable that the forecasted transaction will not occur.

Changes in the ineffective portion of a derivative instrument are recognized in earnings in the current period. Effectiveness for forward cash flow hedge contracts is measured by comparing the fair value of the forward contract to the change in the forward value of the anticipated transaction. The fair market value of the hedged exposure is presumed to be the market value of the hedge instrument when critical terms match. Ineffectiveness in 2004 and 2005 was not significant.

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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

8. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (continued)

The Company has significant international revenues and purchase transactions and related receivables and payables denominated in non-functional currencies at the Company’s foreign subsidiaries. As a result, the Company purchased currency option and forward contracts as cash flow hedges to reduce or eliminate certain foreign currency exposures that can be identified and quantified. Pursuant to its foreign exchange risk hedging policy, the Company may hedge anticipated and recorded transactions and the related receivables and payables denominated in non-functional currencies using forward foreign exchange rate contracts and foreign currency options. Foreign currency derivatives are used only to meet the Company’s objective of minimizing the variability in the Company’s operating results arising from foreign currency exchange rate movements. The Company does not enter into derivative financial instruments for speculative or trading purposes. Hedging contracts are measured at fair value using dealer quotes and mature within twelve months from their inception.

The Company’s hedging contracts are primarily intended to protect against the impact of changes in the value of the U.S. dollar against other currencies and its impact on operating results. Accordingly, for forecasted transactions, non-U.S. dollar functional subsidiaries incurring expenses in foreign currencies hedge U.S. dollar revenue contracts. OCI associated with hedges of foreign currency revenue is reclassified into revenue upon recognition of the forecasted transaction in the statement of operations. All values reported in OCI at March 31, 2005 will be reclassified to earnings within twelve months. At March 31, 2005, the face amount of the foreign exchange contracts designated as cash flow hedges was $33.3 million.

The Company also enters into foreign currency forward contracts to hedge against changes in the fair value of monetary assets and liabilities denominated in a non-functional currency. These derivative instruments are not designated as hedging instruments; therefore, changes in the fair value of these contracts are recognized immediately in other income, net as an offset to the changes in the fair value of the monetary assets or liabilities being hedged. At March 31, 2005, the face amount of these contracts was $26.1 million.

At March 31, 2005, the fair value of the Company’s foreign currency derivative portfolio was $380,000 recorded as a component of prepaid expenses and other current assets and $87,000 recorded as a component of other accrued expenses.

9. INCOME TAXES

The effective tax rate for the first quarter of 2005 was 27.5%. The effective tax rate was positively impacted by a $3.7 million reduction in the valuation allowance provided for the deferred tax asset relating to a capital loss carryforward due to the recognition of capital gains for both the SurroMed transaction and the $10.0 million dapoxetine new drug application milestone. This reduction in the valuation allowances decreased the effective tax rate by 7.5%.

The Company records current and deferred income tax expense related to its foreign operations to the extent those earnings are taxable. Historically, no provision has been made for the additional taxes that would result from the distribution of earnings of foreign subsidiaries because those earnings were expected to be reinvested permanently. The American Jobs Creation Act of 2004, (the “Act”) introduced a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer. No provision is being made in the first quarter of 2005 relating to this matter because the Company is currently evaluating the effect of the new Act on its plan for these undistributed foreign earnings. The Company expects to complete this evaluation by the end of June 2005. The cumulative amount of undistributed retained earnings of foreign subsidiaries for which no provision has been made was $50.4 million as of December 31, 2004 and $58.6 million as of March 31, 2005. The income tax effect of repatriating these earnings is not estimable at this time.

15

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

10. PENSION PLAN

Pension costs are determined under the provisions of Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions”, and related disclosures are determined under the provisions of Statement of Financial Accounting Standards No. 132 (Revised 2003), “Employers’ Disclosures about Pensions and other Postretirement Benefits”.

The Company has a separate contributory defined benefit plan for its qualifying United Kingdom employees employed by the Company’s U.K. subsidiaries. This pension plan was closed to new participants as of December 31, 2002. The benefits for the U.K. Plan are based primarily on years of service and average pay at retirement. Plan assets consist principally of investments managed in a mixed fund.

Pension costs for the U.K. Plan included the following components:

(in thousands)	Three Months Ended March 31,
	2004			2005
Service cost	$	313		$	304
Interest cost		439			525
Expected return on plan assets		(368	)		(438	)
Amortization of transition asset amount		(4	)		(2	)
Amortization of net loss		158			155
Net periodic pension cost	$	538		$	544

For the three months ended March 31, 2005, the Company made contributions of $0.5 million and anticipates contributing an additional $1.4 million to fund this plan during the remainder of 2005.

11. COMMITMENTS AND CONTIGENCIES

The Company currently maintains insurance for risks associated with the operation of its business, provision of professional services, and ownership of property. These policies provide coverage for a variety of potential losses, including loss or damage to property, bodily injury, general commercial liability, professional errors and omissions, and medical malpractice. The Company’s retentions and deductibles associated with these insurance policies range from $0.25 million to $0.5 million.

The Company is self-insured for health insurance for employees located within the United States. The Company maintains stop-loss insurance on a “claims made” basis for expenses in excess of $0.25 million per member per year. As of December 31, 2004 and March 31, 2005, the Company maintained a reserve of approximately $3.6 million and $4.3 million, respectively, included in other accrued expenses on the consolidated condensed balance sheets, to cover open claims and estimated claims incurred but not reported.

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PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

11. COMMITMENTS AND CONTIGENCIES (continued)

In April 2000, the Company made an investment in Spotlight Health, Inc. The Company subsequently entered into an agreement to guarantee a $2.0 million revolving line of credit that is now being provided to Spotlight Health by Bank of America. Indebtedness under the line of credit is unsecured and subject to traditional covenants relating to financial ratios. This credit facility is scheduled to expire on June 30, 2005, at which time any outstanding balance would be due. As of March 31, 2005, Spotlight Health had $2.0 million outstanding under this credit facility. In accordance with the requirements of FASB Statement No. 5, “Accounting for Contingencies”, as clarified by FASB Interpretation No. 45, the Company has recorded a liability in the amount of $0.2 million for the estimated fair value of the obligation the Company has assumed under this guarantee. The Company reviews the financial statements of Spotlight Health on a quarterly basis to determine if it has sufficient financial resources to continue operations. Future events and circumstances might adversely affect Spotlight Health’s financial condition and Spotlight Health might not be in the position to repay the facility, in which case Bank of America might attempt to collect against the Company on its guarantee.

In February 2005, the Company acquired substantially all of SurroMed’s assets related to its biomarker business. As part of this acquisition, the Company agreed to guarantee repayment of up to $1.5 million under a SurroMed bank loan with a maturity date of December 31, 2006. In accordance with the requirements of FASB Statement No. 5, “Accounting for Contingencies”, as clarified by FASB Interpretation No. 45, the Company has recorded a liability in the amount of $150,000 for the estimated fair value of the obligation it has assumed under this guarantee.

In November 2003, the Company entered into an agreement with Syrrx, Inc. to jointly develop and commercialize human dipeptidyl peptidase IV, or DPP IV, inhibitors as drug products for the treatment of type 2 diabetes and other major human diseases. The Company is obligated to provide preclinical and clinical development resources and expertise for the collaboration, and to fund the majority of preclinical and clinical studies through Phase IIb development of selected DPP IV inhibitors. The Company and Syrrx agreed to share equally the costs of Phase III development. In addition, the Company agreed to make milestone payments up to $17.5 million to Syrrx for each collaboration product upon the occurrence of certain clinical and regulatory events. In September 2004, the Company filed an investigational new drug application for one DPP IV inhibitor and the Phase I clinical study for that inhibitor commenced in late October 2004. In the fourth quarter of 2004, the Company expensed the first milestone payment to Syrrx of $2.5 million as a result of the commencement of the Phase I studies. These studies were completed in March 2005 and the Phase II studies were commenced in April. The Company expensed the milestone payment of $2.5 million relating to the commencement of the Phase II studies in the second quarter of 2005. The remaining milestone payments will be expensed when the event triggering payment of the milestone occurs. In the event the parties are successful in obtaining approval to market a drug product under the collaboration, the parties will share equally the profits from drug sales. In March 2005, Takeda Pharmaceutical Company Limited completed its acquisition of 100% of the equity of Syrrx, which is now known as Takeda San Diego, Inc. At this time, the Company does not know what impact, if any, this acquisition will have on the DPP IV collaboration with Takeda San Diego.

In April 2003, the Company made an equity investment in Chemokine Therapeutics Corp. In connection with this investment, Chemokine granted the Company an exclusive option to license a proprietary peptide for a one-time license fee of $1.5 million. The Company is waiting for the results of an on-going Phase I study to determine if it will exercise its option. If the Company chooses to exercise this option, it will be obligated to pay the license fee plus the costs for future development work on the peptide. Chemokine also granted the Company the right to first negotiate a license to other peptides.

In November 2003, the Company became a limited partner in A. M. Pappas Life Science Ventures III, LP, a venture capital fund. The Pappas Fund was established for the purpose of making investments in equity securities of privately held companies in the life sciences, healthcare and technology industries. The Company has committed to invest up to an aggregate of approximately $2.5 million in the Pappas Fund. No capital call can exceed 10% of the

17

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

11. COMMITMENTS AND CONTINGENCIES (continued)

Company’s aggregate capital commitment and no more than two-thirds of the Company’s commitment could be called prior to May 2005. As such, the Company anticipates that its aggregate investment will be made through a series of future capital calls over the next several years. Capital calls through March 31, 2005 were $165,000. The Company’s capital commitment will expire in May 2009.

In the fourth quarter of 2003, the Company acquired from Eli Lilly & Company the patents for the compound dapoxetine for development in the field of genitourinary disorders. This compound is currently licensed to ALZA Corporation, a subsidiary of Johnson & Johnson, and is being developed for premature ejaculation. Under the terms of the agreement with Lilly, the Company paid Lilly $65.0 million in cash and agreed to pay Lilly a royalty of 5% on annual net sales of dapoxetine in excess of $800 million. Dapoxetine has not been approved for sale in the United States or any foreign country.

As of March 31, 2005, the Company had liabilities of $4.9 million for certain unsettled matters in connection with tax positions taken in the Company’s tax returns that include interpretations of applicable income tax laws and regulations. Such amounts are based on management’s expectation regarding the ultimate tax treatment and outcome of these matters. The Company believes it is unlikely that the resolution of these matters will have a material adverse effect on the Company’s financial position or results of operations.

In January 2005, the Company acquired approximately 7.5 acres of property located in downtown Wilmington, North Carolina, on which the Company plans to construct a new headquarters building. The total purchase price for the land was approximately $2.8 million. In connection with the sale of the property, the seller, Almont Shipping Company, refinanced existing liens on the property with the proceeds of an $8.0 million loan from Bank of America, N.A. This loan will mature in January 2006 and is secured by a lien on substantially all of Almont’s assets, including an approximately 30-acre tract of land adjacent to the tract the Company acquired. This loan is also secured by a guarantee from the Company. In accordance with the requirements of FASB Statement No. 5, “Accounting for Contingencies”, as clarified by FASB Interpretation No. 45, the Company has recorded a liability in the amount of $0.8 million for the estimated fair value of the obligation the Company has assumed under this guarantee. Almont’s obligation to reimburse the Company in the event the Company is required to pay any sums to Bank of America under the guarantee is also secured by a lien on substantially all of Almont’s assets. As a part of this transaction, Almont granted the Company an option to purchase all or a portion of the adjacent 30-acre tract of land at an agreed upon price per acre. The option will expire on January 31, 2007.

Under most of the agreements for Development Group services, the Company agrees to indemnify and defend the sponsor against third-party claims based on the Company’s negligence or willful misconduct. Any successful claims could have a material adverse effect on the Company’s financial condition, results of operations and future prospects.

In the normal course of business, the Company is a party to various claims and legal proceedings. In addition to other pending claims, the Company is currently in litigation with a former client that has sued the Company for breach of contract and tortious acts in conducting a clinical trial. That former client is claiming that it does not owe the Company the remaining amounts due under the contract and is seeking other damages from the Company’s alleged breach of contract and tortious acts. The Company records a reserve for these litigation matters when an adverse outcome is probable and the amount of the potential liability is reasonably estimable. Although the ultimate outcome of these matters is currently not determinable, management of the Company, after consultation with legal counsel, does not believe that the resolution of these matters will have a material effect upon the Company’s financial condition, results of operations or cash flows for an interim or annual period.

18

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

12. BUSINESS SEGMENT DATA

Revenue by principal business segment is separately stated in the consolidated condensed financial statements. Income from operations and identifiable assets by principal business segment were as follows:

	Three Months Ended March 31,
(in thousands)	2004		2005
Income from operations:
Development	$	35,482	$	41,847
Discovery sciences		3,012		6,083
Total	$	38,494	$	47,930
	December 31, 2004		March 31, 2005
Identifiable assets:
Development	$	879,123	$	905,811
Discovery sciences		96,078		112,989
Total	$	975,201	$	1,018,800

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is provided to increase understanding of, and should be read in conjunction with, our consolidated condensed financial statements and accompanying notes. In this discussion, the words “PPD”, “we”, “our” and “us” refer to Pharmaceutical Product Development, Inc., together with its subsidiaries where appropriate.

Forward-looking Statements

This Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These statements relate to future events or our future financial performance. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performances, expectations, predictions, assumptions and other statements that are not statements of historical facts. In some cases, you can identify forward-looking statements by words such as “might”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “intend”, “potential” or “continue”, or the negative of these terms, or other comparable terminology. These statements are only predictions. These statements rely on a number of assumptions and estimates that could be inaccurate and that are subject to risks and uncertainties. Actual events or results might differ materially due to a number of factors, including those listed in “Potential Volatility of Quarterly Operating Results and Stock Price” below. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Company Overview

We are a leading global provider of drug discovery and development services and products to pharmaceutical, biotechnology and medical device companies. Our corporate mission is to help clients maximize the return on their research and development investments. We offer broad therapeutic expertise, advanced technologies and extensive resources for drug discovery and drug and device development. In addition to providing discovery through post-market services, we also offer our clients compound partnering opportunities.

We have been in the drug development business for more than 19 years. Our development services include preclinical programs and Phase I to Phase IV clinical development services. We have extensive clinical trial experience across a multitude of therapeutic areas and various parts of the world, including regional, national and global studies. In addition, for drugs that have received approval for market use, we also offer post-market support services such as product launch services, patient compliance programs, disease registry programs, and medical communications programs for consumer and healthcare providers on product use and adverse events.

With more than 7,100 professionals worldwide, we have provided services to 41 of the top 50 pharmaceutical companies in the world as ranked by 2003 healthcare research and development spending, in addition to our work with leading biotechnology and medical device companies. We believe that we are one of the world’s largest providers of drug development services to pharmaceutical, biotechnology and medical device companies based on 2004 annual net revenues generated from contract research organizations.

Building on our outsourcing relationship with pharmaceutical and biotechnology clients, we established our discovery services business in 1997. After restructuring the Discovery Sciences segment in 2003 and 2004, this business now primarily focuses on preclinical evaluations of anticancer therapies and compound partnering arrangements associated with the development and commercialization of potential drug products. We have developed a risk-sharing research and development model to help pharmaceutical and biotechnology clients develop compounds. Through collaborative arrangements based on this model, we assist our clients’ research and evaluate the development and commercial potential for compounds at various stages of development. In February 2005, we completed the acquisition of a biomarker business. This acquisition will expand our discovery sciences business by adding biomarker discovery and patient sample analysis capability to the services offered by us.

We believe that our integrated drug discovery and development services offer our clients a way to identify and develop successful drugs more quickly and cost-effectively. We also use our proprietary informatics technology to support our development services. In addition, because we are positioned globally, we are able to accommodate the multinational drug discovery and development needs of our customers. As a result of having these core areas of expertise in discovery and development, we can provide integrated services across the entire drug development spectrum. For more detailed information on PPD, see our Annual Report on Form 10-K for the year ended December 31, 2004.

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Executive Overview

Because our revenues are dependent on a relatively small number of industries and clients, we closely monitor the market for our services. For a discussion of the trends affecting our market, see “Item 1. Business—Trends Affecting the Drug Discovery and Development Industry” in our Annual Report on Form 10-K for the year ended December 31, 2004.

While we cannot predict the demand for CRO services in the remainder of 2005, we believe the overall historical market drivers for our industry are intact. To grow authorizations in the remainder of 2005, we plan to continue to focus on our business development efforts, including increasing the percentage of successful proposals and the delivery of timely, high quality services to our clients. We believe there are several specific opportunities for growth in the remainder of 2005. We currently conduct a significant amount of government-sponsored research and plan to continue our efforts to win new opportunities in this market. Our Latin American and European Phase II through IV units had an excellent 2004 and first quarter of 2005 and we believe there are opportunities for continued growth in these areas. We have also experienced an increase in the demand for our Phase I services, so we expanded our Phase I clinic in Austin, Texas to 300 beds to enhance our ability to service large, complex studies. This expansion was completed in April 2005 and the new Phase I unit is in operation. In 2004 and the first quarter of 2005, the demand for our bioanalytical and GMP services increased and we have expanded our GMP laboratory facilities and invested in new equipment to meet this increased demand. Finally, we also believe the demand for our post-marketing development services will continue to grow.

We review various metrics, including period-to-period growth in backlog, new authorizations, cancellation rates, revenue, margins and earnings, to evaluate our financial performance. In the first quarter of 2005, we had new authorizations of $331.3 million, an increase of 20.0% over the first quarter of 2004. The cancellation rate for the first quarter of 2005 was 15% compared to 22% in the full year of 2004. On a net basis, authorizations were up 26% in the first quarter of 2005 compared to the same period in 2004. Backlog grew to $1.3 billion as of March 31, 2005, up 16% over March 31, 2004. Backlog by client type as of March 31, 2005 was 54% pharmaceutical, 34% biotech and 12% government/other. Backlog by client type as of December 31, 2004 was 58% pharmaceutical, 28% biotech and 14% government/other. This change in the composition of our backlog reflects an increase in new authorizations from both large and small biotech clients. Net revenue by client type for the quarter ended March 31, 2005 was 63% pharmaceutical, 28% biotech and 9% government/other. Top therapeutic areas by net revenue for the quarter ended March 31, 2005 were anti-infective/anti-viral, oncology, central nervous system, circulatory/cardiovascular and endocrine/metabolic. For a detailed discussion of our revenue, margins, earnings and other financial results for the quarter ended March 31, 2005, see “Results of Operations – Three Months Ended March 31, 2005 versus Three Months Ended March 31, 2004” below.

Capital expenditures for the quarter ended March 31, 2005 totaled approximately $58.4 million. Capital expenditures included $30.5 million for our new corporate airplane and $8.6 million related to leasehold improvements to the new clinic in Austin, Texas. The majority of the remaining capital expenditures included spending on software, computer hardware and additional scientific equipment for our Phase I and laboratory units. In addition to investing in our growing business, we are also focused on improving the efficiency of our operations by streamlining training matrices and clinical procedural documents, decreasing the number of documents needed for study initiation, centralizing regulatory document collection and rolling out a new clinical trial management system.

In February 2005, we acquired substantially all of the assets of SurroMed, Inc.’s biomarker business. This acquisition expands our discovery business by adding biomarker discovery and patient sample analysis to the discovery services offered by us. Our Discovery Sciences segment also includes our compound collaboration arrangements. These collaborations allow us to leverage our resources and global drug development expertise to create new opportunities for growth and to share the risks and potential rewards of drug development. For a background discussion of our compound partnering arrangements, see “Item 1. Business – Our Services – Our Discovery Sciences Group – Compound Partnering Programs” in our Annual Report on Form 10-K for the year ended December 31, 2004.

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In the first quarter of 2005, we made significant progress on two important collaborations. First, in February 2005, the FDA accepted the dapoxetine new drug application for filing and we received the $10.0 million payment from ALZA Corporation for this milestone in March. Secondly, with regard to the DPP IV collaboration with Takeda San Diego (formerly Syrrx, Inc.), we completed the Phase Ib study in patients for the first DPP IV inhibitor in March 2005 and initiated the Phase II program for that inhibitor in April. We also commenced the Phase I first in man study for the second DPP IV inhibitor in April 2005.

In the first quarter of 2005, we also elected to terminate the implitapide program for various reasons and are in the process of winding down these studies and our collaboration with Bayer A.G. With regard to our collaboration with Chemokine Therapeutics Corp. regarding its proprietary peptide for possible use as a blood recovery agent, we are waiting on the results of the Phase I study before deciding whether to exercise our option to license this peptide.

As a result of these arrangements and the progression of our pipeline, we expect to continue to incur significant R&D expense during the remainder of 2005. Furthermore, in addition to progressing our existing collaborations, we will continue to evaluate opportunities for new collaborations and investments that we believe will help us achieve our mid- to long-term growth objectives.

Acquisitions

In February 2005, we completed our acquisition of substantially all of the assets of SurroMed, Inc.’s biomarker business. The assets acquired by us consist of equipment, fixtures, leasehold improvements, intellectual property and contracts. The biomarker business supports drug discovery and drug development by identifying biomarkers using biological, chemical and bioinformatics expertise and technologies. The acquisition expands our business by adding biomarker discovery and patient sample analysis capability to the services offered by us. In exchange for the assets, we surrendered to SurroMed for cancellation all shares of preferred stock of SurroMed we held. As additional consideration for the acquisition, we assumed approximately $3.4 million of SurroMed liabilities under capital leases and certain additional operating liabilities and agreed to guarantee repayment of up to $1.5 million under a SurroMed bank loan. We recognized a pre-tax gain on the exchange of assets of $5.1 million. The biomarker business is now part of the Discovery Sciences segment.

We accounted for this acquisition using the purchase method of accounting, utilizing appropriate fair value techniques to allocate the purchase price based on the estimated fair values of the assets acquired and liabilities assumed. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in our consolidated condensed balance sheet as of the effective date of the acquisition. For further details regarding this acquisition, see Note 2 to the Notes to Consolidated Financial Statements.

Investments

In January 2004, we purchased 5.0 million shares of Accentia Biopharmaceuticals, Inc. Series E convertible preferred stock for $5.0 million. At that time, we also received a Class A and Class B warrant, each to purchase up to an additional 5.0 million shares of Series E convertible preferred stock for $1.00 per share. In January 2005, PPD exercised the Class A warrant of Accentia and purchased an additional 5.0 million shares of Series E convertible preferred stock for $5.0 million. In February 2005, Accentia filed a registration statement with the SEC for its proposed initial public offering of common stock. Accentia proposes to sell in this public offering, in addition to shares for its own account, up to $12.0 million of common stock issuable to us upon conversion of 5.0 million shares of the Series E convertible preferred stock held by us.

In March 2005, Takeda Pharmaceutical Company Limited completed its acquisition of 100% of the equity of Syrrx, Inc. We owned $25.0 million in preferred stock of Syrrx. Takeda paid us $25.0 million in April 2005 for our preferred stock in Syrrx. For further details regarding investments, see Note 6 to the Notes to Consolidated Financial Statements.

Restructuring Charges

In the first quarter and second quarter of 2004, we recorded a $0.5 million and $2.1 million restructuring charge, respectively, associated with exiting our chemistry facility in Research Triangle Park, North Carolina. These charges include lease payments and termination costs, net of sublease rentals, of approximately $2.1 million and a loss on sale of assets used in our chemistry services of approximately $0.5 million. The lease termination liability will be paid over the remaining life of the lease, which terminates in 2015.

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New Business Authorizations and Backlog

New business authorizations, which are sales of our services, are added to backlog when we enter into a contract or letter of intent or receive a verbal commitment. Authorizations can vary significantly from quarter to quarter, and contracts generally have terms ranging from several months to several years. We recognize revenue on these authorizations as services are performed. Our new authorizations for the three months ended March 31, 2004 and 2005 were $276.0 million and $331.3 million, respectively.

Our backlog consists of new business authorizations for which the work has not started but is anticipated to begin in the near future, and contracts in process that have not been completed. As of March 31, 2005, the remaining duration of the contracts in our backlog ranged from one month to 174 months with an average duration of 27.4 months. Amounts included in backlog represent future revenue and exclude revenue that we have previously recognized. Once work begins on a project included in backlog, net revenue is recognized over the life of the contract. However, there can be no assurance that our backlog will ever be recognized as revenue. Our backlog as of March 31, 2004 and 2005 was $1.16 billion and $1.35 billion, respectively.

Results of Operations

Revenue Recognition

We record revenue from fixed-price contracts on a proportional performance basis in our Development Group. To measure performance on a given date, we compare direct costs incurred through that date to estimated total contract direct costs. We believe this is the best indicator of the performance of the contractual obligations because the costs relate primarily to the amount of labor incurred to perform the service. Changes to the estimated total contract direct costs result in a cumulative adjustment to the amount of revenue recognized. For time-and-materials contracts in both our Development Group and Discovery Sciences Group, we recognize revenues as hours are worked, multiplied by the applicable hourly rate. For our Phase I and laboratory businesses, we recognize revenues from unitized contracts as subjects or samples are tested, multiplied by the applicable unit price.

In connection with the management of multi-site clinical trials, we pay, on behalf of our customers, fees to investigators and test subjects as well as other out-of-pocket costs for items such as travel, printing, meetings and couriers. Our clients reimburse us for these costs. As required by EITF 01-14, amounts paid by us as a principal for out-of-pocket costs are included in direct costs as reimbursable out-of-pocket expenses and the reimbursements we receive as a principal are reported as reimbursed out-of-pocket revenue. In our statements of operations, we combine amounts paid by us as an agent for out-of-pocket costs with the corresponding reimbursements, or revenue, we receive as an agent. During the three months ended March 31, 2004 and 2005, fees paid to investigators and other fees we paid as an agent and the associated reimbursements were approximately $59.9 million and $69.8 million, respectively.

Most of the contracts for our Development Group can be terminated by our clients either immediately or after a specified period following notice by the client. These contracts typically require payment to us of expenses to wind down a study, fees earned to date, and in some cases, a termination fee or some portion of the fees or profit that we could have earned under the contract if it had not been terminated early. Therefore, revenue recognized prior to cancellation does not generally require a significant adjustment upon cancellation. If we determine that a loss will result from the performance of a fixed-price contract, the entire amount of the estimated loss is charged against income in the period in which such determination is made.

The Discovery Sciences Group also generates revenue from time to time in the form of milestone payments in connection with licensing of compounds. We only recognize milestone payments as revenue if the specified milestone is achieved and accepted by the customer, payment received and continued performance of future research and development services related to that milestone are not required.

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Recording of Expenses

We generally record our operating expenses among the following categories:

• direct costs;

• research and development;

• selling, general and administrative;

• depreciation and

• amortization.

Direct costs consist of appropriate amounts necessary to carry out the revenue and earnings process, and include direct labor and related benefit charges, other costs directly related to contracts, an allocation of facility and information technology costs, and reimbursable out-of-pocket expenses. Direct costs, as a percentage of net revenue, tend to and are expected to fluctuate from one period to another as a result of changes in labor utilization and the mix of service offerings involved in the hundreds of studies being conducted during any period of time.

Research and development, or R&D, expenses consist primarily of patent expenses, labor and related benefit charges associated with personnel performing internal research and development work, supplies associated with this work, consulting services and an allocation of facility and information technology costs.

Selling, general and administrative, or SG&A, expenses consist primarily of administrative payroll and related benefit charges, sales, advertising and promotional expenses, recruiting and relocation expenses, administrative travel, an allocation of facility and information technology costs, and costs related to operational employees performing administrative tasks.

Depreciation consists of depreciation costs recorded on a straight-line method, based on estimated useful lives of 40 to 50 years for buildings, five years for laboratory equipment, two to five years for software, computers and related equipment, and five to ten years for furniture and equipment, except for airplanes, which we depreciate over 30 years. We depreciate leasehold improvements over the shorter of the life of the relevant lease or the useful life of the improvement. We depreciate property under capital leases over the life of the lease or the service life, whichever is shorter.

Amortization consists of amortization costs recorded on intangible assets on a straight-line method over the life of the intangible assets.

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Three Months Ended March 31, 2005 Versus Three Months Ended March 31, 2004

The following table sets forth amounts from our consolidated condensed financial statements along with the dollar and percentage change for the three months ended March 31, 2005 compared to the three months ended March 31, 2004.

	Three Months Ended March 31, (unaudited)					$ Inc (Dec)			% Inc (Dec)
(in thousands, except per share data)	2005			2004
Net revenue:
Development revenue	$	212,921		$	174,714	$	38,207		21.9	%
Discovery sciences revenue		12,860			7,548		5,312		70.4
Reimbursed out-of-pockets		18,273			13,018		5,255		40.4
Total net revenue		244,054			195,280		48,774		25.0
Direct costs:
Development		108,330			88,210		20,120		22.8
Discovery sciences		1,765			1,566		199		12.7
Reimbursable out-of-pocket expenses		18,273			13,018		5,255		40.4
Total direct costs		128,368			102,794		25,574		24.9
Research and development expenses		8,821			1,286		7,535		585.9
Selling, general and administrative expenses		55,432			45,159		10,273		22.8
Depreciation		8,359			6,717		1,642		24.5
Amortization		288			325		(37	)	(11.4	)
Gain on exchange of assets		(5,144	)		—		(5,144	)
Restructuring charges		—			505		(505	)
Income from operations		47,930			38,494		9,436		24.5
Interest and other income, net		1,180			504		676		134.1
Income before taxes		49,110			38,998		10,112		25.9
Provision for income taxes		13,489			14,234		(745	)	(5.2	)
Net income	$	35,621		$	24,764	$	10,857		43.8	%
Net income per diluted share	$	0.62		$	0.44	$	0.18		40.9

Total net revenue increased $48.8 million to $244.1 million in the first quarter of 2005. The increase in total net revenue resulted primarily from an increase in our Development Group revenue and the $10.0 million milestone payment from ALZA Corporation related to the filing of the new drug application, or NDA, for dapoxetine in the first quarter of 2005. The Development Group’s operations generated net revenue of $212.9 million, which accounted for 87.2% of total net revenue for the first quarter of 2005. The 21.9% increase in the Development Group’s net revenue was primarily attributable to an increase in the level of global CRO Phase II through IV services we provided in the first quarter of 2005 as compared to the first quarter of 2004.

The Discovery Sciences Group generated net revenue of $12.9 million in the first quarter of 2005, an increase of $5.3 million from the first quarter of 2004. The increase in the Discovery Sciences net revenue was mainly attributable to the $10.0 million milestone payment related to the filing of the dapoxetine NDA. In 2004, we received a $5.0 million payment from ALZA in connection with an amendment to the dapoxetine out-license agreement.

Total direct costs increased $25.6 million to $128.4 million in the first quarter of 2005 primarily as the result of an increase in the Development Group direct costs. Development Group direct costs increased $20.1 million to

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$108.3 million in the first quarter of 2005. The primary reason for this increase was an increase in personnel costs of $12.4 million. Personnel costs increased due to hiring additional employees in our global CRO Phase II through IV division and increased costs in our foreign operations due to the weakening of the U.S. dollar. The remaining $7.7 million of this increase in Development direct costs primarily consisted of increased facility costs related to the increase in personnel and increased subcontractor costs to support increased revenue.

Discovery Sciences direct costs increased $0.2 million to $1.8 million in the first quarter of 2005. The higher costs in the first quarter of 2005 related primarily to additional direct costs related to our acquisition of the biomarker business from SurroMed.

Gross margin from the Development segment was 49.1% in the first quarter of 2005 compared to 49.5% in the first quarter of 2004. The decrease is due to the relocation of the Phase I clinic in Austin, Texas and lower revenues from MRL, our specialty central laboratory.

R&D expenses increased $7.5 million to $8.8 million in the first quarter of 2005. R&D expenses increased as a result of increased spending in connection with our existing compound partnering arrangements. We expect to continue to incur significant R&D expenses in 2005 in connection with our existing compound partnering arrangements.

SG&A expenses increased $10.3 million to $55.4 million in the first quarter of 2005. As a percentage of total net revenue, SG&A expenses decreased to 22.7% in the first quarter of 2005 compared to 23.1% in the first quarter of 2004. The increase in SG&A expenses includes additional personnel costs of $5.8 million. The increase in personnel costs related to training costs for new personnel, higher levels of operations infrastructure to manage direct personnel and changes in utilization levels. The increase in SG&A costs also includes an additional $1.4 million in recruiting costs to hire additional personnel and an increase of $1.3 million in travel costs due to training initiatives for new and existing operations personnel and increased travel related to additional personnel in administrative functions.

Depreciation increased $1.6 million to $8.4 million in the first quarter of 2005. The increase was related to the depreciation of the property and equipment we acquired to accommodate our growth. Capital expenditures were $58.4 million in the first quarter of 2005. Capital expenditures included $30.5 million for our new corporate airplane and $8.6 million related to leasehold improvements to the new clinic in Austin, Texas. The majority of the remaining capital expenditures included spending on software, computer hardware, and additional scientific equipment for our Phase I and laboratory units.

Operating income increased $9.4 million to $47.9 million in the first quarter of 2005. As a percentage of net revenue, operating income decreased slightly to 19.6% of net revenue in the first quarter of 2005 from 19.7% in the first quarter of 2004. Operating income in the first quarter of 2005 included a $5.1 million gain on exchange of assets associated with the acquisition of SurroMed, Inc.’s biomarker business. Operating income in the first quarter of 2004 included a $0.5 million in restructuring charge associated with exiting our chemistry facility in Research Triangle Park, North Carolina. Operating income in the first quarter of 2005 was also negatively impacted by approximately $1.4 million due to the weakening of the U.S. dollar relative to the euro, British pound and Brazilian real. During the first quarter of 2005, we recorded a foreign currency hedging gain of $93,000, resulting in a net impact to operating income of $1.3 million attributable to foreign currency transactions. Although these currency movements increased net revenue in the aggregate, the negative impact on operating income is attributable to dollar-denominated contracts for services rendered in countries other than the United States. In these cases, revenue is not impacted by the weakening of the U.S. dollar, but the costs associated with performing these contracts, which are paid in local currency, are negatively impacted when translated into U.S. dollars.

Our provision for income taxes decreased $0.7 million to $13.5 million in the first quarter of 2005. Our effective income tax rate for the first quarter of 2005 was 27.5% compared to 36.5% for the first quarter of 2004. The effective tax rate was positively impacted by a $3.7 million reduction in our valuation allowance provided for the deferred tax asset relating to a capital loss carryforward due to the recognition of capital gains for both the SurroMed transaction and the dapoxetine NDA milestone. This reduction in the valuation allowances decreased the effective tax rate by 7.5%. The remaining difference in our effective rates for the first quarter of 2005 compared to the first quarter of 2004 is due to the change in the geographic distribution of our pretax earnings among locations with varying tax rates.

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Net income of $35.6 million in the first quarter of 2005 represents an increase of $10.9 million from $24.8 million in the first quarter of 2004. Net income per diluted share of $0.62 in the first quarter of 2005 represents a 40.9% increase from net income per diluted share of $0.44 in the first quarter of 2004. Net income per diluted share for the first quarter of 2005 included $0.07 per share, net of tax, for the gain on exchange of assets associated with the acquisition of SurroMed’s biomarker business.

Liquidity and Capital Resources

As of March 31, 2005, we had $236.4 million of cash and cash equivalents. Our expected primary cash needs on both a short- and long-term basis are for capital expenditures, including our new corporate headquarters, expansion of services, possible acquisitions, geographic expansion, working capital and other general corporate purposes. We have historically funded our operations and growth, including acquisitions, with cash flow from operations, leasing arrangements, borrowings and sales of our stock. We invest our cash and cash equivalents in financial instruments that are rated A or better by Standard & Poor’s or Moody’s, and earn interest at market rates.

In the first quarter of 2005, our operating activities provided $47.4 million in cash as compared to $30.9 million for the same period last year. The increase in cash flow from operations is primarily due to a $10.9 million increase in net income, partially offset by a non-cash gain on exchange of assets of $5.1 million, a non-cash increase in provision for deferred income taxes of $5.1 million and an increase in cash related to changes in operating assets and liabilities of $5.5 million as compared to an increase of $0.4 million in the first quarter of 2004. The increase related to changes in operating assets and liabilities primarily consisted of an increase in current income taxes of $15.2 million and an increase in payables to investigators of $6.4 million partially offset by a decrease in unearned income of $7.5 million, an increase in receivables and unbilled services of $4.9 million and a decrease in accounts payable and other accrued expenses of $5.1 million.

In the first quarter of 2005, we generated $41.5 million in cash from investing activities. The net cash provided by purchases, maturities and sales of available-for-sale investments of $105.0 million was partially offset by investments of $5.1 million and capital expenditures of $58.4 million. We expect our capital expenditures for the remainder of 2005 to be approximately $65.0 million to $70.0 million. This estimate includes 2005 construction costs of $30.0 million to $35.0 million for the new corporate headquarters building in Wilmington, North Carolina which we estimate will be completed in late 2006. The majority of the remaining anticipated capital expenditures will relate to equipment for our Phase I and laboratory units, and information technology enhancement and expansion.

In the first quarter of 2005, our financing activities provided $4.3 million in cash, as net proceeds from stock option exercises and purchases under our employee stock purchase plan totaling $4.8 million were partially offset by $0.4 million in repayments of capital lease obligations.

Working capital as of March 31, 2005 was $235.7 million, compared to $257.1 million at December 31, 2004. The decrease in working capital was due primarily to a decrease in cash and short-term investments of $13.0 million, a decrease in income tax receivable of $6.3 million, an increase of payables to investigators of $6.1 million, and a increase of accrued income taxes of $7.7 million, partially offset by a decrease in other accrued expenses of $6.7 million and a decrease in unearned income of $6.9 million. The number of days’ revenue outstanding in accounts receivable and unbilled services, net of unearned income, also known as DSO, was 32.2 and 40.0 days as of March 31, 2005 and March 31, 2004, respectively. We calculate DSO by dividing accounts receivable and unbilled services less unearned income by average daily gross revenue for the period presented. Over the past three years, our year-to-date DSO has fluctuated between 32.2 days and 43.2 days. We expect DSO will fluctuate in the future depending on the mix of contracts performed within a quarter, the level of investigator advances and unearned income, and our success in collecting receivables.

In July 2004, we renewed our $50.0 million revolving credit facility with Bank of America, N. A. Indebtedness under the facility is unsecured and subject to traditional covenants relating to financial ratios and restrictions on certain types of transactions. Borrowings under this credit facility are available to provide working capital and for general corporate purposes. As of March 31, 2005, there was no amount outstanding under this credit facility. However, the aggregate amount we are able to borrow has been reduced by $0.8 million due to outstanding letters of credit issued under this facility. This credit facility is currently scheduled to expire in June 2005, at which time any outstanding balance would be due.

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In April 2000, we made an investment in Spotlight Health, Inc. We subsequently entered into an agreement to guarantee a $2.0 million revolving line of credit that is now being provided to Spotlight Health by Bank of America. Indebtedness under the line of credit is unsecured and subject to traditional covenants relating to financial ratios. This credit facility is scheduled to expire on June 30, 2005, at which time any outstanding balance would be due. As of March 31, 2005, Spotlight Health had $2.0 million outstanding under this credit facility. In accordance with the requirements of FASB Statement No. 5, “Accounting for Contingencies”, as clarified by FASB Interpretation No. 45, we have recorded a liability in the amount of $0.2 million for the estimated fair value of the obligation we have assumed under this guarantee. We review the financial statements of Spotlight Health on a quarterly basis to determine if it has sufficient financial resources to continue operations. Future events and circumstances might adversely affect Spotlight Health’s financial condition and Spotlight Health might not be in the position to repay the facility, in which case Bank of America might attempt to collect against us on our guarantee.

In February 2005, we acquired substantially all of SurroMed’s assets related to its biomarker business. As part of this acquisition, we agreed to guarantee repayment of up to $1.5 million under a SurroMed bank loan with a maturity date of December 31, 2006. In accordance with the requirements of FASB Statement No. 5, “Accounting for Contingencies”, as clarified by FASB Interpretation No. 45, we have recorded a liability in the amount of $150,000 for the estimated fair value of the obligation assumed under this guarantee.

In November 2003, we entered into a collaboration agreement with Syrrx to jointly develop and commercialize human dipeptidyl peptidase IV, or DPP IV, inhibitors as drug products for the treatment of type 2 diabetes and other major human diseases. Under the terms of the agreement, we are obligated to provide preclinical and clinical development resources and expertise for the collaboration, and to fund the majority of preclinical and clinical studies through Phase IIb development of selected DPP IV inhibitors. PPD and Syrrx agreed to share equally the costs of Phase III development. In addition, we agreed to make milestone payments up to an aggregate amount equal to $17.5 million for each collaboration product upon the occurrence of certain clinical and regulatory events. In September 2004, we filed an investigational new drug application for one DPP IV inhibitor and the Phase I clinical study for that inhibitor commenced in late October 2004. In the fourth quarter of 2004, we paid Syrrx a milestone payment of $2.5 million as a result of the commencement of the Phase I studies. These studies were completed in March 2005. We began the Phase II program in April and will be required to pay a milestone payment of $2.5 million in the second quarter. The remaining milestone payments under the collaboration agreement will be expensed when the event triggering payment of the milestone occurs. In the event we are successful in obtaining approval to market a drug product under the collaboration, the parties will share equally the profits from drug sales. In March 2005, Takeda Pharmaceutical Company Limited completed the acquisition of 100% of the equity of Syrrx, which is now known as Takeda San Diego, Inc. We owned $25.0 million in preferred stock of Syrrx, for which Takeda paid us $25.0 million in April 2005. At this time, we do not know what impact, if any, this acquisition will have on our DPP IV collaboration with Takeda San Diego.

In April 2003, we made an equity investment in Chemokine Therapeutics Corp. In connection with this investment, Chemokine granted us an exclusive option to license a proprietary peptide for a one-time license fee of $1.5 million. We are waiting for the results of an on-going Phase I study to determine if we will exercise our option. If we choose to exercise this option, we will be obligated to pay the one-time license fee plus the costs for future development work on the peptide. Chemokine also granted us the right to first negotiate a license to other peptides.

In November 2003, we became a limited partner in A. M. Pappas Life Science Ventures III, LP, a venture capital fund. The Pappas Fund was established for the purpose of making investments in equity securities of privately-held companies in the life sciences, healthcare and technology industries. We are committed to invest up to an aggregate of approximately $2.5 million in the Pappas Fund. No capital call can exceed 10% of our aggregate capital commitment, and no more than two-thirds of our commitment could be called prior to May 2005. As such, we anticipate that our aggregate investment will be made through a series of future capital calls over the next several years. Capital calls through March 31, 2005 were $165,000. Our capital commitment will expire in May 2009.

In January 2005, we acquired approximately 7.5 acres of property located in downtown Wilmington, North Carolina, on which we plan to construct a new headquarters building. The new facility will be approximately 400,000 square feet and is expected to be completed in November 2006. At that time, we will begin consolidating our Wilmington operations into the new building. We expect the total cost for the construction and up-fit of the new building to be $80.0 million to $100.0 million. The purchase price for the land was approximately $2.8 million. In connection with the sale of the property, the seller, Almont Shipping Company, refinanced existing liens on the property with the proceeds of an $8.0 million loan from Bank of America. This loan will mature in January 2006

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and is secured by a lien on substantially all of Almont’s assets, including an approximately 30-acre tract of land adjacent to the tract we acquired. This loan is also secured by a guarantee from us. In accordance with the requirements of FASB Statement No. 5, “Accounting for Contingencies”, as clarified by FASB Interpretation No. 45, we have recorded a liability in the amount of $0.8 million for the estimated fair value of the obligation we have assumed under this guarantee. Almont’s obligation to reimburse us in the event we are required to pay any sums to Bank of America under the guarantee is also secured by a lien on substantially all of Almont’s assets. As a part of this transaction, Almont granted us an option to purchase all or a portion of the adjacent 30-acre tract of land at an agreed upon price per acre. The option will expire on January 31, 2007.

The American Jobs Creation Act of 2004 introduced a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer. We have not previously recorded a U.S. tax liability on such revenues since we intended to permanently reinvest them in our foreign operations. No provision is being made in the first quarter of 2005 relating to this matter because we are currently evaluating the effect of the new Act on our plan for these undistributed foreign earnings. We expect to complete this evaluation by the end of June 2005. The income tax effect of repatriating these earnings is not estimable at this time.

As of March 31, 2005, we had liabilities of $4.9 million for certain unsettled matters in connection with tax positions taken in the Company’s tax returns that include interpretations of applicable income tax laws and regulations. Such amounts are based on management’s expectation regarding the ultimate tax treatment and outcome of these matters. We believe it is unlikely that the resolution of these matters will have a material adverse effect on our financial position or results of operations.

Under most of our agreements for Development Group services, we agree to indemnify and defend the sponsor against third party claims based on our negligence or willful misconduct. Any successful claims could have a material adverse effect on our financial condition, results of operations and future prospects.

We expect to continue expanding our operations through internal growth and strategic acquisitions and investments. We expect these activities will be funded from existing cash, cash flow from operations and, if necessary or appropriate, borrowings under our existing or future credit facilities. We believe that these sources of liquidity will be sufficient to fund our operations for at least the next 12 months. From time to time, we evaluate potential acquisitions, investments and other growth opportunities that might require additional external financing, and we might seek funds from public or private issuances of equity or debt securities. In any event, our sources of liquidity could be affected by our dependence on a small number of industries and clients, compliance with regulations, international risks, personal injury, environmental or intellectual property claims, as well as other factors described below under “Potential Volatility of Quarterly Operating Results and Stock Price” and “Quantitative and Qualitative Disclosures about Market Risk”. In addition, see “Contractual Obligations and Commercial Commitments” and “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2004.

Critical Accounting Policies and Estimates

There were no material changes to our critical accounting policies and estimates in the first quarter of 2005. For detailed information on our critical accounting policies and estimates, see our Annual Report on Form 10-K for the year ended December 31, 2004.

Recently Issued Accounting Standards

For information about recently issued accounting standards, see “Recent Accounting Pronouncements” in Note 1 to our financial statements in Item I.

Income Taxes

Because we conduct operations on a global basis, our effective tax rate has and will continue to depend upon the geographic distribution of our pretax earnings among locations with varying tax rates. Our profits are also impacted by changes in the tax rates of the various taxing jurisdictions. In particular, as the geographic mix of our pre-tax earnings among various tax jurisdictions changes, our effective tax rate might vary from period to period.

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Inflation

Our long-term contracts, those in excess of one year, generally include an inflation or cost of living adjustment or factor for the portion of the services to be performed beyond one year from the contract date. As a result, we expect that inflation generally will not have a material adverse effect on our operations or financial condition.

Potential Volatility of Quarterly Operating Results and Stock Price

Our quarterly and annual operating results have fluctuated in the past, and we expect that they will continue to fluctuate in the future. Factors that could cause these fluctuations to occur include:

• the timing of our Discovery Sciences Group milestone payments or other revenue;

• the timing and amount of costs associated with R&D and compound collaborations;

• exchange rate fluctuations between periods;

• our dependence on a small number of industries and clients;

• the timing of the initiation, progress or cancellation of significant projects;

• the timing and level of new business authorizations;

• the mix of products and services sold in a particular period;

• pricing pressure in the market for our services;

• our ability to recruit and retain experienced personnel;

• rapid technological change;

• the timing and amount of start-up costs incurred in connection with the introduction of new products and services;

• the timing and extent of new government regulations;

• intellectual property risks;

• impairment of investments or intangible assets;

• the timing of the opening of new offices;

• the timing of other internal expansion costs; and

• the timing and amount of costs associated with integrating acquisitions.

Delays and terminations of trials are often the result of actions taken by our customers or regulatory authorities, and are not typically controllable by us. Because a large percentage of our operating costs are relatively fixed while revenue is subject to fluctuation, variations in the timing and progress of large contracts can materially affect our quarterly operating results. For these reasons, we believe that comparisons of our quarterly financial results are not necessarily meaningful and should not be relied upon as an indication of future performance.

Fluctuations in quarterly results or other factors beyond our control could affect the market price of our common stock. These factors include changes in earnings estimates by analysts, market conditions in our industry, announcements by competitors, changes in pharmaceutical, biotechnology and medical device industries, general economic conditions, and differences in assumptions used as compared to actual results. Any effect on our common stock could be unrelated to our longer-term operating performance. For more detail, see “Factors that Might Affect our Business or Stock Price” in our Annual Report on Form 10-K for the year ended December 31, 2004.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to foreign currency risk by virtue of our international operations. Approximately 23.6% and 27.2% of our total net revenue for the three months ended March 31, 2004 and 2005, respectively, were derived from operations outside the United States. Funds generated by each subsidiary are generally reinvested in the country where they are earned. Our operations in the United Kingdom generated approximately 44.8% of our net revenue from international operations during the three months ended March 31, 2005. Accordingly, we are exposed to adverse movements in the pound sterling and other foreign currencies.

The vast majority of our contracts are entered into by our U. S. or U. K. subsidiaries. The contracts entered into by the U. S. subsidiaries are almost always denominated in U.S. dollars. Contracts entered into by our U. K. subsidiaries are generally denominated in pounds sterling, U.S. dollars or euros, but the majority of these contracts are in U.S. dollars. Although an increase in exchange rates for the pound sterling or euro relative to the U.S. dollar would increase net revenue from contracts denominated in these currencies, the negative impact on operating income is attributable to dollar-denominated contracts for services rendered in countries other than the United States. In these cases, revenue is not impacted by the weakening of the U.S. dollar, but the costs associated with performing these contracts, which are paid in local currency, are negatively impacted when translated into U.S. dollars. In January 2004, we began engaging in hedging activities in an effort to manage our potential foreign exchange exposure.

We also have currency risk resulting from the passage of time between the invoicing of customers under contracts and the ultimate collection of customer payments against those invoices. If a contract is denominated in a currency other than the subsidiary’s local currency, we recognize a receivable at the time of invoicing for the local currency equivalent of the foreign currency invoice amount. Changes in exchange rates from the time the invoice is prepared until payment from the customer is received will result in our receiving either more or less in local currency than the local currency equivalent of the invoice amount at the time the invoice was prepared and the receivable established. We recognize this difference as a foreign currency transaction gain or loss, as applicable, and report it in other income, net. We do not expect that a 10% increase or decrease in exchange rates would have a material effect on our financial statements.

Our strategy for management of currency risk relies primarily on conducting our operations in a country’s currency, making intercompany foreign currency denominated loans and from time to time, using currency derivatives, primarily forward exchange contracts. As of March 31, 2005, we had open foreign exchange derivative contracts with a face amount totaling $59.4 million to buy the local currencies of our foreign subsidiaries. The estimated fair value of the foreign currency derivative portfolio was $0.4 million recorded as a component of prepaid expenses and other current assets, and we recorded $87,000 as a component of other accrued expenses. The potential loss resulting from a hypothetical weakening of the U.S. dollar relative to the pound sterling and euro of 10% would have been approximately $1.6 million for the quarter ended March 31, 2005 based on first quarter 2005 revenues and the costs related to our foreign operations. Because our foreign currency hedging activities would partially offset these potential losses, we do not expect that a 10% change in exchange rates in the future would have a material effect on our financial statements.

Changes in exchange rates between the applicable foreign currency and the U.S. dollar will affect the translation of foreign subsidiaries’ financial results into U.S. dollars for purposes of reporting our consolidated financial results. The process by which we translate each foreign subsidiary’s financial results to U.S. dollars is as follows:

• we translate income statement accounts at average exchange rates for the period;

• we translate balance sheet assets and liability accounts at end of period exchange rates; and

• we translate equity accounts at historical exchange rates.

Translation of the balance sheet in this manner affects shareholders’ equity through the cumulative translation adjustment account. This account exists only in the foreign subsidiary’s U.S. dollar balance sheet and is necessary to keep the foreign balance sheet, stated in U.S. dollars, in balance. Translation adjustments are reported with accumulated other comprehensive income (loss) as a separate component of shareholders’ equity. To date, cumulative translation adjustments have not been material to our consolidated financial position. However, future translation adjustments could materially and adversely affect our financial position.

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Currently, there are no material exchange controls on the payment of dividends or otherwise prohibiting the transfer of funds out of or from within any country in which we conduct operations. Although we perform services for clients located in a number of foreign jurisdictions, we have not experienced any difficulties in receiving funds remitted from foreign countries. However, new or modified exchange control restrictions could have an adverse effect on our financial condition.

We are exposed to changes in interest rates on our cash equivalents and amounts outstanding under notes payable and lines of credit. We invest our cash and cash equivalents in financial instruments with interest rates based on financial market conditions. We do not expect that a 10% change in interest rates in the future would have a material effect on our financial statements.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed only to provide reasonable assurance that information to be disclosed in our Exchange Act Reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to provide the reasonable assurance discussed above.

Internal Control Over Financial Reporting

There were no changes in internal control over financial reporting during the first quarter of 2005 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 6. Exhibits

(a) Exhibits

10.213	First Amendment dated March 16, 2005 to Lease Agreement between Met Center Partners-6, Ltd. and PPD Development, LP
10.214	Second Amendment dated March 16, 2005 to Lease Agreement between Met Center Partners-6, Ltd. and PPD Development, LP
31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 – Chief Executive Officer
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 – Chief Financial Officer

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
(Registrant)
By	/s/ Fredric N. Eshelman
	Chief Executive Officer
	(Principal Executive Officer)
By	/s/ Linda Baddour
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

Date: May 5, 2005

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EX-10.213

EXHIBIT 10.213

FIRST AMENDMENT TO LEASE AGREEMENT

This First Amendment to Lease Agreement (this “Amendment”) is made and entered into to be effective the day and year set forth below and between MET CENTER PARTNERS-6, LTD, a Texas limited partnership (“Landlord”), PPD DEVELOPMENT, LP, a Texas limited partnership (“Tenant”), and PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North Carolina corporation (“Guarantor”).

RECITALS:

A. By Lease Agreement (the “Lease”) effective June 18, 2004, Landlord leased to Tenant approximately 128,941 gross square feet of space in Building Ten located in the Met Center development in Austin, Travis County, Texas, as more particularly described in the Lease (the “Leased Premises”).

B. Landlord and Tenant have approved the Plans and Specifications for the Tenant Improvements and, as contemplated in the Lease, desire to confirm the number of gross square feet contained within the Leased Premises and other matters associated therewith.

NOW, THEREFORE, in consideration of the premises, the mutual covenants and agreements of the parties hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord, Tenant and Guarantor agree as follows:

1. Except as otherwise expressly defined herein, all capitalized terms shall have the meanings ascribed to them as provided in the Lease.

2. Landlord completed its work within the Building prior to October 1, 2004.

3. Section 1.10 of the Lease is hereby amended to provide that Lot 5-A originally comprising the Property has been resubdivided with the Additional Land as contemplated by Section 1.10 and that the current legal description for the Property, and all references in the Lease to the “Property” shall mean and refer to “Lot 5-E, AMENDED PLAT OF THE RESUBDIVISION OF LOT 5 BLOCK B METRO CENTER SECTION 6, a subdivision in the City of Austin, Travis County, Texas, according to the map or plat thereof recorded under Document No. 200400295 of the Official Public Records of Travis County, Texas.”

4. Exhibit D, Work Letter is deleted and is replaced in its entirety with Exhibit D-1, “Work Letter” attached hereto.

5. The Plans and Specifications have been approved by the parties and

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attached as Exhibit E to the Lease. In connection with the approval of the Plans and Specifications, the architects for the parties have confirmed, and the parties hereby confirm and agree, that the approximate number of gross square feet of space constituting the Leased Premises is 128,941 square feet as provided in Section 1.11. Accordingly, Landlord and Tenant confirm and agree that the number of parking spaces for tenant is under Section 1.18 is 645 and no adjustment is necessary; the Base Rent for the initial term of the Lease is as set forth in Section 1.20 and no adjustment is necessary; the Tenant’s Proportionate Share is 37.31% as set forth in Section 1.24 and no adjustment is necessary; and the amount of the Tenant Improvement Allowance under Section 1.26 is $3,223,525.00.

6. Landlord and Tenant expressly agree that except as amended hereby, all of the terms and provisions of the Lease shall remain in full force and effect, and the same are hereby confirmed, ratified and approved.

7. Guarantor has executed this Amendment to acknowledge and consent to the amendments to the Lease as provided herein and to confirm, acknowledge and agree that the terms and provisions of the Lease Guaranty attached as Exhibit G to the Lease continue in full force and effect.

8. This Amendment may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. The parties agree that this Amendment may be transmitted between them by facsimile machine. The parties intend that faxed signatures constitute original signatures, and that a faxed copy of this Amendment containing the signatures (original or faxed) of all the parties is binding upon the parties.

EXECUTED by the parties on the dates set forth below their respective signatures to be effective the date the last party so signs.

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LANDLORD:
MET CENTER PARTNERS-6, LTD.
By:	Met Center 3, Inc., a Texas corporation, General Partner
By:	/s/ Howard C. Yancy
	Howard C. Yancy, President
Date: March 16, 2005
TENANT:
PPD DEVELOPMENT, LP
By:	PPD GP, LLC, a Delaware limited liability company, General Partner
By:	/s/ Fred. B. Davenport, Jr.
Name:	Fred B. Davenport, Jr.
Title:	President
Date: March 16, 2005
GUARANTOR:
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North Carolina corporation
By:	/s/ Fred B. Davenport, Jr.
Name:	Fred B. Davenport, Jr
Title:	President
Date: March 16, 2005

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EXHIBIT D-1

WORK LETTER

This Exhibit D-1 is attached to and made part of that certain Lease Agreement by and between Met Center Partners-6, Ltd., as Landlord, and PPD Development, LP as Tenant.

1. Building Shell. The Building, other than those portions occupied by other tenants, is in shell condition and Landlord represents that it has been constructed substantially in accordance with the plans and specifications described in Schedule 1 attached to this Exhibit D-1 (the “Shell Plans”), except as expressly provided in paragraph 2(n) and 2(s) below. Except as expressly provided in paragraph 2(n), and 2(s) below, the cost of any and all work not specifically delineated in such Shell Plans, or any increase in cost resulting from subsequent changes required to complete the Tenant Improvements (as defined below), shall be the responsibility of, and paid for by Tenant, subject to reimbursement from the Tenant Improvement Allowance as part of the Tenant Improvements Construction Costs as provided below. Tenant shall have access to the Property and the Building necessary to timely complete the Tenant Improvements subject to the provisions of Section 2.2 of the Lease.

2. Tenant Improvements.

(a) Tenant shall complete all improvements required or desired by Tenant for Tenant’s use of the Leased Premises (collectively, the “Tenant Improvements”) according to the Tenant Improvement Plans (defined below) as provided herein. It is understood that the Tenant Improvements may include, subject to the provisions hereof, the following:

1. The interior improvements within the Leased Premises, including but not limited to clinical labs, administrative offices, dormitories, server room, commercial kitchen, commercial laundry, pharmacy and chemical storage.

2. Tenant may improve for its exclusive use and control, any building stairwells that are internal to the Leased Premises, and may integrate those stairwells into Tenant’s security systems.

3. Tenant may install an uninterrupted power supply (UPS) system and emergency stand-by battery system, and may use a portable generator (in addition to the external auxiliary generator) during emergencies. Tenant may use reasonably necessary riser space for the connection of these systems to the Leased Premises.

4. As provided above, Tenant shall install generator, chemical storage and platform lift at the rear of the Building, and shall not be charged extra rent or other fee for the use of this area.

5. Tenant shall be entitled to construct antennae and/or satellite dish (the “Antennae”) on that portion of the roof of the Building located immediately above the Leased Premises, and shall not be charged extra rent or other fee by Landlord for the Antennae or the use of roof space for the Antennae.

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(b) Subject to sections (l), (n) and (s) below, Tenant shall bear the entire cost of the construction of the Tenant Improvements, including, without limitation, all architectural and engineering fees associated with the space planning for the Leased Premises, the design of the Tenant Improvements and preparation of the Tenant Improvement Plans (including any changes to the Shell Plans required therefore) and any changes thereto; all labor, material and equipment costs; additional janitorial services; general tenant signage; permit fees; and taxes and insurance costs related to the construction of the Tenant Improvements to the extent not included in Operating Costs (the “Tenant Improvement Construction Costs”). Landlord shall not charge or be entitled to receive payment of any fee in connection with or during the construction of the Tenant Improvements or Tenant’s move-in, including without limitation any project management, supervision or review fee, or any fee for the use of the Building services (such as, but not limited to, loading dock, parking or freight elevators, nor shall Tenant be charged for utilities consumed during construction of the Tenant Improvements).

(c) Landlord shall make available to Tenant, the construction, architectural and engineering information reasonably requested by Tenant’s architect or general contractor. Tenant shall submit to Landlord construction drawings and specifications for the Tenant Improvements (the “Tenant Improvement Plans”) within one hundred twenty (120) days after the Effective Date of this Lease. The Tenant Improvement Plans shall consist of detailed plans and specifications for the construction of the Tenant Improvements in accordance with all applicable governmental laws, codes, rules and regulations, including partition layout, ceiling plan, electrical outlets and switches, telephone outlets, drawings for any modifications to the mechanical and plumbing systems of the Building. The Tenant Improvement Plans shall specifically include a requirement for expansion joints for every twenty (20) feet on all interior walls and above all doorways and other openings. The Tenant Improvement Plans must be approved by Landlord as provided herein.

(d) Within five (5) business days after Landlord’s receipt of the Tenant Improvement Plans, Landlord shall submit to Tenant in writing any requested changes thereto, and Landlord and Tenant shall thereafter work together in good faith to agree upon final Tenant Improvement Plans. Landlord’s approval of the Tenant Improvement Plans shall not be unreasonably delayed or withheld, provided that they comply with all applicable governmental laws, codes, rules and regulations and the provisions of this Lease. Notwithstanding the foregoing, Landlord’s approval of any changes to the Building systems or the exterior or structural components of the Building, including relocation or alteration of stairwells and elevators, shall be subject to Landlord’s approval, and shall be subject to approval by Landlord’s structural engineer. If Landlord’s structural engineer fails to approve any such portion of the Tenant Improvement Plans, the specific reasons for such disapproval shall be provided to Tenant, together with specific drawings and other corrections necessary to correct the specific reasons for such disapproval. If Tenant modifies the Tenant Improvement Plans to specifically incorporate the drawings and other corrections made by Landlord’s structural engineer, the modifications of the exterior or structural components of the Building shall be deemed to be approved by Landlord. Landlord shall not refuse, without adequate justification, to approve the final Tenant Improvement Plans within thirty (30) days after Landlord’s receipt thereof. In the event Landlord does disapprove the Tenant Improvement Plans, as submitted, the parties shall cooperate fully to achieve a final approved set of plans in conformity with this Work Letter. If, despite good faith efforts, the parties cannot agree on a final approved set of Tenant Improvement Plans Landlord and Tenant shall each have the right to terminate the Lease by notice to the other at such time, and in the event of such termination the first month’s Base Rent shall be promptly returned to Tenant.

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(e) No approval by Landlord or Landlord’s architects and/or engineers of the Tenant Improvement Plans or any of Tenant’s drawings, plans and specifications that are prepared in connection with any construction of improvements in the Leased Premises shall in any way be construed or operate as a representation or warranty by Landlord as to the adequacy of such drawings, plans and specifications, or the improvements to which they relate, for any use, purpose, or condition, but such approval shall merely satisfy the requirement of consent by Landlord under this Lease as to Tenant’s right to construct the improvements in the Leased Premises in accordance with such drawings, plans and specifications.

(f) Upon Landlord’s approval of the Tenant Improvement Plans, Tenant, at Tenant’s expense, shall promptly apply for, and obtain, all permits and approvals required by governmental agencies, and Landlord shall joint Tenant in promptly applying for approval (to the extent necessary) by the Association Architectural Control Committee (the “Committee”) under the Declaration and any other restrictive covenants applicable to the construction of the Tenant Improvements (the foregoing collectively referred to as the “Approvals”), and Landlord shall affirmatively request and support such approval by the Committee in Landlord’s capacity as the owner of the Property. It is contemplated that among such other items as may require approval of the Committee, the Approvals shall include approval of the Committee of the following: (i) installation of rooftop equipment and services (within Landlord provided “roof loading zones”); (ii) utilization of the fenced area on the southeast of the Property for an outdoor recreation area in accordance with Exhibit C; (iii) installation of an emergency generator outside the south side of the Building; (iv) installation of a side-loading lift on the south side of the Building to serve Tenant as a loading dock; (v) construction of a CMU building used for Hazardous Materials, Hazardous Substances and bio-wastes; (vi) construction of an additional outdoor storage building for storage of such items as outdoor furniture; and (vii) installation of back-illuminated signage, mounted prominently on the Building that would be visible from Ben White Boulevard. Landlord represents and warrants that it has obtained pre-approval by the Committee as to the preliminary drawings provided by Tenant to Landlord prior to the Effective Date of this Lease for those items described in (i) through (viii) in the immediately preceding sentence. Upon substantial completion of the Tenant Improvements, Tenant shall obtain a permanent certificate of occupancy for the Leased Premises.

(g) Prior to the commencement of construction of any of the Tenant Improvements, Tenant shall (i) furnish Landlord with evidence satisfactory to Landlord that the Approvals have been obtained, (ii) furnish Landlord with evidence that Tenant has obtained and is maintaining (1) All Risk Builder’s Risk Insurance covering the replacement value of the Tenant Improvements and naming Landlord as an additional insured, and (2) the Comprehensive Commercial Liability Insurance policy described in the Lease, and (iii) notify Landlord of the date on which Tenant intends to commence construction of the Tenant Improvements. The construction contemplated by the Tenant Improvement Plans shall be performed by skilled contractors and subcontractors whose names shall be furnished in writing to Landlord in advance. All contractors shall be required to maintain commercial general liability insurance in amounts of not less than $1 million per occurrence, $2 million aggregate, with reputable companies licensed to provide insurance in Texas. Certificates of insurance for Tenant and its contractors shall be delivered to Landlord before Tenant commences construction of the Tenant Improvements.

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(h) The construction of the Tenant Improvements shall be done in a good and workmanlike manner and in accordance with the Tenant Improvement Plans, as approved by Landlord. All material changes to any of the Tenant Improvement Plans must be submitted to Landlord for Landlord’s written approval prior to, and as a condition precedent to, making such change; provided, Landlord shall promptly review the same and shall not unreasonably withhold, delay or condition its approval. All materials used in executing the Tenant Improvement Plans by Tenant shall be new and of good quality for their intended purposes.

(i) The failure of Tenant to complete the Tenant Improvements by the Rent Commencement Date for any reason other than delays caused by the acts of Landlord or Landlord’s Related Parties shall not delay or extend the Rent Commencement Date and the obligations of Landlord and Tenant shall continue in full force and effect and the rent shall not be abated. Any such delays caused by Landlord shall extend the Rent Commencement Date by a period equal to the period of the delay attributable to the acts of Landlord.

(j) Tenant shall have no right, authority or power to bind Landlord or any interest of Landlord in the Project, the Property, the Building, or the Leased Premises for the payment of any claim for labor or materials or for any charge or expense incurred or the erection or construction of the Tenant Improvements, nor to render the Project, the Property, the Building, or the Leased Space part of the Leased Premises or any part thereof liable for any mechanic’s or material men’s lien, and Tenant shall in no way be considered the agent of Landlord in the construction or erection of any of the Tenant Improvements. If any lien is imposed upon any portion of the Property by reason of the construction of the Tenant Improvements, Tenant shall discharge or bond around the same in accordance with the provisions of this Lease.

(k) Tenant and its contractor(s) shall cause the construction of the Tenant Improvements in such manner as to minimize interference or inconvenience to the other tenants of the Building, the Property and the Project to the extent reasonably possible. All construction activity and storage of materials shall be confined to the Leased Premises, Tenant’s storage building(s), if already erected, and the associated parking area unless Landlord specifically agrees otherwise in writing. The work site(s) shall be maintained in a safe and reasonably clean condition at all times during the construction. The construction of the Tenant Improvements shall be conducted so as to avoid damage to part of the Project, the Property, the Common Areas, including all parking and landscaped areas, or the Building, and in the event of any such damage, Tenant shall immediately cause such damage to be fully repaired and restored.

(l) Landlord shall pay Tenant a tenant improvement allowance (the “Tenant Improvement Allowance”) of an amount as provided in Section 1.26 of the Lease, which funds may be applied by Tenant to defray any and all expenses and fees incurred by Tenant in connection with the design, planning, approval and construction of the Tenant Improvements.

(m) Intentionally omitted.

(n) In addition with respect to the Leased Premises, Landlord shall also pay Tenant, in

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addition to the Tenant Improvement Allowance, an allowance of $187,000 for furnishing and installation of elevators, and an allowance of $30,000 for furnishing and installation of two (2) separate steel stairs and handrails for the existing floor openings and demising walls with one-hour fire walls taped, floated and painted to deck.

(o) Except for any work required to be accomplished by Landlord as set forth in this Lease, the Shell Plans, or in this Work Letter, all of the work to be accomplished with respect to the Leased Premises, the Building and the Property, including the recreation area and Tenant’s out-buildings, shall be included in the Tenant Improvement Plans, and all of such items shall be completed by Tenant as part of the Tenant Improvements. Notwithstanding anything to the contrary herein, it is specifically agreed that Tenant shall be entitled to use the existing site utilities for construction purposes, and the cost of such utilities shall be borne by Landlord.

(p) The Tenant Improvement Allowance shall be paid to Tenant as follows: within thirty (30) days after the last to occur of (i) Tenant’s deliver to Landlord of an invoice for such payment, along with a detail schedule of the Tenant Improvement Construction Costs certified by an officer of Tenant and signed lien waivers from all contractors and subcontractors providing labor and materials for the Tenant Improvements: (ii) written confirmation from Landlord’s architect that the Tenant Improvements are substantially completed in accordance with the Tenant Improvement Plans; and (iii) delivery to Landlord of a permanent certificate of occupancy for the Leased Premises.

(q) Notwithstanding anything contained herein to the contrary, Tenant shall not be entitled to receive, and Landlord shall have no obligation to provide, the Tenant Improvement Allowance at any time after an event has occurred unless Tenant cures such default within any time allowed in this Lease for such cure.

(r) THE MECHANICAL, ELECTRICAL AND PLUMBING SYSTEMS FOR THE LEASED PREMISES SHALL BE EXACTLY AS SPECIFIED BY TENANT AS PART OF THE TENANT IMPROVEMENTS TO THE LEASED PREMISES. LANDLORD REPRESENTS THAT TO THE BEST OF THE ACTUAL KNOWLEDGE OF LANDLORD BASED ON THE LETTER FROM LANDLORD’S STRUCTURAL ENGINEER ATTACHED HERETO AS SCHEDULE D-1, THAT THE LOAD LEVELS FOR THE FIRST AND SECOND FLOORS OF THE BUILDING ARE AS SPECIFIED IN LANDLORD’S ENGINEER’S LETTER.

(s) Landlord shall also pay Tenant, in addition to the Tenant Improvement Allowance, an allowance equal to one-half of all costs incurred by Tenant towards improving the fire rating of the Leased Premises over its current level as required by applicable governmental authorities in order to allow Tenant’s Permitted Use under applicable governmental statues, codes and regulations, provided that such allowance shall be limited in all events to a maximum sum of $100,000. In addition, Landlord shall provide an allowance equal to all costs incurred by Tenant associated with the upgrade of water and wastewater lines and modification to the second floor expansion joint to accommodate Tenant’s use of the Leased Premises, provided that such allowance shall be limited in all events to a maximum sum of $224,000.

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EX-10.214

EXHIBIT 10.214

SECOND AMENDMENT TO LEASE AGREEMENT

This Second Amendment to Lease Agreement (this “Amendment”) is made and entered into to be effective the day and year set forth below and between MET CENTER PARTNERS-6, LTD, a Texas limited partnership (“Landlord”), PPD DEVELOPMENT, LP, a Texas limited partnership (“Tenant”), and PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North Carolina corporation (“Guarantor”).

RECITALS:

A. By Lease Agreement (the “Lease”) effective June 18, 2004, Landlord leased to Tenant approximately 128,941 gross square feet of space in Building Ten located in the Met Center development in Austin, Travis County, Texas, as more particularly described in the Lease (the “Leased Premises”).

B. Pursuant to that certain First Amendment of Lease Agreement, Landlord, Tenant and Guarantor approved the Plans and Specifications for the Tenant Improvements and, as contemplated in the Lease, confirmed the number of gross square feet contained within the Leased Premises and other matters associated therewith.

C. Subject to and contingent upon the sale of the property and building in which the Leased Premises are located, Landlord and Tenant desire to agree to amend the Lease further to provide that the Lease include approximately 82,328 gross square feet of additional space within the Building (“Expansion Space”), and to set forth certain other agreements and understanding between them, as hereinafter provided

NOW, THEREFORE, in consideration of the premises, the mutual covenants and agreements of the parties hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord, Tenant and Guarantor agree as follows:

1. Except as otherwise expressly defined herein, all capitalized terms shall have the meanings ascribed to them as provided in the Lease.

2. Landlord is currently in the process of marketing the Property for sale. In the event Landlord closes the sale and conveyance of the Property on or before June 1, 2005 Landlord shall assign and transfer all of the right, title, interest and obligations of the “Landlord” under the Lease to the new buyer, which shall assume such obligations from and after the date of such sale, conveyance and assignment. Should the sale of the Property not occur, Landlord shall reimburse Tenant for any and all costs associated with Tenant’s planned expansion in the Expansion Space including but not limited to any architectural fees, programming costs, legal expenses and any other costs incurred by Tenant in anticipation of Landlord’s sale of the Property and Tenant’s lease of the Expansion Space.

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Subject to, and contingent upon, such sale, conveyance and assignment occurring on or before June 1, 2005, the Lease shall automatically be further amended effective as of the date of such sale and conveyance as follows:

(a) Section 1.5 of the Lease is hereby amended to provided that the Commencement Date shall be April 1, 2005.

(b) Section 1.11 of the Lease shall be amended to provide that the Leased Premises include the original 128,941 approximate gross square feet of space as reflected on Exhibit B attached to the Lease (the “Primary Space”) and the Expansion Space consisting of that certain 82,328 approximate gross square feet of additional space within the Building as more particularly described on Exhibit A attached to this Amendment and made a part hereof for a total of 211,269 approximate gross square feet of space and all references to the “Leased Premises” shall mean and refer to said 211,269 approximate gross square feet of space.

(c) Section 1.9 of the Lease is hereby amended to provide that the Expiration Date is June 30, 2015.

(d) Section 1.15 of the Lease is hereby amended to provide that the Lease Term shall be a period of time from the Commencement Date until June 30, 2015.

(e) Section 1.18 of the Lease shall be amended to provide that the number of parking spaces for Tenant within the parking lot as shown on Exhibit A attached to the Lease shall be 1,056 parking spaces, of which 392 spaces shall be reserved as set forth on Exhibit B attached to this Amendment and made a part hereof.

(f) Section 1.20 of the Lease shall be amended to include the following language:

“Total Base Rent” for the Expansion Space shall be the sum of the Additional Base Rent and the Base Rent as defined below:

For the period of July 1, 2005 until June 30, 2010, Base Rent shall be $752,477.92 per year (being $9.14 multiplied by the approximate number of total 82,328 gross square feet of the total Expansion Space), payable in monthly installments of $62,706.49, plus Additional Base Rent for the period for July 1, 2005 until June 30, 2010 shall be $275,000 per year, payable in monthly installments of $22,916.66 which equals Total Base Rent of $1,027,477.90 per year, payable in monthly installments of $85,623.16.

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For the period of July 1, 2010 until June 30, 2015, Base Rent shall be $865,267.28 per year (being $10.51 multiplied by the approximate number of total 82,328 gross square feet of the total Expansion Space), payable in monthly installments of $72,105.61, plus Additional Base Rent for the period for July 1, 2010 until June 30, 2015 shall be $275,000 per year, payable in monthly installments of $22,916.66 which equals Total Base Rent of $1,140,267.20 per year, payable in monthly installments of $95,022.27.

(g) Section 1.20 of the Lease shall be amended to provide that Tenant’s Proportionate Share shall be 61.13%.

(h) Section 1.25 of the Lease shall be amended to provide that the Work Letter for the Expansion Space is attached hereto as Exhibit D-2 (the “Expansion Space Work Letter”).

(i) Section 1.26 of the Lease is hereby amended to provide that in addition to the original Tenant Improvement Allowance with respect to the Primary Space, Landlord shall provide the amount of $2,058,200 as the Tenant Improvement Allowance with respect to the Expansion Space for a total Tenant Improvement Allowance for the entire Leased Premises of $5,281,725, which additional Tenant Improvement Allowance shall be payable in accordance with the terms of the Expansion Space Work Letter attached hereto as Exhibit D-2. It is expressly understood and agreed that the terms and provisions of the Expansion Space Work Letter shall apply independently and separately from the original Work Letter attached to the Lease as Exhibit D-1 (“Original Work Letter”). Without limiting the generality of the foregoing, it is expressly agreed that payment of the Tenant Improvement Allowance applicable to the Primary Space shall be paid separately from the payment of the Tenant Improvement Allowance for the Expansion Space with the intended result that the Tenant Improvement Allowance for the Primary Space comprising the Leased Premises shall be paid upon the completion of the Tenant Improvements for such space in accordance with the terms and conditions of the Original Work Letter and the Tenant Improvement Allowance with respect to the Expansion Space shall be paid upon completion of the Tenant Improvements for the Expansion Space in accordance with the terms of the Expansion Space Work Letter.

(j) Section 1.27 of the Lease is hereby amended to provide that upon Landlord and Tenant mutually agreeing to the Plans and Specifications for the Expansion Space in accordance with the provisions of the Work Letter, such Plans and Specifications shall be attached to the Lease as an additional part of Exhibit E.

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(k) Paragraph 9 (Right to Purchase the Property) in Exhibit C to the Lease is hereby deleted in its entirety, it being agreed that Tenant shall not have any right of first refusal or options to acquire the Property.

3. Landlord and Tenant agree that the foregoing contingent amendment to the Lease provides for a Commencement Date of April 1, 2005. To accommodate such amendment, Landlord and Tenant agree no Base Rent or Tenant’s Additional Rent shall be payable under the Lease until April 1, 2005. In the event Landlord has sold and conveyed the Property prior to June 1, 2005, as contemplated herein, and the foregoing Lease Amendment becomes effective, the Commencement Date shall be April 1, 2005, as provided above. In the event Landlord has not sold and conveyed the Property prior to June 1, 2005, then the foregoing amendments shall not become effective; the Commencement Date of the Lease shall be January 1, 2005 as currently provided in the Lease; and Tenant shall pay to Landlord the Base Rent and Tenant’s Additional Rent for the period from January 1, 2005, until April 30, 2005, on or before April 5, 2005.

4. It is agreed that in the event Tenant determines that its business requires space in addition to the Leased Premises, Tenant may, at Tenant’s sole and exclusive option, give notice to Landlord that Tenant requires more space than contained within the Leased Premises. Upon receipt of such notice, Landlord shall sell to Tenant a plot of land measuring approximately seven (7) acres on a portion of the current parking facilities located on the most westerly portion of the Property, as reflected on Exhibit E attached hereto (the “Expansion Area”) for Tenant to construct an additional building. The terms and conditions of such sale shall be as Landlord and Tenant may mutually agree, each in their respective sole and absolute discretion, provided that in any case Tenant shall be entitled to purchase the Expansion Area for fair market value based on an appraisal performed by an appraiser mutually agreeable to both Landlord and Tenant. In addition, any new such building shall be subject to obtaining all requisite approvals and permits from applicable governmental entities. In all events, (i) the construction of such new building shall include the construction of structured parking in the area reflected on Exhibit E attached hereto in levels necessary to satisfy the parking requirements of Building Ten, which structured parking area shall be constructed prior to the start of construction of the new building, (ii) the number of parking spaces on the land on which Building Ten is situated and the Expansion Area shall equal the number of parking spaces on the land on which Building Ten is situated and the Expansion Area prior to the construction of the new building (currently approximately 1,533 spaces) plus the number of parking spaces necessary for the new building after the construction of the new building and the construction of the structured parking for Building Ten and any structured parking for the new building, (iii) the driveway through the Expansion Area shall remain unchanged, and (iv) the sale shall be subject to, and conditioned upon, the resubdivision of the Property to create a separate lot for each of the Building and the Expansion Area which separates the two lots in the approximate manner as reflected on Exhibit E attached hereto. It is further understood and agreed that such sale shall have no effect on the Lease, which shall continue in full force and effect other than an amendment to exclude the Expansion Area from the definition of the “Property” under the Lease. To accommodate the possibility of Tenant’s expansion pursuant to this Section 4, Landlord shall use commercially reasonable efforts to cause such re-subdivision to be completed as promptly as reasonably possible after the sale and conveyance of the Property.

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5. At Tenant’s request, Landlord agrees to use commercially reasonable efforts to relocate Texas Parks & Wildlife from the Building; provided, it is understood and acknowledged that Landlord can provide no assurance that Texas Parks & Wildlife will wish or agree to move from the Building or that Landlord and Texas Parks & Wildlife will be able to mutually agree to the terms and conditions for such relocation.

6. It is acknowledged by the parties that there are no real estate brokers or agents involved in connection with this Amendment except for Equis Corporation, which represents Tenant and shall be paid a commission pursuant to a separate agreement with Landlord. Each party agrees to defend, indemnify and hold the other harmless from any cost or claim for commission, fee or other compensation by reason of this transaction made by any agent, broker, entity or person alleging to be acting for or under the indemnifying party or which otherwise arises out of the acts or conduct of the indemnifying party.

7. Landlord and Tenant expressly agree that except as amended hereby, all of the terms and provisions of the Lease shall remain in full force and effect, and the same are hereby confirmed, ratified and approved.

8. Guarantor has executed this Amendment to acknowledge and consent to the amendments to the Lease as provided herein and to confirm, acknowledge and agree that the terms and provisions of the Lease Guaranty attached as Exhibit G to the Lease continue in full force and effect and that the increase in the Base Rent and Tenant’s Additional Rent and the other obligations, liabilities and duties of the Tenant under the Lease as a result of adding the Expansion Space as part of the Leased Premises are and shall be included within the “ Obligations” guaranteed in accordance with the terms of the Lease Guaranty.

9. This Amendment may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. The parties agree that this Amendment may be transmitted between them by facsimile machine. The parties intend that faxed signatures constitute original signatures, and that a faxed copy of this Amendment containing the signatures (original or faxed) of all the parties is binding upon the parties.

EXECUTED by the parties on the dates set forth below their respective signatures to be effective the date the last party so signs.

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LANDLORD:
MET CENTER PARTNERS-6, LTD.
By:	Met Center 3, Inc., a Texas corporation, General Partner
By:	/s/ Howard C. Yancy
	Howard C. Yancy, President
Date: March 16, 2005
TENANT:
PPD DEVELOPMENT, LP
By:	PPD GP, LLC, a Delaware limited liability company, General Partner
By:	/s/ Fred B. Davenport, Jr.
Name:	Fred B. Davenport, Jr.
Title:	President
Date: March 16, 2005
GUARANTOR:
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North Carolina corporation
By:	/s/ Fred B. Davenport
Name:	Fred B. Davenport
Title:	President
Date: March 16, 2005

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EXHIBIT A

EXPANSION AREA

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EXHIBIT B

RESERVED AND UNRESERVED PARKING FOR BUILDING TEN

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EXHIBIT C

INTENTIONALLY OMITTED

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EXHIBIT D-2

EXPANSION SPACE WORK LETTER

This Exhibit D-2 is attached to and made part of that certain Lease Agreement by and between Met Center Partners-6, Ltd., as Landlord, and PPD Development, LP as Tenant.

1. Building Shell. The Building, other than those portions occupied by other tenants, is in shell condition and Landlord represents that it has been constructed substantially in accordance with the plans and specifications described in Schedule 1 attached to this Exhibit D-2 (the “Shell Plans”), except as expressly provided in paragraph 2(n) below. Except as expressly provided in paragraph 2(n) below, the cost of any and all work not specifically delineated in such Shell Plans, or any increase in cost resulting from subsequent changes required to complete the Tenant Improvements (as defined below), shall be the responsibility of, and paid for by Tenant, subject to reimbursement from the Tenant Improvement Allowance as part of the Tenant Improvements Construction Costs as provided below. Tenant shall have access to the Property and the Building necessary to timely complete the Tenant Improvements subject to the provisions of Section 2.2 of the Lease.

2. Tenant Improvements.

(a) Tenant shall complete all improvements required or desired by Tenant for Tenant’s use of the Expansion Space part of the Leased Premises (collectively, the “Tenant Improvements”) according to the Tenant Improvement Plans (defined below) as provided herein. It is understood that the Tenant Improvements may include, subject to the provisions hereof, the following:

1. The interior improvements within the Expansion Space part of the Leased Premises for general office use. In addition, Tenant shall be entitled to install a separate primary entrance to the Expansion Space on the south side of the Building.

2. Tenant may improve for its exclusive use and control, any building stairwells that are internal to the Expansion Space part of the Leased Premises, and may integrate those stairwells into Tenant’s security systems.

3. Tenant may install an uninterrupted power supply (UPS) system and emergency stand-by battery system, and may use a portable generator (in addition to the external auxiliary generator) during emergencies. Tenant may use reasonably necessary riser space for the connection of these systems to the Expansion Space part of the Leased Premises.

4. Tenant shall be entitled to construct antennae and/or satellite dish (the “Antennae”) on that portion of the roof of the Building located immediately above the Expansion Space part of the Leased Premises, and shall not be charged extra rent or other fee by Landlord for the Antennae or the use of roof space for the Antennae.

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(b) Subject to sections (l) and (n) below, Tenant shall bear the entire cost of the construction of the Tenant Improvements, including, without limitation, all architectural and engineering fees associated with the space planning for the Expansion Space part of the Leased Premises, the design of the Tenant Improvements and preparation of the Tenant Improvement Plans (including any changes to the Shell Plans required therefore) and any changes thereto; all labor, material and equipment costs; additional janitorial services; general tenant signage; permit fees; and taxes and insurance costs related to the construction of the Tenant Improvements to the extent not included in Operating Costs (the “Tenant Improvement Construction Costs”). Landlord shall not charge or be entitled to receive payment of any fee in connection with or during the construction of the Tenant Improvements or Tenant’s move-in, including without limitation any project management, supervision or review fee, or any fee for the use of the Building services (such as, but not limited to, loading dock, parking or freight elevators, nor shall Tenant be charged for utilities consumed during construction of the Tenant Improvements).

(c) Landlord shall make available to Tenant, the construction, architectural and engineering information reasonably requested by Tenant’s architect or general contractor. Tenant shall submit to Landlord construction drawings and specifications for the Tenant Improvements (the “Tenant Improvement Plans”) within one hundred twenty (120) days after the Effective Date of this Lease. The Tenant Improvement Plans shall consist of detailed plans and specifications for the construction of the Tenant Improvements in accordance with all applicable governmental laws, codes, rules and regulations, including partition layout, ceiling plan, electrical outlets and switches, telephone outlets, drawings for any modifications to the mechanical and plumbing systems of the Building. The Tenant Improvement Plans shall specifically include a requirement for expansion joints for every twenty (20) feet on all interior walls and above all doorways and other openings. The Tenant Improvement Plans must be approved by Landlord as provided herein.

(d) Within five (5) business days after Landlord’s receipt of the Tenant Improvement Plans, Landlord shall submit to Tenant in writing any requested changes thereto, and Landlord and Tenant shall thereafter work together in good faith to agree upon final Tenant Improvement Plans. Landlord’s approval of the Tenant Improvement Plans shall not be unreasonably delayed or withheld, provided that they comply with all applicable governmental laws, codes, rules and regulations and the provisions of this Lease. Notwithstanding the foregoing, Landlord’s approval of any changes to the Building systems or the exterior or structural components of the Building, including relocation or alteration of stairwells and elevators, shall be subject to Landlord’s approval, and shall be subject to approval by Landlord’s structural engineer. If Landlord’s structural engineer fails to approve any such portion of the Tenant Improvement Plans, the specific reasons for such disapproval shall be provided to Tenant, together with specific drawings and other corrections necessary to correct the specific reasons for such disapproval. If Tenant modifies the Tenant Improvement Plans to specifically incorporate the drawings and other corrections made by Landlord’s structural engineer, the modifications of the exterior or structural components of the Building shall be deemed to be approved by Landlord. Landlord shall not refuse, without adequate justification, to approve the final Tenant Improvement Plans within thirty (30) days after Landlord’s receipt thereof. In the event Landlord does disapprove the Tenant Improvement Plans, as submitted, the parties shall cooperate fully to achieve a final approved set of plans in conformity with this Work Letter. If, despite good faith efforts, the parties cannot agree on a final approved set of Tenant Improvement Plans Landlord and Tenant shall each have the right to terminate the Lease by notice to the other at such time, and in the event of such termination the first month’s Base Rent shall be promptly returned to Tenant.

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(e) No approval by Landlord or Landlord’s architects and/or engineers of the Tenant Improvement Plans or any of Tenant’s drawings, plans and specifications that are prepared in connection with any construction of improvements in the Expansion Space part of the Leased Premises shall in any way be construed or operate as a representation or warranty by Landlord as to the adequacy of such drawings, plans and specifications, or the improvements to which they relate, for any use, purpose, or condition, but such approval shall merely satisfy the requirement of consent by Landlord under this Lease as to Tenant’s right to construct the improvements in the Expansion Space part of the Leased Premises in accordance with such drawings, plans and specifications.

(f) Upon Landlord’s approval of the Tenant Improvement Plans, Tenant, at Tenant’s expense, shall promptly apply for, and obtain, all permits and approvals required by governmental agencies, and Landlord shall joint Tenant in promptly applying for approval (to the extent necessary) by the Association Architectural Control Committee (the “Committee”) under the Declaration and any other restrictive covenants applicable to the construction of the Tenant Improvements (the foregoing collectively referred to as the “Approvals”), and Landlord shall affirmatively request and support such approval by the Committee in Landlord’s capacity as the owner of the Property. It is contemplated that among such items as may require approval of the Committee, the Approvals shall include approval of the Committee of the installation of a separate primary entrance to the Expansion Space on the south side of the Building and the additional walkway from the upper parking area as described in paragraph 2(a)(4) above, and Landlord represents and warrants that it has obtained pre-approval by the Committee such entrance and additional walkway from the upper parking area. Upon substantial completion of the Tenant Improvements, Tenant shall obtain a permanent certificate of occupancy for the Expansion Space part of the Leased Premises.

(g) Prior to the commencement of construction of any of the Tenant Improvements, Tenant shall (i) furnish Landlord with evidence satisfactory to Landlord that the Approvals have been obtained, (ii) furnish Landlord with evidence that Tenant has obtained and is maintaining (1) All Risk Builder’s Risk Insurance covering the replacement value of the Tenant Improvements and naming Landlord as an additional insured, and (2) the Comprehensive Commercial Liability Insurance policy described in the Lease, and (iii) notify Landlord of the date on which Tenant intends to commence construction of the Tenant Improvements. The construction contemplated by the Tenant Improvement Plans shall be performed by skilled contractors and subcontractors whose names shall be furnished in writing to Landlord in advance. All contractors shall be required to maintain commercial general liability insurance in amounts of not less than $1 million per occurrence, $2 million aggregate, with reputable companies licensed to provide insurance in Texas. Certificates of insurance for Tenant and its contractors shall be delivered to Landlord before Tenant commences construction of the Tenant Improvements.

(h) The construction of the Tenant Improvements shall be done in a good and workmanlike manner and in accordance with the Tenant Improvement Plans, as approved by Landlord. All material changes to any of the Tenant Improvement Plans must be submitted to Landlord for Landlord’s written approval prior to, and as a condition precedent to, making such change; provided, Landlord shall promptly review the same and shall not unreasonably withhold, delay or condition its approval. All materials used in executing the Tenant Improvement Plans by Tenant shall be new and of good quality for their intended purposes.

(i) The failure of Tenant to complete the Tenant Improvements by the Rent Commencement Date for any reason other than delays caused by the acts of Landlord or Landlord’s Related Parties shall not delay or extend the Rent Commencement Date and the

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obligations of Landlord and Tenant shall continue in full force and effect and the rent shall not be abated. Any such delays caused by Landlord shall extend the Rent Commencement Date by a period equal to the period of the delay attributable to the acts of Landlord.

(j) Tenant shall have no right, authority or power to bind Landlord or any interest of Landlord in the Project, the Property, the Building, or the Expansion Space part of the Leased Premises for the payment of any claim for labor or materials or for any charge or expense incurred or the erection or construction of the Tenant Improvements, nor to render the Project, the Property, the Building, or the Expansion Space part of the Leased Premises or any part thereof liable for any mechanic’s or materialmen’s lien, and Tenant shall in no way be considered the agent of Landlord in the construction or erection of any of the Tenant Improvements. If any lien is imposed upon any portion of the Property by reason of the construction of the Tenant Improvements, Tenant shall discharge or bond around the same in accordance with the provisions of this Lease.

(k) Tenant and its contractor(s) shall cause the construction of the Tenant Improvements in such manner as to minimize interference or inconvenience to the other tenants of the Building, the Property and the Project to the extent reasonably possible. All construction activity and storage of materials shall be confined to the Expansion Space part of the Leased Premises, Tenant’s storage building(s), if already erected, and the associated parking area unless Landlord specifically agrees otherwise in writing. The work site(s) shall be maintained in a safe and reasonably clean condition at all times during the construction. The construction of the Tenant Improvements shall be conducted so as to avoid damage to part of the Project, the Property, the Common Areas, including all parking and landscaped areas, or the Building, and in the event of any such damage, Tenant shall immediately cause such damage to be fully repaired and restored.

(l) Landlord shall pay Tenant a tenant improvement allowance (the “Tenant Improvement Allowance”) of an amount as provided in Section 1.26 of the Lease, which funds may be applied by Tenant to defray any and all expenses and fees incurred by Tenant in connection with the design, planning, approval and construction of the Tenant Improvements.

(m) Intentionally omitted.

(n) Landlord shall also pay Tenant, in addition to the Tenant Improvement Allowance, an allowance of $200,000 for furnishing and installation of elevators for the Expansion Space part of the Leased Premises, the construction of an additional walkway from the upper parking area for Building Ten to the south side of the Building along the eastern edge of the retaining wall for one of the parking areas directly adjacent to the Building, additional security related improvements to be made by Tenant and for other costs related to the upfit of the building.

(o) Except for any work required to be accomplished by Landlord as set forth in this Lease, the Shell Plans, or in this Work Letter, all of the work to be accomplished with respect to the Expansion Space part of the Leased Premises, the Building and the Property, shall be included in the Tenant Improvement Plans, and all of such items shall be completed by Tenant as part of the Tenant Improvements. Notwithstanding anything to the contrary herein, it is specifically agreed that Tenant shall be entitled to use the existing site utilities for construction purposes, and the cost of such utilities shall be borne by Landlord.

(p) The Tenant Improvement Allowance shall be paid to Tenant as follows: within thirty (30) days after the last to occur of (i) Tenant’s deliver to Landlord of an invoice for such

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payment, along with a detail schedule of the Tenant Improvement Construction Costs certified by an officer of Tenant and signed lien waivers from all contractors and subcontractors providing labor and materials for the Tenant Improvements: (ii) written confirmation from Landlord’s architect that the Tenant Improvements are substantially completed in accordance with the Tenant Improvement Plans; and (iii) delivery to Landlord of a permanent certificate of occupancy for Expansion Space part of the Leased Premises.

(q) Notwithstanding anything contained herein to the contrary, Tenant shall not be entitled to receive, and Landlord shall have no obligation to provide, the Tenant Improvement Allowance at any time after an event of default has occurred unless Tenant cures such default within any time allowed in this Lease for such cure.

(r) THE MECHANICAL, ELECTRICAL AND PLUMBING SYSTEMS FOR THE EXPANSION SPACE PART OF THE LEASED PREMISES SHALL BE EXACTLY AS SPECIFIED BY TENANT AS PART OF THE TENANT IMPROVEMENTS TO THE EXPANSION SPACE PART OF THE LEASED PREMISES. LANDLORD REPRESENTS THAT TO THE BEST OF THE ACTUAL KNOWLEDGE OF LANDLORD BASED ON THE LETTER FROM LANDLORD’S STRUCTURAL ENGINEER ATTACHED HERETO AS SCHEDULE D-1, THAT THE LOAD LEVELS FOR THE FIRST AND SECOND FLOORS OF THE BUILDING ARE AS SPECIFIED IN LANDLORD’S ENGINEER’S LETTER.

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EXHIBIT E

EXPANSION AREA, APPROXIMATE LOCATION OF LOT LINE ON RESUBDIVISION, AND LOCATION FOR STRUCTURED PARKING FOR BUILDING TEN IN THE EVENT OF CONSTRUCTION OF ADDITIONAL BUILDING IN THE EXPANSION AREA

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EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Fredric N. Eshelman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Pharmaceutical Product Development, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 2, 2005	By:	/s/ Fredric N. Eshelman
		Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Linda Baddour, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Pharmaceutical Product Development, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 2, 2005	By:	/s/ Linda Baddour
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Pharmaceutical Product Development, Inc. (“PPD”) on Form 10-Q for the period ended March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Fredric N. Eshelman, Chief Executive Officer of PPD, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of PPD as of, and for, the periods presented in the Report.

Date: May 2, 2005

/s/ Fredric N. Eshelman

Fredric N. Eshelman

Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Pharmaceutical Product Development, Inc. (“PPD”) on Form 10-Q for the period ended March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Linda Baddour, Chief Financial Officer of PPD, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of PPD as of, and for, the periods presented in the Report.

Date: May 2 , 2005

/s/ Linda Baddour

Linda Baddour

Chief Financial Officer