10-Q

UNITED STATES

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 September 30, 2010.

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)

929 North Front Street

Wilmington, North Carolina

(Address of principal executive offices)

28401

(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 has submitted electronically and posted on its Corporate website every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 118,856,886 shares of common stock, par value $0.05 per share, as of October 27, 2010.

INDEX

	Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income for the Three and Nine Months Ended September  30, 2009 and 2010 (unaudited)		3
Consolidated Condensed Balance Sheets as of December 31, 2009 and September  30, 2010 (unaudited)		4
Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September  30, 2009 and 2010 (unaudited)		5
Notes to Consolidated Condensed Financial Statements (unaudited)		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3. Quantitative and Qualitative Disclosures about Market Risk		36
Item 4. Controls and Procedures		37
Part II. OTHER INFORMATION
Item 6. Exhibits		37
Signatures		38

2

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2010			2009		2010
Net revenue:
Service revenue	$	316,283		$	339,390		$	987,140	$	1,005,006
Reimbursed revenue		24,117			25,985			72,228		77,054
Total net revenue		340,400			365,375			1,059,368		1,082,060
Direct costs		174,597			189,979			545,803		564,948
Research and development expenses		974			470			3,264		15,253
Selling, general and administrative expenses		93,028			102,365			282,812		327,381
Depreciation and amortization		16,282			15,726			47,118		49,877
Restructuring costs		3,892			—			3,892		—
Total operating expenses		288,773			308,540			882,889		957,459
Operating income		51,627			56,835			176,479		124,601
Loss from equity method investment		—			(4,562	)		—		(8,351	)
Other income, net		1,246			877			2,103		4,899
Income from continuing operations before provision for income taxes		52,873			53,150			178,582		121,149
Provision for income taxes		12,773			15,148			51,897		41,303
Income from continuing operations		40,100			38,002			126,685		79,846
Income (loss) from discontinued operations, net of income taxes		(2,426	)		—			13,618		(3,662	)
Net income	$	37,674		$	38,002		$	140,303	$	76,184
Basic and diluted income per common share from continuing operations	$	0.34		$	0.32		$	1.07	$	0.67
Income (loss) per common share from discontinued operations:
Basic	$	(0.02	)	$	—		$	0.12	$	(0.03	)
Diluted	$	(0.02	)	$	—		$	0.11	$	(0.03	)
Net income per common share:
Basic	$	0.32		$	0.32		$	1.19	$	0.64
Diluted	$	0.32		$	0.32		$	1.18	$	0.64
Dividends declared per common share	$	0.15		$	0.15		$	0.425	$	0.45
Weighted-average number of common shares outstanding:
Basic		118,130			118,814			117,951		118,607
Dilutive effect of stock options and restricted stock		447			991			770		964
Diluted		118,577			119,805			118,721		119,571

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)

(unaudited)

Assets

	December 31,			September 30,
	2009			2010
Current assets:
Cash and cash equivalents	$	408,903		$	440,442
Short-term investments		144,645			89,988
Accounts receivable and unbilled services, net		429,670			416,161
Income tax receivable		16,887			5,543
Investigator advances		13,980			15,231
Prepaid expenses		24,458			25,683
Deferred tax assets		26,068			25,870
Cash held in escrow		12,415			16,884
Other current assets		55,115			37,610
Total current assets		1,132,141			1,073,412
Property and equipment, net		388,459			379,173
Goodwill		323,383			280,216
Long-term investments		88,558			82,617
Other investments		44,641			43,433
Intangible assets		24,315			21,571
Deferred tax assets		11,959			6,796
Other assets		16,747			18,249
Total assets	$	2,030,203		$	1,905,467
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	34,005		$	29,873
Payables to investigators		54,428			53,564
Accrued income taxes		4,043			3,307
Other accrued expenses		200,720			209,725
Unearned income		297,844			291,686
Total current liabilities		591,040			588,155
Accrued income taxes		34,268			32,464
Accrued pension liability		15,434			16,293
Deferred rent		14,334			16,685
Other long-term liabilities		29,000			11,307
Total liabilities		684,076			664,904
Shareholders’ equity:
Common stock		5,913			5,943
Paid-in capital		576,069			600,347
Retained earnings		776,110			652,180
Accumulated other comprehensive loss		(11,965	)		(17,907	)
Total shareholders’ equity		1,346,127			1,240,563
Total liabilities and shareholders’ equity	$	2,030,203		$	1,905,467

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

(in thousands)

(unaudited)

	Nine Months Ended
	September 30,
	2009			2010
Cash flows from operating activities:
Net income	$	140,303		$	76,184
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		48,062			49,791
Stock compensation expense		14,354			13,728
Gain on sale of business, net of taxes		(19,452	)		—
Loss from equity investment, net of taxes		—			5,403
Provision for deferred income taxes		7,664			221
Net gain on sale of investments		(1,076	)		(3,291	)
Other		467			2,382
Change in operating assets and liabilities		(53,214	)		24,953
Net cash provided by operating activities		137,108			169,371
Cash flows from investing activities:
Purchases of property and equipment		(37,721	)		(41,295	)
Proceeds from sale of property and equipment		382			98
Proceeds from sale of business		42,095			3,464
Purchases of investments		(144,978	)		(46,590	)
Maturities and sales of investments		23,585			109,294
Purchases of other investments		(3,157	)		(7,893	)
Proceeds from sale of other investments		1,075			3,339
Net cash paid for acquisitions		(46,619	)		(10,169	)
Changes in restricted cash		(5,459	)		3,000
Purchase of intangibles		(500	)		—
Loan advances		—			(7,700	)
Net cash (used in) provided by investing activities		(171,297	)		5,548
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan		11,070			11,387
Income tax benefit from exercise of stock options and disqualifying dispositions of stock		143			197
Cash and cash equivalents contributed to Furiex Pharmaceuticals, Inc.		—			(100,000	)
Cash dividends paid		(50,183	)		(53,423	)
Net cash used in financing activities		(38,970	)		(141,839	)
Effect of exchange rate changes on cash and cash equivalents		18,999			(1,541	)
Net (decrease) increase in cash and cash equivalents		(54,160	)		31,539
Cash and cash equivalents, beginning of the period		491,755			408,903
Cash and cash equivalents, end of the period	$	437,595		$	440,442

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

(numbers in tables in thousands)

(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. The Company prepared these unaudited consolidated condensed financial statements in accordance with Rule 10-01 of Regulation S-X and, in management’s opinion, has 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, 2009. The results of operations for the three-month and nine-month periods ended September 30, 2010 are not necessarily indicative of the results to be expected for the full year or any other period. The amounts in the December 31, 2009 consolidated condensed balance sheet are derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

On June 14, 2010, the Company spun off its compound partnering business into a new independent, publicly traded company, Furiex Pharmaceuticals, Inc. (Nasdaq: FURX). Substantially all of the operating business components of the Discovery Sciences segment were included in the spin-off. The Company contributed $100.0 million of cash and cash equivalents to Furiex and distributed all outstanding shares of Furiex to the Company’s shareholders as a pro-rata, tax-free dividend, issuing one share of Furiex common stock for every twelve shares of the Company’s common stock to shareholders of record on June 1, 2010. The results of operations for the former compound partnering business conducted by the Company until June 14, 2010 are included as part of this report as continuing operations. The Company does not have any equity or other form of ownership interest in Furiex subsequent to the separation. For further details, see Note 14.

In the third quarter of 2010, the Company re-organized its operations into two new business segments. As a result of this re-organization, the Company changed the presentation of net revenue and direct costs on the consolidated condensed statements of income.

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.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board, or FASB, issued a new accounting standard modifying how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This standard clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. This standard requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity and requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. This standard was effective on January 1, 2010. The adoption of this standard had no impact on the Company’s consolidated financial statements.

In October 2009, the FASB issued a new accounting standard related to the accounting for revenue arrangements with multiple deliverables. This standard applies to all deliverables in contractual arrangements in all industries in which a vendor will perform multiple revenue-generating activities. This standard also addresses the unit of accounting for an arrangement involving multiple deliverables and how arrangement consideration should be allocated. This standard will be effective for fiscal years beginning on or after June 15, 2010. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

6

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)

1. Significant Accounting Policies

In March 2010, the Emerging Issues Task Force of the FASB issued a new accounting standard, the objective of which is to establish a revenue recognition model for contingent consideration that is payable upon the achievement of an uncertain future event, referred to as a milestone. This consensus will apply to milestones in single or multiple-deliverable arrangements involving research and development transactions, and will be effective for fiscal years (and interim periods within those fiscal years) beginning on or after June 15, 2010. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

Earnings per Share

The Company computes basic income per share information based on the weighted-average number of common shares outstanding during the period. The Company computes diluted income per share information based on the weighted-average number of common shares outstanding during the period plus the effects of any dilutive common stock equivalents. The Company excluded 8,339,427 shares and 7,033,229 shares from the calculation of diluted earnings per share during the three months ended September 30, 2009 and 2010, respectively, and 6,937,950 shares and 8,644,124 shares from the calculation of diluted earnings per share during the nine months ended September 30, 2009 and 2010, respectively, because they were antidilutive. The antidilutive shares consist of shares underlying stock options, employee stock purchase plan subscriptions and restricted stock that were antidilutive for the period.

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, or GAAP, 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.

2. Acquisitions and Dispositions

In April 2009, the Company acquired 100 percent of the outstanding equity interests of AbC.R.O., Inc., a contract research organization operating in Central and Eastern Europe, for total consideration of $40.0 million. Of this amount, the Company paid $36.4 million at closing and deposited the remaining $3.6 million into an escrow account to secure indemnification claims. The escrowed funds are scheduled to be released in the second quarter of 2011. The Company recorded the escrowed funds as a component of other accrued expenses as of September 30, 2010. Through the acquisition, the Company expanded its infrastructure in this region for clinical research by adding offices in Romania, Bulgaria, Serbia and Croatia, and strengthened its operations in other countries in the region. This acquisition is included in the Company’s Clinical Development Services segment. The fair value of the financial assets acquired included accounts receivable of $3.9 million and unbilled receivables of $2.4 million.

In April 2009, the Company acquired 100 percent of the outstanding equity interests of Magen BioSciences, Inc., a biotechnology company focused on the development of dermatologic therapies, for total consideration of $14.9 million. Of this amount, the Company paid $13.1 million at closing and deposited the remaining $1.8 million into an escrow account to secure indemnification claims. In the second quarter of 2010, the Company made a claim against the former Magen stockholders under the merger agreement, and therefore has not released the escrowed funds, pending resolution of the claim. The Company recorded the escrowed funds as a component of other accrued expenses as of September 30, 2010. Through the acquisition, the Company expanded its former compound partnering program to include dermatological drug discovery and gained screening capability for dermatologic compounds. This acquisition was included in the Company’s Discovery Sciences segment. As discussed below, in May 2010, the Company discontinued the operations of this business unit.

7

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)

2. Acquisitions and Dispositions

In November 2009, the Company acquired 100 percent of the outstanding equity interests of Excel PharmaStudies, Inc., a contract research organization operating in China. The total purchase price was $22.2 million, subject to final working capital adjustments. Of this amount, the Company paid $15.7 million at closing and an additional $2.0 million in the second quarter of 2010. At closing, the Company also deposited $4.5 million of the purchase price into an escrow account to secure indemnification claims, which is scheduled to be released by May 2011. The Company recorded the escrowed funds as a component of other accrued expenses as of September 30, 2010. Through the acquisition, the Company expanded its Phase II-IV clinical trial operations in China. This acquisition is included in the Company’s Clinical Development Services segment. The fair value of the financial assets acquired included accounts receivable of $1.6 million.

In November 2009, the Company acquired 100 percent of the outstanding equity interests of BioDuro LLC, a drug discovery services company focused on integrated drug discovery programs and services in China, for total consideration of $78.6 million. As of September 30, 2010, the Company had paid $69.6 million. The Company deposited the remaining $9.0 million of the purchase price into an escrow account to secure indemnification claims and the payment of other obligations. The escrowed funds are scheduled to be released by April 2013. Of the $9.0 million escrowed funds, the Company recorded $6.9 million as a component of other accrued expenses and $2.1 million as a component of other long-term liabilities as of September 30, 2010. Through the acquisition, the Company expanded its drug development capabilities within the region. This acquisition is included in the Company’s Laboratory Services segment. The fair value of the financial assets acquired included accounts receivables, net of $3.2 million and unbilled receivables of $1.6 million.

Acquisition costs related to AbC.R.O., Magen, Excel and BioDuro were not significant and were included in selling, general and administrative costs in the consolidated condensed statements of income.

As of September 30, 2010, the Company held $18.9 million in escrow relating to payments to be made for the AbC.R.O., Magen, Excel and BioDuro acquisitions, of which $16.9 million is reflected as cash held in escrow in the accompanying consolidated condensed balance sheet and $2.0 million is reflected as a component of other assets. These escrows secure the indemnification provisions of the purchase agreements and the payment of other obligations. The Company classified these balances as current or long-term based on the expected date of the release of the funds.

The Company accounted for these acquisitions under the purchase method of accounting. Accordingly, the Company allocated the total purchase price for these acquisitions to the estimated fair value of assets acquired and liabilities assumed, which are set forth in the following table:

	AbC.R.O.			Magen			Excel			BioDuro
Value of net assets:
Current assets	$	9,935		$	3,625		$	2,670		$	7,114
Property and equipment, net		1,025			609			682			5,850
Other assets		90			—			—			415
Current liabilities		(4,780	)		(1,246	)		(5,674	)		(5,728	)
Other long-term liabilities		—			—			—			(1,668	)
Value of identifiable intangible assets:
Backlog and customer relationships		7,920			—			3,049			9,810
In-process research and development		—			10,361			—			—
Goodwill		25,843			1,517			21,518			62,770
Total	$	40,033		$	14,866		$	22,245		$	78,563

The purchase price allocation for the above-referenced acquisitions was complete at September 30, 2010. Pro forma results of operations prior to the dates of acquisition have not been presented because the pro forma results are not materially different from the actual results presented.

8

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)

2. Acquisitions and Dispositions

The Company will not be able to deduct the goodwill related to the AbC.R.O., Magen, Excel or BioDuro acquisitions for tax purposes.

Dispositions

In May 2009, the Company completed the disposition of substantially all of the assets of its wholly owned subsidiary Piedmont Research Center, LLC for total consideration of $46.0 million. As of December 31, 2009, the purchaser had an indemnification holdback of $3.4 million, which was included as a component of other current assets. The Company received the $3.4 million in the first quarter of 2010. Piedmont Research Center provided preclinical research services and was included in the Company’s Discovery Sciences segment.

In December 2009, the Company completed the disposition of its wholly owned subsidiary PPD Biomarker Discovery Sciences, LLC for total consideration of $0.1 million and the right to receive a percentage of the revenue received by the purchaser on contracts awarded as of the date of the acquisition. Contingent consideration will be recognized when and if received in the future. PPD Biomarker Discovery Sciences provided biomarker discovery services and participant sample analysis.

Due to the unique service offerings of these subsidiaries, the Company determined these business units were no longer a long-term strategic fit and elected to sell them.

In May 2010, the Company discontinued the operations of its wholly owned subsidiary PPD Dermatology, Inc. due to unfavorable efficacy data associated with the MAG-131 program.

The results of Piedmont Research Center, PPD Biomarker Discovery Sciences and PPD Dermatology are reported as discontinued operations within the consolidated condensed statements of income as set forth in the following table:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009			2010		2009			2010
Net revenue	$	659		$	—	$	6,456		$	—
Loss from discontinued operations		(4,727	)		—		(10,484	)		(4,444	)
Gain on sale of business		—			—		35,505			—
Provision (benefit) for income taxes		(2,301	)		—		11,403			(782	)
Income (loss) from discontinued operations, net of income taxes		(2,426	)		—		13,618			(3,662	)

9

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)

3. Cash and Cash Equivalents, Short-term Investments, Long-term Investments and Other Investments

Cash and cash equivalents, short-term investments, long-term investments and other investments were composed of the following as of the dates set forth below:

	Cash and Cash Equivalents		Short-term Investments		Long-term Investments		Other Investments		Unrealized Gains		Unrealized Losses
As of December 31, 2009
Cash	$	228,482
Money market funds		180,421
Auction rate securities					$	88,558					$	21,317
Municipal debt securities			$	36,000					$	153		36
Corporate debt securities – FDIC insured				12,713						48		3
Treasury securities				95,932						36		7
Equity method investment:
Celtic Therapeutics Holdings, L.P.							$	31,426
Cost basis investments:
Bay City Capital Funds								9,181
A.M. Pappas Funds								3,593
Other investments								441
Total	$	408,903	$	144,645	$	88,558	$	44,641	$	237	$	21,363
As of September 30, 2010
Cash	$	203,103
Money market funds		232,339
Auction rate securities					$	82,617					$	18,458
Municipal debt securities			$	29,416					$	241		2
Corporate debt securities – FDIC insured				12,710						132		3
Treasury securities		5,000		47,862						158		3
Equity method investment:
Celtic Therapeutics Holdings, L.P.							$	23,074
Cost basis investments:
Bay City Capital Funds								10,029
A.M. Pappas Funds								4,196
Other investments								6,134
Total	$	440,442	$	89,988	$	82,617	$	43,433	$	531	$	18,466

10

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)

3. Cash and Cash Equivalents, Short-term Investments, Long-term Investments and Other Investments

For the three months and nine months ended September 30, 2009 and 2010, the Company had the following gross realized gains and losses on investments:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2010		2009		2010
Gross realized gains on other investments	$	360	$	—	$	1,076	$	3,340
Gross realized gains on municipal debt securities		—		—		—		4
Gross realized loss on other investments		—		—		—		750
Gross realized losses on municipal debt securities		—		—		—		53

Short-term and Long-term Investments

The Company classifies its short-term and long-term investments as available-for-sale securities. The Company determines realized and unrealized gains and losses on short-term and long-term investments on a specific identification basis.

The Company held $88.6 million and $82.6 million, net of unrealized losses, in auction rate securities at December 31, 2009 and September 30, 2010, respectively. The Company’s portfolio of investments in auction rate securities consists principally of interests in government-guaranteed student loans, insured municipal debt obligations and municipal preferred auction rate securities. The Company classified its entire balance of auction rate securities as long-term investments as of September 30, 2010 due to continuing uncertainties about the liquidity of the auction rate securities market. The Company also recorded unrealized losses on these investments of $21.3 million and $18.5 million as of December 31, 2009 and September 30, 2010, respectively. The Company recorded these unrealized losses based on a Level 3 valuation, including assumptions about appropriate maturity periods of the instruments by utilizing a 3 to 5 year workout period based on industry expectations, market interest rates for comparable securities, and the credit-worthiness of the underlying issuers. The Company concluded that this impairment was temporary because of its ability and intent to hold the auction rate securities until the fair value recovers. The Company will continue to seek to liquidate these investments at par value and will review the classification and valuation of these securities on a quarterly basis.

11

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)

3. Cash and Cash Equivalents, Short-term Investments, Long-term Investments and Other Investments

Equity Method Investment

In October 2009, the Company committed to invest up to $102.7 million in Celtic Therapeutics Holdings, L.P., or Celtic. Celtic is an investment partnership organized for the purpose of identifying, acquiring and investing in a diversified portfolio of novel therapeutic product candidates, with a focus on mid-stage compounds that have progressed through human proof of concept studies and that are targeted to address unmet medical needs. As of September 30, 2010, the Company had invested a total of $32.7 million of the aggregate commitment. For the three months and nine months ended September 30, 2010, the Company recognized a loss of $4.6 million and $8.4 million, respectively, which is based on the Company’s percentage ownership of Celtic’s losses. As of September 30, 2010, the Company had an investment balance of $23.1 million, which included cumulative investment losses to date. The Company expects to invest the remainder of its commitment over a period of four years.

Other Investments

The Company is a limited partner in several venture capital funds established for the purpose of investing in life sciences and healthcare companies. These funds require the Company to commit to make investments in the funds over a period of time. The Company accounts for these funds as cost basis investments and determines realized and unrealized losses on a specific identification method.

The Company is a stockholder in Accelerator III Corporation and certain of its incubator companies. Accelerator III requires the Company to make investments upon request up to its committed capital amount. The Company accounts for this investment as a cost basis investment and determines realized and unrealized losses on a specific identification method.

The Company’s capital commitments in these funds at September 30, 2010 were as follows:

Fund	Ownership			Total Capital Commitment		Remaining Commitment		Commitment Expiration
Bay City Capital Fund IV, L.P.		2.9	%	$	10,000	$	1,926	September 2010 (2)
Bay City Capital Fund V, L.P.		2.0	%		10,000		7,008	October 2012
A.M. Pappas Life Science Ventures III, L.P.		4.7	%		4,750		736	December 2009 (2)
A.M. Pappas Life Science Ventures IV, L.P.		3.0	%		2,935		2,201	February 2014
Accelerator III and incubator companies (1)		19.9	%		4,602		2,142	None

⁽¹⁾ The Company’s percentage ownership of incubator companies might vary but will not exceed 19.9%.

⁽²⁾ The funding commitments to Bay City Capital Fund IV, L.P. and A.M. Pappas Life Science Ventures, III, L.P. have expired for new investments. The Company may still be required to fund additional investments in existing fund portfolio companies and the ongoing operations of the funds up to the amount of the remaining capital commitment.

In May 2010, the Company invested $5.0 million for a 10.4% ownership interest in Liquidia Technologies, Inc. The Company accounts for this investment as a cost basis investment and determines realized and unrealized losses on a specific identification method.

In the second quarter of 2010, the Company recorded a $3.3 million pretax gain on the sale of a cost basis investment that had previously been fully impaired. The investment was sold in connection with the acquisition of the investee by a major pharmaceutical company.

12

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)

4. Accounts Receivable and Unbilled Services

Accounts receivable and unbilled services, net, consisted of the following amounts on the dates set forth below:

	December 31,			September 30,
	2009			2010
Billed	$	273,994		$	271,716
Unbilled		161,600			152,114
Allowance for doubtful accounts		(5,924	)		(7,669	)
Total accounts receivable and unbilled services, net	$	429,670		$	416,161

5. Property and Equipment

Property and equipment, stated at cost, consisted of the following amounts on the dates set forth below:

	December 31,			September 30,
	2009			2010
Land	$	8,299		$	8,226
Buildings and leasehold improvements		259,186			272,318
Fixed assets not placed in service		24,086			13,246
Information technology systems under development		10,102			20,029
Furniture and equipment		222,649			230,585
Computer equipment and software		203,447			208,630
Total property and equipment		727,769			753,034
Less accumulated depreciation		(339,310	)		(373,861	)
Total property and equipment, net	$	388,459		$	379,173

As of September 30, 2010, fixed assets not placed in service included software licenses purchased from a third-party vendor with annual payment terms as follows:

June 1, 2011	$	4,212
June 1, 2012		4,212
Total future remaining payments	$	8,424
Present value discount		(303	)
Present value of remaining payments	$	8,121

The Company classified its liability related to these licenses as $4.1 million in other accrued expenses and $4.0 million in other long-term liabilities on its consolidated condensed balance sheet as of September 30, 2010.

13

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)

6. Goodwill and Intangible Assets

Changes in the carrying amount of goodwill for the nine months ended September 30, 2010, by operating segment, were as follows:

	Clinical Development Services			Laboratory Services			Discovery Sciences			Total
Balance as of December 31, 2009	$	103,882		$	172,855		$	46,646		$	323,383
Adjustments to goodwill for prior year acquisitions		4,296			747			—			5,043
Spin-off of Furiex Pharmaceuticals, Inc.								(46,646	)		(46,646	)
Translation adjustments		(1,151	)		(413	)		—			(1,564	)
Balance as of September 30, 2010	$	107,027		$	173,189		$	—		$	280,216

As of September 30, 2010, the Company’s acquisitions of Excel and BioDuro had adjustments to goodwill of $4.3 million and $0.7 million, respectively, as a result of information that became available after the preliminary purchase price allocation was established.

The Company’s intangible assets were composed of the following as of the dates set forth below:

	December 31, 2009							September 30, 2010
	Carrying Amount		Accumulated Amortization			Net		Carrying Amount		Accumulated Amortization			Net
Backlog and customer relationships	$	24,657	$	(2,342	)	$	22,315	$	24,595	$	(5,024	)	$	19,571
Other intangible asset		2,000		—			2,000		2,000		—			2,000
Total	$	26,657	$	(2,342	)	$	24,315	$	26,595	$	(5,024	)	$	21,571

Intangible assets consist of backlog and customer relationships and an other intangible asset. The Company amortizes backlog and customer relationships on a straight-line basis, based on an estimated useful life of two to ten years. The weighted-average amortization period is 6.5 years for backlog and customer relationships. The other intangible asset has an indefinite life and the Company does not amortize this asset.

Amortization expense for the three months ended September 30, 2009 and 2010 was $0.5 million and $0.9 million, respectively. Amortization expense for the nine months ended September 30, 2009 and 2010 was $1.2 million and $2.8 million, respectively. As of September 30, 2010, expected amortization expense for each of the next five years is as follows:

2010 (remaining three months)	$	921
2011		3,600
2012		2,968
2013		2,791
2014		2,051

14

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)

7. Shareholders’ Equity

The Company measures share-based compensation cost at grant date, based on the fair value of the award, and recognizes it as expense over the employee’s requisite service period.

During the nine months ended September 30, 2010, the Company granted options to purchase approximately 2,797,000 shares with a weighted-average exercise price of $23.42. All options were granted with an exercise price equal to the fair value of the Company’s common stock on the grant date. The fair value of the Company’s common stock on the grant date is equal to the Nasdaq closing price of the Company’s stock on the date of grant. The weighted-average grant date fair value per share determined using the Black-Scholes option-pricing method and the aggregate fair value of options granted during the nine months ended September 30, 2009 and 2010 was $6.29, $5.15, $11.3 million and $16.5 million, respectively. As of September 30, 2010, the Company had 11.7 million options outstanding.

As a result of adjustments under the Company’s equity compensation plan triggered by the Furiex spin-off, the Company issued options to purchase approximately 415,200 additional shares not included in the granted options above. The per share exercise price of the majority of the outstanding option was adjusted to be equal to the product of the pre-distribution option exercise price multiplied by a fraction, the numerator of which was the Company’s closing price of its stock on the day of distribution and the denominator of which was the closing price of the Company’s stock plus the closing price of Furiex’s stock on the day of distribution. Following this adjustment to the per share exercise price, the number of shares subject to each outstanding option were adjusted to ensure that the intrinsic value of each option was the same on the day after the distribution as it was on the day of the distribution.

8. Comprehensive Income (Loss)

Comprehensive income consisted of the following amounts on the dates set forth below:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2010			2009			2010
Net income, as reported	$	37,674		$	38,002		$	140,303		$	76,184
Other comprehensive income (loss):
Cumulative translation adjustment		5,421			25,867			18,899			(6,585	)
Change in fair value of hedging transactions, net of tax expense of ($1,241), ($2,240), ($6,437) and ($784), respectively		1,692			5,360			13,265			1,376
Reclassification adjustment for hedging results included in direct costs, net of tax benefit (expense) of $169, $673, ($1,677) and $1,609, respectively		(138	)		(1,274	)		4,410			(2,835	)
Net unrealized (loss) gain on investments, net of tax benefit (expense) of $813, $73, ($3,109) and ($1,089), respectively		(1,480	)		(131	)		5,646			2,102
Reclassification to net income of realized gain (loss) on investment, net of tax of $181, $0, $409, and $0, respectively		(330	)		—			(745	)		—
Total other comprehensive income (loss)		5,165			29,822			41,475			(5,942	)
Comprehensive income	$	42,839		$	67,824		$	181,778		$	70,242

15

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)

8. Comprehensive Income (Loss)

Accumulated other comprehensive loss consisted of the following amounts on the dates set forth below:

	December 31, 2009			September 30, 2010
Translation adjustment	$	9,951		$	3,366
Pension liability, net of tax benefit of $5,876		(13,778	)		(13,778	)
Fair value on hedging transactions, net of tax expense of ($2,792) and ($2,026), respectively		5,554			4,095
Net unrealized losses on investments, net of tax benefit of $7,434 and $6,345, respectively		(13,692	)		(11,590	)
Total	$	(11,965	)	$	(17,907	)

9. Accounting for Derivative Instruments and Hedging Activities

The Company has significant international revenues and expenses, and related receivables and payables, denominated in currencies other than the functional currency of the related subsidiary. As a result, the Company’s operating results can be affected by changes in foreign currency exchange rates. In an effort to minimize this risk, from time to time, the Company purchases foreign currency option and forward contracts as hedges against anticipated and recorded transactions, and the related receivables and payables denominated in foreign currencies. The Company only uses foreign currency option and forward contracts as hedges to attempt to minimize the variability in the Company’s operating results arising from foreign currency exchange rate movements and not for speculative or trading purposes.

The Company recognizes changes in the fair value of the effective portion of foreign exchange derivatives that are designated and qualify as cash flow hedges of forecasted revenue and expense transactions in accumulated other comprehensive income, or OCI. The Company reclassifies these amounts from OCI and recognizes them in earnings when either the forecasted transaction occurs or it becomes probable that the forecasted transaction will not occur. The Company reclassifies OCI associated with hedges of foreign currency revenue into direct costs upon recognition of the forecasted transaction in the statements of income. The ineffective portion of a derivative instrument is recognized in earnings in the current period as a component of direct costs, and is measured by comparing the fair value of the forward contract to the change in the forward value of the anticipated transaction. Hedging portfolio ineffectiveness during the three months ended September 30, 2009 and 2010 was $0.1 million and $0.3 million, respectively. Hedging portfolio ineffectiveness during the nine months ended September 30, 2009 and 2010 was $0.1 million in each period.

The Company recognizes the fair value of foreign currency options and forwards used to manage the Company’s exposure on receivables and payables denominated in foreign currencies other than the entity’s functional currency, with fluctuations in the fair value being included in the statements of income. All foreign currency options and forwards related to receivables and payables hedging entered into during the period matured as of September 30, 2010 and the gains and losses on transactions during the period reported in the statements of income were not significant.

As of September 30, 2010, the Company’s outstanding hedging contracts were scheduled to expire over the next 15 months. The Company expects to reclassify the current gain positions of approximately $3.6 million, net of tax, within the next 12 months from OCI into the statement of income. At December 31, 2009 and September 30, 2010, the Company’s foreign currency derivative portfolio resulted in the Company recognizing an asset of $9.0 million and $8.1 million, respectively, as a component of other current assets and a liability of $0.6 million and $1.9 million, respectively, as a component of other accrued expenses.

16

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)

10. Pension Plan

The Company has a defined benefit plan for its qualifying United Kingdom, or U.K., employees employed by the Company’s U.K. subsidiaries. This pension plan was closed to new participants as of December 31, 2002. In December 2009, the Company amended the plan effective January 1, 2010. As amended, participants are entitled to receive benefits previously accrued, which are based on the expected pay at retirement and number of years of service through January 1, 2010, but will receive no additional credit for future years of service. Plan assets consist principally of equities, bonds and cash in a managed investment fund.

Pension costs for the U.K. pension plan included the following components on the dates set forth below:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2010			2009			2010
Service cost	$	284		$	—		$	801		$	—
Interest cost		672			794			1,897			2,357
Expected return on plan assets		(492	)		(619	)		(1,388	)		(1,837	)
Amortization of losses		257			265			726			787
Net periodic pension cost	$	721		$	440		$	2,036		$	1,307

11. Commitments and Contingencies

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 in amounts up to $5.0 million.

The Company is self-insured for health insurance for the majority of its employees located within the United States, but maintains stop-loss insurance on a “claims made” basis for expenses in excess of $0.3 million per member per year. As of December 31, 2009 and September 30, 2010, the Company maintained a reserve of approximately $2.9 million and $2.5 million, respectively, included in other accrued expenses on the consolidated condensed balance sheets, to cover open claims and estimated claims incurred but not reported.

As of September 30, 2010, the Company had commitments to invest up to an aggregate additional $11.9 million in four venture capital funds, $2.1 million in other investments and $70.0 million in an equity method investment. For further details, see Note 3.

17

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)

11. Commitments and Contingencies

As of September 30, 2010, the Company’s total gross unrecognized tax benefits were $26.1 million, of which $15.0 million, if recognized, would reduce its effective tax rate. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits could decrease up to $2.4 million within the next twelve months due to the settlement of audits and the expiration of statutes of limitations.

The Company’s policy for recording interest and penalties associated with tax audits is to record them as a component of provision for income taxes. For the nine months ended September 30, 2010, the Company recognized $0.5 million and $32,000, respectively, of interest and penalties as a reduction in expense on its statement of income, which includes releases related to the lapse of tax statutes of limitations in the period. As of September 30, 2010, the Company accrued $5.0 million of interest and $1.0 million of penalties with respect to uncertain tax positions. To the extent interest and penalties are not assessed with respect to uncertain tax positions, the Company will reduce amounts accrued and reflect them as a reduction of the overall income tax provision.

In 2010, the Company entered into a non-revolving line of credit agreement to loan Celtic Pharma Development Services Bermuda Ltd., a subsidiary of Celtic Pharmaceutical Holdings L.P., up to $18.0 million to finance trade payables in connection with a specified drug candidate. Celtic Pharma Development Services Bermuda Ltd. has appointed the Company to conduct certain clinical studies on the specified drug candidate. Principal and interest are due and payable no later than June 30, 2013 and are secured by a guarantee of an affiliate of the borrower. As of September 30, 2010, the Company had advanced $7.7 million to the borrower and recorded this as a component of other assets.

Under most of the agreements for services, the Company typically 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 or cash flows.

In the normal course of business, the Company is a party to various claims and legal proceedings. The Company records a reserve for pending and threatened litigation matters when an adverse outcome is probable and the amount of the potential liability is reasonably estimable. Although the ultimate outcome of pending and threatened litigation is currently not determinable and litigation costs can be material, 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.

18

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)

12. Fair Value of Financial Instruments

The accounting standards related to fair value establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the inputs as follows:

• Level 1 – Valuations based on quoted prices for identical assets or liabilities in active markets that the Company has the ability to access. Items valued using Level 1 inputs include money market funds, U.S. treasury securities and exchange-traded equity securities.

• Level 2 – Valuations based on quoted prices in markets that are not active, or for which all significant inputs are not observable, either directly or indirectly. Level 2 valuations include the use of matrix pricing models, quotes for comparable securities and valuation models using observable market inputs. Items valued using Level 2 inputs include derivatives and corporate and municipal debt securities.

• Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Items valued using Level 3 inputs include auction rate securities which are valued using unobservable input such as time to market liquidity and appropriate rates of return for comparable securities.

The following table presents information about the Company’s assets and liabilities required to be measured at fair value on a recurring basis:

	Level 1		Level 2		Level 3		Total
As of December 31, 2009
Assets
Money market funds	$	180,421	$	—	$	—	$	180,421
Short-term investments:
Treasury securities		95,932		—		—		95,932
Municipal debt securities		—		36,000		—		36,000
Corporate debt securities		9,165		3,548		—		12,713
Long-term investments		—		—		88,558		88,558
Derivative contracts		—		9,004		—		9,004
Total assets	$	285,518	$	48,552	$	88,558	$	422,628
Liabilities
Derivative contracts	$	—	$	611	$	—	$	611
Total liabilities	$	—	$	611	$	—	$	611

19

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)

12. Fair Value of Financial Instruments

	Level 1		Level 2		Level 3		Total
As of September 30, 2010
Assets
Cash and cash equivalents:
Money market funds	$	232,339	$	—	$	—	$	232,339
Treasury securities		5,000		—		—		5,000
Short-term investments:
Treasury securities		47,862		—		—		47,862
Municipal debt securities		—		29,416		—		29,416
Corporate debt securities		—		12,710		—		12,710
Long-term investments		—		—		82,617		82,617
Derivative contracts		—		8,117		—		8,117
Total assets	$	285,201	$	50,243	$	82,617	$	418,061
Liabilities
Derivative contracts	$	—	$	1,896	$	—	$	1,896
Total liabilities	$	—	$	1,896	$	—	$	1,896

The following table provides a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value using significant unobservable inputs (Level 3) for the nine months ended September 30, 2010:

	Long-term investments
Balance as of December 31, 2009	$	88,558
Liquidation of investments		(1,325	)
Decrease in unrealized losses on investments included in other comprehensive income		2,801
Balance as of March 31, 2010	$	90,034
Transfers out of Level 3		(6,800	)
Liquidation of investments		(575	)
Decrease in unrealized losses on investments included in other comprehensive income		351
Balance as of June 30, 2010	$	83,010
Liquidation of investments		(100	)
Increase in unrealized losses on investments included in other comprehensive income		(293	)
Balance as of September 30, 2010	$	82,617

Transfers out of Level 3 represent assets reclassified to Level 1 securities as the result of market activity that provided observable inputs for valuation during the period. Transfers out of Level 3 are measured at the end of the period.

20

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)

13. Business Segment Data

In the third quarter of 2010, the Company re-organized its operations into the following two new business segments:

• Clinical Development Services, which includes Phase II-IV clinical trial management services consisting of project management, clinical trial management, monitoring, data management, biostatistics, regulatory affairs, pharmacovigilance, late stage and related services; and

• Laboratory Services, which includes Phase I, clinical chemistry assay testing and various pre-clinical and clinical laboratory services, including discovery services, central laboratory services, vaccines and biologics testing, bioanalytical services and product analysis.

Substantially all of the operating business components of the Company’s Discovery Sciences segment were included in the spin-off of the Company’s compound partnering business in June 2010. Data for that segment is shown below solely for historical information.

The Company evaluates segment performance and allocates resources based on net revenue and operating income (loss). Depreciation expense is allocated to the business unit based on various operational metrics, such as headcount and space allocation. In addition, net revenue and operating income (loss) by segment exclude reimbursed revenue. The Company has a global infrastructure supporting its business segments, and therefore, assets are not identified by reportable segment.

Net revenue and operating income (loss) by business segment were as follows as of the dates set forth below:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2009			2010		2009		2010
Net revenue:
Clinical Development Services	$	249,981		$	260,345	$	778,152	$	765,075
Laboratory Services		65,860			79,045		203,222		231,921
Discovery Sciences		442			—		5,766		8,010
Reimbursed revenue		24,117			25,985		72,228		77,054
Total	$	340,400		$	365,375	$	1,059,368	$	1,082,060
Operating income (loss):
Clinical Development Services	$	39,202		$	43,681	$	130,941	$	101,830
Laboratory Services		12,813			13,154		42,627		34,631
Discovery Sciences		(388	)		—		2,911		(11,860	)
Total	$	51,627		$	56,835	$	176,479	$	124,601

21

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(numbers in tables in thousands)

(unaudited)

14. Spin-off of Furiex Pharmaceuticals, Inc.

On June 14, 2010, the Company spun off its compound partnering business. Substantially all of the operating business components of the Discovery Sciences segment were included in the spin-off. The Company contributed substantially all of the assets and liabilities of the Discovery Sciences segment and $100.0 million of cash and cash equivalents to Furiex Pharmaceuticals, Inc. The Company then distributed all outstanding shares of Furiex to the Company’s shareholders of record as of June 1, 2010 as a pro-rata, tax-free dividend of one share of Furiex common stock for every twelve shares of the Company’s common stock.

In connection with the spin-off, the Company and Furiex entered into a series of agreements, including a separation and distribution agreement, transition services agreement, sublease and license agreements, employee matters agreement, tax sharing agreement and a master development services agreement.

The total value of the Furiex stock dividend was $146.7 million, based on the net book value of the net assets that were contributed to Furiex in connection with the spin-off, as follows:

	2010
Net book value of assets transferred:
Cash and cash equivalents	$	100,000
Accounts receivable		7,705
Prepaid expenses		100
Property and equipment, net		18
Goodwill		46,646
Accounts payable		(758	)
Accrued expenses and other current liabilities		(3,545	)
Long-term liabilities		(3,502	)
Net assets transferred	$	146,664

Furiex’s historical results of operations have been presented as continuing operations in the consolidated condensed statements of income because the Company believes that this transaction does not qualify for discontinued operations treatment due to the ongoing master development services agreement between PPD and Furiex.

22

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 performance, expectations, predictions, assumptions and other statements that are not statements of historical facts. In some cases, you can identify forward-looking statements by terminology 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 and in “Item 1A. Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2009. 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 contract research organization providing clinical development, laboratory and drug discovery services. Our clients and partners include pharmaceutical, biotechnology, medical device, academic and government organizations. Our corporate mission is to help clients and partners accelerate the delivery of safe and effective therapeutics and maximize returns on their research and development investments.

We have been in the drug development business for more than 25 years. Our services include preclinical programs and Phase I through Phase IV clinical development services, as well as bioanalytical, cGMP, global central laboratory, vaccines and biologics laboratory and discovery services. We have extensive clinical trial experience, including regional, national and global studies across a wide spectrum of therapeutic areas and in 102 countries spanning six continents. In addition, for marketed drugs, biologics and devices, we offer support such as medical information, patient compliance programs, patient and disease registry programs, product safety and pharmacovigilance, standard response document development, Phase IV monitored studies and prescription-to-over-the-counter, or Rx to OTC, programs.

With 85 offices in 42 countries and more than 10,500 employees worldwide, we have provided services to 49 of the top 50 pharmaceutical companies in the world as ranked by 2009 healthcare research and development spending. We also work with leading biotechnology companies and government organizations that sponsor clinical research. We are one of the world’s largest providers of drug development services based on 2009 annual net revenue generated from contract research organizations.

Building on our outsourcing relationship with pharmaceutical and biotechnology clients, we established our Discovery Sciences business in 1997. This business primarily focused on compound development and commercialization collaborations. We spun off this business to our shareholders in a new independent, publicly traded company, Furiex Pharmaceuticals, Inc., in June 2010.

In the third quarter of 2010, we re-organized our operations into the following two new business segments:

• Clinical Development Services, which includes Phase II-IV clinical trial management services consisting of project management, clinical trial management, monitoring, data management, biostatistics, regulatory affairs, pharmacovigilance, late stage and related services; and

• Laboratory Services, which includes Phase I, clinical chemistry assay testing and various pre-clinical and clinical laboratory services, including discovery services, central laboratory services, vaccines and biologics testing, bioanalytical services and product analysis.

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Our services offer our clients a way to identify and develop drug candidates more quickly and cost-effectively. In addition, with global infrastructure, we are able to accommodate the multinational drug discovery and development needs of our clients. For more detailed information on PPD, see our Annual Report on Form 10-K for the year ended December 31, 2009.

Executive Overview

Our revenues depend on a relatively small number of industries and clients. As a result, we closely monitor the market for our services. For a discussion of the trends affecting the market for our services, see “Item 1. Business – Industry Overview – Trends Affecting the Drug Discovery and Development Industry” in our Annual Report on Form 10-K for the year ended December 31, 2009. In the first nine months of 2010, we experienced higher demand for our services than we experienced during 2009, which was a difficult year. We continue to believe in the fundamentals of the market. During the third quarter, we continued to focus on strengthening our client relationships. We believe that creating innovative long-term relationships with clients is critical to our future success, as we expect many clinical trial sponsors to continue to narrow their vendor lists and outsource a greater percentage of their research and development budgets in the years ahead. We plan to continue to pursue and establish innovative relationships, while enhancing our focus on safety and quality, to differentiate our company and create value for our clients and our shareholders. For the remainder of 2010, we plan to focus on sales execution, operational performance and building strategic relationships with pharmaceutical and biotechnology companies.

We review various metrics to evaluate our financial performance, including period-to-period changes in backlog, new authorizations, cancellation rates, revenue, margins and earnings. In the third quarter of 2010, we had net authorizations, defined as new authorizations less cancellations and adjustments, of $442.9 million, an increase of 67.0% over the same period in 2009. The cancellation rate for the first nine months of 2010 was 5.1% of backlog, compared to 6.1% for the same period in 2009. As of September 30, 2010, backlog was $3.4 billion, up 11.6% from December 31, 2009. The average length of our contracts in backlog decreased to 34 months as of September 30, 2010 from 36 months as of September 30, 2009.

Backlog by client type as of September 30, 2010 was 76.8% pharmaceutical, 16.6% biotech and 6.6% government/other, as compared to 68.8% pharmaceutical, 26.0% biotech and 5.2% government/other as of September 30, 2009. Net revenue by client type for the quarter ended September 30, 2010 was 77.4% pharmaceutical, 18.7% biotech and 3.9% government/other, compared to 63.2% pharmaceutical, 29.4% biotech and 7.4% government/other for the quarter ended September 30, 2009. This change in the composition of our backlog and net revenue is primarily a result of an increase in the percentage of authorizations from pharmaceutical companies during the twelve-month period ended September 30, 2010 and mergers of biotechnology clients into pharmaceutical companies.

For the third quarter of 2010, net revenue by business segment was 76.7% from Clinical Development Services and 23.3% from Laboratory Services, compared to 79.2% from Clinical Development Services and 20.8% from Laboratory Services for the same period in 2009. The change in the mix of revenue was due primarily to the acquisition of BioDuro in the fourth quarter of 2009. Our top therapeutic areas by net revenue for the quarter ended September 30, 2010 were oncology, circulatory/cardiovascular, endocrine/metabolic, infectious diseases and central nervous system. For a detailed discussion of our revenue, margins, earnings and other financial results for the quarter ended September 30, 2010, see “Results of Operations – Three Months Ended September 30, 2009 versus Three Months Ended September 30, 2010” below.

Our operating margin rate for the third quarter of 2010 was 15.6% compared to 10.8% for the second quarter of 2010. This improvement in operating margin reflects our focus on discretionary spending, improved operating performance and lower integration costs. We continue to focus on all selling, general and administrative, or SG&A, spending and driving efficiencies, while selectively investing for future growth and productivity gains.

Capital expenditures for the three months ended September 30, 2010 totaled $14.1 million. These capital expenditures were primarily for computer software, scientific equipment for our laboratory units and leasehold improvements for our new Bulgaria and China facilities. We made these investments to support our business and to improve the efficiencies of our operations.

As of September 30, 2010, we had $613.0 million of cash, cash equivalents and short- and long-term investments. In the third quarter of 2010, we generated $47.9 million in cash from operations. The number of days’ revenue outstanding in accounts receivable and unbilled services, net of unearned income, also known as DSO, was 23 days for the nine months ended September 30, 2010, compared to 31 days for the year ended December 31, 2009. DSO decreased in the first nine months of 2010 due to improved cash collections, the mix of contracts performed and their

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payment terms. We plan to continue to monitor DSO and the various factors that affect it. However, we expect DSO will continue to fluctuate from quarter to quarter depending on contract terms, the mix of contracts performed and our success in collecting receivables.

In June 2010, we spun off our compound partnering business into a new independent, publicly traded company, Furiex Pharmaceuticals, Inc.

New Business Authorizations and Backlog

We add new business authorizations, which are sales of our services, to backlog when we enter into a contract or letter of intent or receive a verbal commitment. Authorizations 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 September 30, 2009 and 2010 were $425.5 million and $663.8 million, respectively.

Our backlog consists of anticipated net revenue from contracts, letters of intent and verbal commitments that either have not started but are anticipated to begin in the future, or are in process and have not been completed. As of September 30, 2010, the remaining duration of the contracts in our backlog ranged from one to 97 months, with a weighted-average duration of 34 months. We expect the weighted-average duration of the contracts in our backlog to fluctuate from quarter to quarter in the future, based on the contracts constituting our backlog at any given time. Amounts included in backlog represent anticipated future net revenue, exclude net revenue that has been recognized previously in our statements of income, and have been adjusted for foreign currency fluctuations. Our backlog as of September 30, 2009 and 2010 was $3.2 billion and $3.4 billion, respectively. For various reasons discussed in “Item 1. Business – Backlog” in our Annual Report on Form 10-K for the year ended December 31, 2009, including contract cancellations, our backlog might never be recognized as revenue and is not necessarily a meaningful predictor of future performance.

Results of Operations

Revenue Recognition

We record revenue from contracts, other than time-and-material contracts, on a proportional performance basis. To measure performance on a given date, we compare direct costs through that date to estimated total direct costs to complete the contract. Direct costs relate primarily to the amount of labor and related overhead costs for the delivery of services. We believe this is the best indicator of the performance of the contractual obligations. Changes in the estimated total direct costs to complete a contract without a corresponding proportional change to the contract value result in a cumulative adjustment to the amount of revenue recognized in the period the change in estimate is determined. For time-and-material contracts, we recognize revenue as hours are worked, multiplied by the applicable hourly rate. For our laboratory services business, we recognize revenue from unitized contracts as subjects or samples are tested, multiplied by the applicable unit price. We offer volume discounts to our large customers based on annual volume thresholds. We record an estimate of the annual volume rebate as a reduction of revenue throughout the period based on the estimated total rebate to be earned for the period.

In connection with the management of clinical trials, we pay, on behalf of our clients, 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. Amounts paid by us as a principal for out-of-pocket costs are included in direct costs and the reimbursements we receive as a principal are reported as reimbursed revenue. In our statements of income, 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 September 30, 2009 and 2010, fees paid to investigators and other fees we paid as an agent and the associated reimbursements were approximately $79.2 million and $104.9 million, respectively.

Most of our contracts can be terminated by our clients either immediately or after a specified period following notice. These contracts typically require the client to pay us the fees earned to date, the fees and expenses to wind down the study 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 generally does not require a significant adjustment upon cancellation. If we determine that a loss will result from the performance of a contract, we charge the entire amount of the estimated loss against income in the period in which such determination is made.

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Prior to our June 2010 spin-off, the Discovery Sciences segment generated revenue in the form of upfront payments, development and regulatory milestone payments, royalties and sales-based milestone payments in connection with the out-licensing of compounds. Upfront payments were generally paid within a short period of time following the execution of an out-license and collaboration agreement. Milestone payments were typically one-time payments to us triggered by the collaborator’s achievement of specified development and regulatory events such as the commencement of Phase III trials or regulatory submission or approval. Royalties were payments received by us based on net product sales of a collaboration. Sales-based milestone payments were typically one-time payments to us triggered when the aggregate net sales of product by a collaborator for a specified period (for example, an annual period) reach an agreed upon threshold amount. We recognized these various forms of payment from our collaborators when the event which triggered the obligation of payment had occurred, there were no further obligations on our part in connection with the payment, and collection was reasonably assured.

Recording of Expenses

We generally record our operating expenses among the following categories:

• direct costs;

• research and development;

• selling, general and administrative; and

• depreciation and amortization.

Direct costs consist of 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 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.

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

We record property and equipment at cost less accumulated depreciation. We record depreciation expense on a straight-line method, based on the following estimated useful lives:

Buildings	20-40 years
Furniture and equipment	5-10 years
Computer equipment and software	2-5 years
Aircraft	30 years

We depreciate leasehold improvements over the shorter of the respective lives of the leases or the useful lives of the improvements. We depreciate property under capital leases over the term of the lease or the service life, whichever is shorter.

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Three Months Ended September 30, 2009 versus Three Months Ended September 30, 2010

The following table sets forth amounts from our consolidated condensed financial statements along with the dollar and percentage change for the three months ended September 30, 2009 compared to the three months ended September 30, 2010.

	Three Months Ended September 30,						$ Inc (Dec)			% Inc (Dec)
(in thousands, except per share data)	2009			2010
Net revenue:
Service revenue	$	316,283		$	339,390		$	23,107			7.3	%
Reimbursed revenue		24,117			25,985			1,868			7.7
Total net revenue		340,400			365,375			24,975			7.3
Direct costs		174,597			189,979			15,382			8.8
Research and development expenses		974			470			(504	)		(51.7	)
Selling, general and administrative expenses		93,028			102,365			9,337			10.0
Depreciation and amortization		16,282			15,726			(556	)		(3.4	)
Restructuring costs		3,892			—			(3,892	)		(100.0	)
Operating income		51,627			56,835			5,208			10.1
Loss from equity method investment		—			(4,562	)		(4,562	)		(100.0	)
Other income, net		1,246			877			(369	)		(29.6	)
Income from continuing operations before provision for income taxes		52,873			53,150			277			0.5
Provision for income taxes		12,773			15,148			2,375			18.6
Income from continuing operations		40,100			38,002			(2,098	)		(5.2	)
Income (loss) from discontinued operations, net of income taxes		(2,426	)		—			2,426			100.0
Net income	$	37,674		$	38,002		$	328			0.9
Income per diluted share from continuing operations	$	0.34		$	0.32		$	(0.02	)		(5.9	)
Income (loss) per diluted share from discontinued operations	$	(0.02	)	$	—		$	0.02			100.0
Net income per diluted share	$	0.32		$	0.32		$	—			—

Total net revenue increased $25.0 million to $365.4 million in the third quarter of 2010. Service revenue was $339.4 million, which accounted for 92.9% of total net revenue for the third quarter of 2010. The $23.1 million increase in service revenue was attributable to a $13.2 million increase in net revenue from our Laboratory Services segment and an increase of $10.4 million in our Clinical Development Services segment. The increase in net revenue from our Laboratory Services segment was primarily related to the BioDuro acquisition in late 2009. The increase in net revenue from our Clinical Development Services segment was related to higher authorizations and lower cancellations during the first nine months of 2010 compared to 2009. In the third quarter of 2009, we recognized $0.5 million of revenue in our Discovery Sciences segment, which we spun off in June 2010. Foreign revenue in 2010, converted at average third quarter 2009 exchange rates, would have resulted in net revenue being $4.1 million higher in our Clinical Development Services segment due to the strengthening of the U.S. dollar relative to the euro and pound sterling in the current quarter.

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Total direct costs increased $15.4 million to $190.0 million in the third quarter of 2010. The increase was mainly attributable to a $13.2 million increase in personnel costs, a $1.9 million increase in reimbursable out-of-pocket expenses, a $1.9 million increase in supply costs related to our laboratories and a $1.4 million increase in contract labor and subcontractor costs. These costs were partially offset by a hedging gain of $1.9 million in the third quarter of 2010 compared to a hedging gain of $0.2 million in the third quarter of 2009. The increase in personnel costs was due to a $7.9 million increase in incentive compensation expense due to overall company performance and a $4.7 million increase in personnel costs due to the addition of approximately 900 new employees from our acquisitions. Only a portion of these new employee costs were classified as direct, with the balance classified as SG&A. The remainder of the increase in personnel costs was due to growth and expansion in our business.

R&D expenses decreased $0.5 million to $0.5 million in the third quarter of 2010. The decrease is due to the completion of our spin-off of the compound partnering business in June 2010.

SG&A expenses increased $9.3 million to $102.4 million in the third quarter of 2010. The increase in SG&A expenses was primarily related to a $7.8 million increase in personnel costs and a $1.0 million increase in non-billable travel and entertainment costs. The increase in personnel costs was due to a $3.3 million increase in incentive compensation expense due to overall company performance, a $2.9 million increase due to more personnel related to acquired entities and the remainder due to growth and expansion in our business.

Restructuring costs were $3.9 million for the third quarter of 2009. In July 2009, we reduced our workforce in North America by approximately 270 employees.

In October 2009, we committed to invest up to $102.7 million in Celtic Therapeutics Holdings, L.P. As of September 30, 2010, we had invested a total of $32.7 million of the aggregate commitment. We account for this investment under the equity method of accounting. For the three months ended September 30, 2010, we recognized a loss from equity investment of $4.6 million. The loss from equity method investment increased significantly in the third quarter due to additional spending by Celtic to advance their compounds. We expect our fourth quarter loss from Celtic to be down significantly. As of September 30, 2010, our investment balance in Celtic was $23.1 million.

Our provision for income taxes from continuing operations decreased $2.4 million to $15.1 million in the third quarter of 2010. Our effective income tax rate from continuing operations for the third quarter of 2010 was 28.5% compared to 24.2% for the third quarter of 2009. The increase in our effective tax rate was primarily due to an increase in pre-tax earnings for our U.S. operations at a higher effective tax rate.

The loss from discontinued operations, net of income taxes was $2.4 million in the third quarter of 2009. In May 2009, we completed the disposition of substantially all of the assets of Piedmont Research Center, LLC. Piedmont Research Center provided preclinical research services. In December 2009, we completed the disposition of our wholly owned subsidiary PPD Biomarker Discovery Sciences, LLC. PPD Biomarker Discovery Sciences provided biomarker discovery services and participant sample analysis. In May 2010, we discontinued the operations of our wholly owned subsidiary PPD Dermatology, Inc. due to unfavorable efficacy data associated with the MAG-131 program. As a result, these business units have been shown as discontinued operations for 2009 and 2010.

Net income increased $0.3 million to $38.0 million in the third quarter of 2010, an increase of 0.9% from $37.7 million in the third quarter of 2009.

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Nine Months Ended September 30, 2009 versus Nine Months Ended September 30, 2010

The following table sets forth amounts from our consolidated condensed financial statements along with the dollar and percentage change for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2010.

	Nine Months Ended September 30,					$ Inc (Dec)			% Inc (Dec)
(in thousands, except per share data)	2009		2010
Net revenue:
Service revenue	$	987,140	$	1,005,006		$	17,866			1.8	%
Reimbursed revenue		72,228		77,054			4,826			6.7
Total net revenue		1,059,368		1,082,060			22,692			2.1
Direct costs		545,803		564,948			19,145			3.5
Research and development expenses		3,264		15,253			11,989			367.3
Selling, general and administrative expenses		282,812		327,381			44,569			15.8
Depreciation and amortization		47,118		49,877			2,759			5.9
Restructuring costs		3,892		—			(3,892	)		(100.0	)
Operating income		176,479		124,601			(51,878	)		(29.4	)
Loss from equity method investment		—		(8,351	)		(8,351	)		(100.0	)
Other income, net		2,103		4,899			2,796			133.0
Income from continuing operations before provision for income taxes		178,582		121,149			(57,433	)		(32.2	)
Provision for income taxes		51,897		41,303			(10,594	)		(20.4	)
Income from continuing operations		126,685		79,846			(46,839	)		(37.0	)
Income (loss) from discontinued operations, net of income taxes		13,618		(3,662	)		(17,280	)		(126.9	)
Net income	$	140,303	$	76,184		$	(64,119	)		(45.7	)
Income per diluted share from continuing operations	$	1.07	$	0.67		$	(0.40	)		(37.4	)
Income (loss) per diluted share from discontinued operations	$	0.11	$	(0.03	)	$	(0.14	)		(127.3	)
Net income per diluted share	$	1.18	$	0.64		$	(0.54	)		(45.8	)

Total net revenue increased $22.7 million to $1.1 billion in the first nine months of 2010. Service revenue was $1.0 billion, which accounted for 92.9% of total net revenue for the first nine months of 2010. The $17.9 million increase in service revenue was attributable to a $28.7 million increase in net revenue from our Laboratory Services segment, offset by a $13.1 million decrease in net revenue from our Clinical Development Services segment. The increase in net revenue from our Laboratory Services segment was primarily related to the BioDuro acquisition in late 2009. The decrease in Clinical Development Services segment was related to our high cancellation rate and low authorizations in 2009. For the first nine months of 2010 and 2009, we recognized revenue of $8.0 million and $5.8 million, respectively, in our Discovery Sciences segment, which we spun off in June 2010. Foreign revenue in 2010, converted at average 2009 exchange rates, would have resulted in net revenue being $3.5 million higher in our Clinical Development Services segment due to the strengthening of the U.S. dollar relative to the euro and pound sterling in the current period.

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Total direct costs increased $19.1 million to $564.9 million in the first nine months of 2010. The increase was mainly attributable to a $15.6 million increase in personnel costs, a $5.6 million increase in supply costs related to our laboratories, a $3.1 million reduction in research credits recognized in the first nine months of 2010 and a $4.8 million increase in reimbursable out-of-pocket expenses. These costs were partially offset by a hedging gain of $4.3 million in the first nine months of 2010 compared to a hedging loss of $6.2 million in the first nine months of 2009. The increase in personnel costs was due to an $8.0 million increase in incentive compensation expense due to overall company performance and a $14.2 million increase in personnel costs due to the addition of approximately 900 new employees from our acquisitions. Only a portion of these new employee costs were classified as direct, with the balance classified as SG&A. These increases in personnel costs were partially offset by a shift in utilization.

R&D expenses increased $12.0 million to $15.3 million in the first nine months of 2010. The increase in R&D expense was primarily due to development costs associated with the two therapeutic compounds acquired from Janssen Pharmaceutica in November 2009 that were part of the Discovery Sciences segment. The majority of our R&D expenses were associated with our Discovery Sciences segment which was spun off in June 2010.

SG&A expenses increased $44.6 million to $327.4 million in the first nine months of 2010. The increase in SG&A expenses was primarily related to a $26.8 million increase in personnel costs, a $4.8 million increase in accounting and legal costs related primarily to our compound partnering spin-off, a $4.8 million increase in non-billable travel and training costs, a $3.1 million reduction in research credits recognized in the first nine months of 2010 compared to the same period in 2009, a $2.0 million increase in contract labor and subcontractor costs and a $1.2 million increase in recruitment and relocation, partially offset by a $1.3 million decrease in bad debt expense. The increase in personnel costs was due to a $2.6 million increase in incentive compensation expense due to overall company performance, a $8.5 million increase due to more personnel related to acquired entities and the remainder was due to a shift in utilization along with growth and expansion in our business.

Depreciation and amortization expense increased $2.8 million to $49.9 million in the first nine months of 2010. The increase relates to property and equipment we acquired over the past year to accommodate growth.

Restructuring costs were $3.9 million for the third quarter of 2009. In July 2009, we reduced our workforce in North America by approximately 270 employees.

In October 2009, we committed to invest up to $102.7 million in Celtic Therapeutics Holdings, L.P. As of September 30, 2010, we had invested a total of $32.7 million of the aggregate commitment. We account for this investment under the equity method of accounting. For the nine months ended September 30, 2010, we recognized a loss from equity investment of $8.4 million. As of September 30, 2010, our investment balance in Celtic was $23.1 million.

Other income, net increased $2.8 million to $4.9 million in the first nine months of 2010. Changes in exchange rates from the time we recognize revenue until the client pays resulted in a net loss of $0.1 million for the first nine months of 2010, down from a net loss of $3.1 million for the first nine months of 2009. The increase in other income, net was also due to a net change in gain on sale of investments of $2.3 million, partially offset by an impairment of investment of $0.8 million and a decrease in interest income of $1.3 million.

Our provision for income taxes from continuing operations decreased $10.6 million to $41.3 million in the first nine months of 2010. Our effective income tax rate from continuing operations for the first nine months of 2010 was 34.1% compared to 29.1% for the first nine months of 2009. The increase in our effective tax rate was primarily attributable to $3.8 million of tax expense in the first nine months of 2010 related to a valuation allowance for deferred tax assets for the compound partnering spin-off.

The loss from discontinued operations, net of income taxes was $3.7 million in the first nine months of 2010. In May 2009, we completed the disposition of substantially all of the assets of Piedmont Research Center, LLC. Piedmont Research Center provided preclinical research services. The gain from the sale of Piedmont Research Center of $19.5 million, net of provision for income taxes of $16.1 million was recognized in the first nine months of 2009. In December 2009, we completed the disposition of our wholly owned subsidiary PPD Biomarker Discovery Sciences, LLC. PPD Biomarker Discovery Sciences provided biomarker discovery services and participant sample analysis. In May 2010, we discontinued the operations of our wholly owned subsidiary PPD Dermatology, Inc. due to unfavorable efficacy data associated with the MAG-131 program. As a result, these business units have been shown as discontinued operations for 2009 and 2010.

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Net income of $76.2 million in the first nine months of 2010 represents a decrease of 45.7% from $140.3 million in the first nine months of 2009. Net income per diluted share of $0.64 in the first nine months of 2010 represents a 45.8% decrease from $1.18 net income per diluted share in the first nine months of 2009. Net income per diluted share for the first nine months of 2009 included $5.0 million in milestone payments in connection with the regulatory approvals of Priligy in Finland and Sweden and a $19.5 million gain, net of tax, from the sale of Piedmont Research Center.

Liquidity and Capital Resources

As of September 30, 2010, we had $440.4 million of cash and cash equivalents and $90.0 million of short-term investments. We invest our cash and cash equivalents and short-term investments in bank deposits, financial instruments that are issued or guaranteed by the U.S. government and municipal debt obligations. Our expected primary cash needs are for capital expenditures, expansion of services, possible acquisitions, investments, geographic expansion, dividends, working capital and other general corporate purposes. We have historically funded our operations, dividends and growth, including acquisitions, primarily with cash flow from operations.

We held approximately $88.6 million and $82.6 million, net of unrealized losses, in auction rate securities at December 31, 2009 and September 30, 2010, respectively. Our portfolio of investments in auction rate securities consists principally of interests in government-guaranteed student loans, insured municipal debt obligations and municipal preferred auction rate securities. We classified our entire balance of auction rate securities as long-term investments as of September 30, 2010 due to continuing uncertainties about the liquidity of the auction rate securities market. We also recorded unrealized losses on these investments of $21.3 million and $18.5 million as of December 31, 2009 and September 30, 2010, respectively. We concluded that this impairment was temporary because of our ability and intent to hold the auction rate securities until the fair value recovers. We will continue to seek to liquidate these investments at par value and will review the classification and valuation of these securities on a quarterly basis.

In the first nine months of 2010, our operating activities provided $169.4 million in cash as compared to $137.1 million for the same period last year. The change in cash flow was due primarily to (1) lower net income in the first nine months of 2010 compared to the same period in 2009, (2) a $18.2 million increase in items relating to investing or financing activities, including a gain on sale of business of $19.5 million in the 2009 period, an increase in gain on sale of investment of $2.2 million, a net-of-tax loss from equity investment of $5.4 million and a $1.7 million increase in depreciation and amortization, partially offset by a $7.4 million decrease in deferred income taxes and (3) changes in operating cash receipts and payments totaling $78.2 million. The change in adjustments for accruals of expected future operating cash receipts and payments includes accounts receivable and unbilled services of $50.8 million, current income taxes of $39.9 million, prepaid expenses and investigator advances of $21.2 million, accounts payable and other accrued expenses and deferred rent of $5.6 million and other assets of $6.6 million. The change in adjustments to deferrals of past operating cash receipts and payments includes payables to investigators of ($19.3) million and unearned income of ($26.6) million. Fluctuations in receivables and unearned income occur on a regular basis as we perform services, achieve milestones or other billing criteria, send invoices to clients and collect outstanding accounts receivable. This activity varies by individual client and contract. We attempt to negotiate payment terms that provide for payment of services prior to or soon after the provision of services, but the levels of unbilled services and unearned revenue can vary significantly from quarter to quarter.

In the first nine months of 2010, our investing activities provided $5.5 million in cash. We used cash of $54.5 million to purchase investments, $41.3 million for capital expenditures, $7.2 million for acquisitions and $7.7 million for loan advances to Celtic Pharmaceutical Holdings L.P. as discussed below. These amounts were offset by maturity and sale of investments of $109.3 million, proceeds from the sale of investment of $3.3 million and additional proceeds from the sale of business of $3.5 million. Our capital expenditures in the first nine months of 2010 primarily consisted of $19.7 million for computer software and hardware, $10.9 million for various facility improvements and furnishings and $10.7 million for additional scientific equipment for our laboratory units.

In the first nine months of 2010, our financing activities used $141.8 million of cash. We contributed $100.0 million of cash and cash equivalents to Furiex in the compound partnering spin-off and paid $53.4 million of dividends to shareholders, which were partially offset by proceeds of $11.4 million from stock option exercises and purchases under our employee stock purchase plan.

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The following table sets forth amounts from our consolidated condensed balance sheet affecting our working capital, along with the dollar amount of the change from December 31, 2009 to September 30, 2010.

(in thousands)	December 31, 2009		September 30, 2010		$ Inc (Dec)
Current assets:
Cash and cash equivalents	$	408,903	$	440,442	$	31,539
Short-term investments		144,645		89,988		(54,657	)
Accounts receivable and unbilled services, net		429,670		416,161		(13,509	)
Income tax receivable		16,887		5,543		(11,344	)
Investigator advances		13,980		15,231		1,251
Prepaid expenses		24,458		25,683		1,225
Deferred tax assets		26,068		25,870		(198	)
Cash held in escrow		12,415		16,884		4,469
Other current assets		55,115		37,610		(17,505	)
Total current assets	$	1,132,141	$	1,073,412	$	(58,729	)
Current liabilities:
Accounts payable	$	34,005	$	29,873	$	(4,132	)
Payables to investigators		54,428		53,564		(864	)
Accrued income taxes		4,043		3,307		(736	)
Other accrued expenses		200,720		209,725		9,005
Unearned income		297,844		291,686		(6,158	)
Total current liabilities	$	591,040	$	588,155	$	(2,885	)
Working capital	$	541,101	$	485,257	$	(55,844	)

Working capital as of September 30, 2010 was $485.3 million, compared to $541.1 million at December 31, 2009. The decrease in working capital was due primarily to a decrease in short-term investments, other current assets and accounts receivable and unbilled services, net partially offset by an increase in cash and cash equivalents.

For the nine months ended September 30, 2010, DSO was 23 days compared to 31 days for the year ended December 31, 2009. We calculate DSO by dividing accounts receivable and unbilled services less unearned income by average daily gross revenue for the applicable period. We expect DSO will continue to fluctuate in the future depending on contract terms, the mix of contracts performed within a quarter, the levels of investigator advances and unearned income, and our success in collecting receivables.

Our $25.0 million revolving credit facility with Bank of America, N.A. expired on June 30, 2010 and we elected not to renew it.

In May 2009, our board of directors increased the annual dividend rate from $0.50 to $0.60 per share per year, payable quarterly at a rate of $0.15 per share effective beginning in the second quarter of 2009. The annual cash dividend policy and the payment of future quarterly cash dividends under that policy are not guaranteed and are subject to the discretion of and continuing determination by our board of directors that the policy remains in the best interests of our shareholders and in compliance with applicable laws and agreements.

In 2008, we announced that our board of directors approved a stock repurchase program authorizing us to repurchase up to $350.0 million of our common stock from time to time in the open market. As of September 30, 2010, $260.7 million remained available for share repurchases under the stock repurchase program. Although we do not presently intend to repurchase additional shares in the near term under our existing repurchase program, if we do, we expect to finance any such potential stock repurchases from existing cash and cash flows from operations.

In October 2009, we committed to invest up to $102.7 million in Celtic Therapeutics Holdings L.P. Celtic is an investment partnership organized for the purpose of identifying, acquiring and investing in a diversified portfolio of novel therapeutic product candidates, with a focus on mid-stage compounds that have progressed through human proof of concept studies that are targeted to address unmet medical needs. As of September 30, 2010, we had invested a total of $32.7 million of the aggregate commitment and had an investment balance of $23.1 million, which includes cumulative investment losses to date. We expect to invest the remainder of our commitment over a period of four years.

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In 2010, we entered into a non-revolving line of credit agreement to loan Celtic Pharma Development Services Bermuda Ltd., a subsidiary of Celtic Pharmaceutical Holdings L.P., up to $18.0 million to finance trade payables in connection with a specified drug candidate. Celtic Pharma Development Services Bermuda Ltd. has appointed us to conduct certain clinical studies on the specified drug candidate. Principal and interest are due and payable no later than June 30, 2013 and are secured by a guarantee of an affiliate of the borrower. As of September 30, 2010, we had advanced $7.7 million to the borrower.

As of September 30, 2010, we had commitments to invest up to an aggregate additional $11.9 million in four venture capital funds and $2.1 million in other investments. For further details, see Note 3 in the notes to the consolidated condensed financial statements.

As of September 30, 2010, our total gross unrecognized tax benefits were $26.1 million, of which $15.0 million, if recognized, would reduce our effective tax rate. We believe that it is reasonably possible that the total amount of unrecognized tax benefits could decrease up to $2.4 million within the next twelve months due to the settlement of audits and the expiration of statutes of limitations.

Our policy for recording interest and penalties associated with tax audits is to record them as a component of provision for income taxes. For the first nine months ended September 30, 2010, we recognized $0.5 million and $32,000, respectively, of interest and penalties as a reduction in expense on our statement of income, which includes releases related to the lapse of tax statutes of limitations in the period. As of September 30, 2010, we accrued $5.0 million of interest and $1.0 million of penalties with respect to uncertain tax positions. To the extent these interest and penalties are not assessed, we will reduce amounts accrued and reflect them as a reduction of the overall income tax provision.

Under most of our agreements for services, we typically 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 statements.

We expect to continue expanding our operations through internal growth, strategic acquisitions and investments. We expect to fund these activities, the payment of future cash dividends and potential repurchases of stock, if any, from existing cash, cash flows from operations and, if necessary or appropriate, borrowings under future credit facilities. We believe that these sources of liquidity will be sufficient to fund our operations, dividends and stock repurchases, if any, for the foreseeable future. From time to time, we evaluate potential acquisitions, investments and other growth and strategic opportunities that might require additional external financing, and we might seek funds from public or private issuances of equity or debt securities. While we believe we have sufficient liquidity to fund our operations for the foreseeable future, our sources of liquidity and ability to pay dividends or repurchase our stock could be affected by current and anticipated difficult economic conditions; our dependence on a small number of industries and clients; compliance with regulations; reliance on key personnel; breach of contract, personal injury or other tort claims; international risks; environmental or intellectual property claims; or other factors described below under “Potential Liability and Insurance”, “Potential Volatility of Quarterly Operating Results and Stock Price” and “Quantitative and Qualitative Disclosures about Market Risk”. In addition, see “Risk Factors,” “Contractual Obligations” and “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2009.

Off-Balance Sheet Arrangements

From time to time, we cause letters of credit to be issued to provide credit support for guarantees, contractual commitments and insurance policies. The fair values of the letters of credit reflect the amount of the underlying obligation and are subject to fees competitively determined in the marketplace. As of September 30, 2010, we had four letters of credit outstanding for a total of $1.8 million. We have no other off-balance sheet arrangements except for operating leases entered into during the normal course of business.

Contractual Obligations

There have been no significant changes to the Contractual Obligation table included in our Annual Report on Form 10-K for the year ended December 31, 2009.

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Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed those estimates that we believe are critical and require the use of complex judgment in their application in our 2009 Annual Report on Form 10-K. There were no material changes to our critical accounting policies and estimates in the first nine months of 2010. For detailed information on our critical accounting policies and estimates, see our Annual Report on Form 10-K for the year ended December 31, 2009.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board, or FASB, issued a new accounting standard modifying how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This standard clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. This standard requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity and requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. This standard was effective January 1, 2010. The adoption of this standard had no impact on our consolidated financial statements.

In October 2009, the FASB issued a new accounting standard related to the accounting for revenue arrangements with multiple deliverables. This standard applies to all deliverables in contractual arrangements in all industries in which a vendor will perform multiple revenue-generating activities. This standard also addresses the unit of accounting for arrangement involving multiple deliverables and how arrangement consideration should be allocated. This standard will be effective for fiscal years beginning on or after June 15, 2010. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

In March 2010, the Emerging Issues Task Force of the FASB issued a new standard, the objective of which is to establish a revenue recognition model for contingent consideration that is payable upon the achievement of an uncertain future event, referred to as a milestone. This consensus will apply to milestones in single or multiple-deliverable arrangements involving research and development transactions, and will be effective for fiscal years (and interim periods within those fiscal years) beginning on or after June 15, 2010. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

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 and tax laws of the various tax jurisdictions as applied to certain items of income and loss recognized for GAAP purposes. In particular, as the geographic mix of our pretax earnings among various tax jurisdictions changes, our effective tax rate might vary from period to period. The effective rate will also change due to the discrete recognition of tax benefits when tax positions are effectively settled or as a result of specific transactions.

Inflation

Our long-term contracts, those in excess of one year, generally include an inflation or cost of living adjustment for the portion of the services to be performed beyond one year from the contract date. In the event that actual inflation rates are greater than our contractual inflation rates or cost of living adjustments, inflation could have a material adverse effect on our operations or financial condition.

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Potential Liability and Insurance

Drug development services involve the testing of potential drug candidates on human volunteers pursuant to a study protocol. This testing exposes us to the risk of liability for personal injury or death to volunteers and participants resulting from, among other things, possible unforeseen adverse side effects or improper administration of the study drug or use of the drug following regulatory approval. We attempt to manage our risk of liability for personal injury or death to volunteers and participants from administration of study products through standard operating procedures, patient informed consent, contractual indemnification provisions with clients and insurance. We monitor clinical trials in compliance with government regulations and guidelines. We have established global standard operating procedures intended to satisfy regulatory requirements in all countries in which we have operations and to serve as a tool for controlling and enhancing the quality of clinical drug development and laboratory services. The contractual indemnifications generally do not protect us against our own actions, such as gross negligence. We currently maintain professional liability insurance coverage with limits we believe are adequate and appropriate.

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 and level of new business authorizations;

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

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

• our ability to properly manage our growth or contraction in our business;

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

• our ability to recruit and retain experienced personnel;

• the timing and extent of new government regulations;

• impairment of investments or intangible assets;

• variability of equity method investments;

• litigation costs;

• the timing of the opening of new offices;

• the timing of other internal expansion costs;

• exchange rate fluctuations between periods;

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

• pricing pressure in the market for our services;

• rapid technological change;

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

• intellectual property risks.

Delays and terminations of trials are often the result of actions taken by our clients 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, actual or anticipated changes in our dividend policy or stock repurchase plan or other factors, including general economic and financial market conditions, could affect the market price of our common stock. These factors include ones beyond our control, such as changes in revenue and earnings estimates by analysts, market conditions in our industry, disclosures by product development partners and actions by regulatory authorities with respect to potential drug candidates, changes in pharmaceutical, biotechnology and medical device industries and the government sponsored clinical research sector, and general economic conditions. Any effect on our common stock could be unrelated to our longer-term operating performance. For further details, see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009.

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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. We derived 40.9% and 42.6% of our net revenue for the three months ended September 30, 2009 and 2010, respectively, from operations outside the United States. We generally reinvest funds generated by each subsidiary in the country where they are earned. Accordingly, we are exposed to adverse movements in foreign currencies, predominately in the pound sterling, euro and Brazilian real.

The vast majority of our contracts are entered into by our U.S., U.K. or Singapore 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. and Singapore subsidiaries are generally denominated in U.S. dollars, pounds sterling or euros, with the majority in U.S. dollars. Although an increase in exchange rates for the pound sterling or euro relative to the U.S. dollar increases net revenue from contracts denominated in these currencies, income from operations is negatively affected due to an increase in operating expenses that occurs when we convert our expenses from local currencies into the U.S. dollar equivalent.

We also have currency risk resulting from the passage of time between the recognition of revenue, the invoicing of clients under contracts and the collection of client payments against those invoices. If a contract is denominated in a currency other than the subsidiary's local currency, we recognize an unbilled receivable at the time of revenue recognition and 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 we recognize revenue until the client pays will result in our receiving either more or less in local currency than the amount that was originally invoiced. We recognize this difference as a foreign currency transaction gain or loss, as applicable, and report it in other income, net.

Our strategy for managing foreign currency risk relies primarily on receiving payment in the same currency used to pay expenses and other non-derivative hedging strategies. From time to time, we also enter into foreign currency hedging activities in an effort to manage our potential foreign exchange exposure. If the U.S. dollar had weakened an additional 10% relative to the pound sterling, euro and Brazilian real in the third quarter of 2010, income from continuing operations, including the impact of hedging, would have been approximately $0.1 million higher for the quarter based on revenues and the costs related to our foreign operations. From time to time, we also enter into foreign currency hedging activities in an effort to manage our potential foreign exchange exposure. We have hedged a significant portion of our foreign currency exposure for the remainder of 2010.

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 condensed financial results. The process by which we translate each foreign subsidiary's financial results to U.S. dollars is as follows:

• we translate statement of income 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. We report translation adjustments 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 condensed financial position. However, future translation adjustments could materially and adversely affect us.

Currently, there are no material exchange controls on the payment of dividends or otherwise prohibiting the transfer of funds out of any country in which we conduct operations. Although we perform services for clients located in a number of jurisdictions, we have not experienced any material difficulties in receiving funds remitted from foreign countries. However, new or modified exchange control restrictions could have an adverse effect on our financial condition. If we were to repatriate dividends from the cumulative amount of undistributed earnings in foreign entities, we would incur a tax liability which is not currently provided for in our consolidated condensed balance sheet.

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We are exposed to changes in interest rates on our cash, cash equivalents and investments and amounts outstanding under notes payable and lines of credit. We invest our cash and investments in financial instruments with interest rates based on market conditions. If the interest rates on cash, cash equivalents and investments decreased by 10%, our interest income would have decreased by approximately $0.1 million in the third quarter of 2010.

We are also exposed to market risk related to our investments in auction rate securities. For further details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”.

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 were effective as of the end of the period covered by this report to provide the reasonable assurance discussed above.

Internal Control Over Financial Reporting

No change to our internal control over financial reporting occurred during the third quarter of 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 6. Exhibits

(a) Exhibits

10.276	Fourth Amendment dated September 3, 2010 to Lease Agreement, dated July 1, 2001, by and between Brandywine Grande C, L.P., 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

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

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
	(Registrant)
By	/s/ David L. Grange
	Chief Executive Officer (Principal Executive Officer)
By	/s/ Daniel G. Darazsdi
	Chief Financial Officer
	(Principal Financial Officer)
By	/s/ Peter Wilkinson
	Chief Accounting Officer
	(Principal Accounting Officer)

Date: November 5, 2010

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EX-10.276

Exhibit 10.276

FOURTH AMENDMENT TO LEASE

THIS FOURTH AMENDMENT TO LEASE (this “Amendment”) is made and entered into as of September 3, 2010, by and between BRANDYWINE GRANDE C, L.P., a Delaware limited partnership (“Landlord”), and PPD DEVELOPMENT, LP, a Texas limited partnership (“Tenant”).

A. Landlord and Tenant, as successor-in-interest to PPD Development, LLC, are parties to a certain Lease (as amended, the “Lease”) dated as of July 1, 2001, as amended by a First Amendment to Lease dated as of March 9, 2007, a Second Amendment to Lease dated as of January 10, 2008, and a Third Amendment to Lease dated as of July 21, 2008, for approximately 87,809 rentable square feet of space (the “Original Premises”) at 2240-2248 Dabney Road, Richmond, Virginia 23230, as more particularly described in the Lease.

B. Tenant desires to lease from Landlord, and Landlord desires to lease to Tenant, certain additional premises known as Suite 2248G (“Suite G”) in the Dabney IX building located at 2248 Dabney Road, Richmond, Virginia 23230 (the “Dabney IX Building”), which additional premises are shown on the location plan attached hereto as Exhibit A. The parties hereby stipulate and agree that Suite G contains 2,089 rentable square feet of space.

C. Landlord and Tenant wish to amend the Lease to, among other things, expand the Original Premises to include Suite G upon the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, Landlord and Tenant hereby agree as follows:

1. Incorporation of Recitals; Definitions. The recitals set forth above are hereby incorporated herein by reference as if set forth in full in the body of this Amendment. Capitalized terms used but not otherwise defined in this Amendment shall have the respective meanings given to them in the Lease.

2. Premises.

(a) Effective on the Suite G Commencement Date (as defined in Section 3(a) below), as used in the Lease: (i) “Premises” shall mean, collectively, the Original Premises and Suite G; and (ii) “Tenant’s Allocated Share” with respect to the Dabney IX Building shall mean the fraction, expressed as a percentage, equal to: (A) the total rentable square footage of that portion of the Premises located in the Dabney IX Building; divided by (B) 30,184.

(b) Tenant acknowledges and agrees that, notwithstanding any provision of the Lease to the contrary, Landlord shall have no obligation to make any improvements to Suite G in connection with this Amendment, and Tenant accepts Suite G in its current “AS IS” condition.

3. Term.

(a) The Term for Suite G shall commence on the date (the “Suite G Commencement Date”) that is the later of: (i) the date Landlord obtains full legal possession of Suite G, free of any occupants or tenancies; or (ii) sixty (60) days after written notice from Tenant to Landlord that the Suite G Commencement Date is requested. Landlord shall use commercially reasonable efforts to gain full legal possession of Suite G, free of any occupants or tenancies within sixty (60) days after written notice from Tenant to Landlord that the Suite G Commencement Date is requested. The Suite G Commencement Date and expiration date of the Term shall be confirmed by Landlord and Tenant by the execution of a Confirmation of Lease Term (the “COLT”) in the form attached hereto as Exhibit B. If Tenant fails to execute or object to the COLT within ten (10) business days of its delivery, Landlord’s determination of such dates shall be deemed accepted. Notwithstanding anything to the contrary in the Lease or this Amendment, Tenant may terminate this Amendment at any time and without penalty of any kind if the Suite G Commencement Date does not occur on or before August 31, 2011.

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(b) The Term for the Premises (collectively, the Original Premises and Suite G) shall terminate on June 30, 2015.

4. Fixed Rent. Fixed Rent for Suite G is set forth below, payable in the monthly installments as set forth below and otherwise in accordance with the terms of the Lease, as amended hereby:

TIME PERIOD	MONTHLY INSTALLMENTS
Suite G Commencement Date – 6/30/11	$	1,218.58
7/1/11 – 6/30/12	$	1,249.05
7/1/12 – 6/30/13	$	1,280.27
7/1/13 – 6/30/14	$	1,312.28
7/1/14 – 6/30/15	$	1,345.09

Rent shall be payable by: (i) check to Landlord at P.O. Box 11951, Newark, NJ 07101-4951; or (ii) wire transfer of immediately available funds to the account at Wachovia Bank, NA, at Philadelphia, PA, account no. 2030000359075, ABA wire routing number 031201467 (ACH ARA routing number 031000503), or as otherwise directed in writing by Landlord to Tenant.

5. Brokerage Commission. Landlord and Tenant each represents and warrants to the other that such party has had no dealings, negotiations or consultations with respect to the Premises or this transaction with any broker or finder. Each party shall indemnify and hold the other harmless from and against all liability, cost and expense, including attorney’s fees and court costs, arising out of any misrepresentation or breach of warranty under this Section.

6. OFAC. Tenant represents, warrants and covenants that neither Tenant nor any of its partners, officers, directors, members or shareholders: (i) is listed on the Specially Designated Nationals and Blocked Persons List maintained by the Office of Foreign Asset Control, Department of the Treasury (“OFAC”) pursuant to Executive Order No. 13224, 66 Fed. Reg. 49079 (Sept. 25, 2001) (“Order”) and all applicable provisions of Title III of the USA Patriot Act (Public Law No. 107-56 (October 26, 2001)); (ii) is listed on the Denied Persons List and Entity List maintained by the United States Department of Commerce; (iii) is listed on the List of Terrorists and List of Disbarred Parties maintained by the United States Department of State; (iv) is listed on any list or qualification of “Designated Nationals” as defined in the Cuban Assets Control Regulations 31 C.F.R. Part 515; (v) is listed on any other publicly available list of terrorists, terrorist organizations or narcotics traffickers maintained by the United States Department of State, the United States Department of Commerce or any other governmental authority or pursuant to the Order, the rules and regulations of OFAC (including without limitation the Trading with the Enemy Act, 50 U.S.C. App. 1-44; the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701-06; the unrepealed provision of the Iraq Sanctions Act, Publ.L. No. 101-513; the United Nations Participation Act, 22 U.S.C. § 2349 as-9; The Cuban Democracy Act, 22 U.S.C. §§ 6001-10; The Cuban Liberty and Democratic Solidarity Act, 18 U.S.C. §§ 2332d and 233; and The Foreign Narcotic Kingpin Designation Act, Publ. L. No. 106-120 and 107-108, all as may be amended from time to time); or any other applicable requirements contained in any enabling legislation or other Executive Orders in respect of the Order (the Order and such other rules, regulations, legislation or orders are collectively called the “Orders”); (vi) is engaged in activities prohibited in the Orders; or (vii) has been convicted, pleaded nolo contendere, indicted, arraigned or custodially detained on charges involving money laundering or predicate crimes to money laundering, drug trafficking, terrorist-related activities or other money laundering predicate crimes or in connection with the Bank Secrecy Act (31 U.S.C. §§ 5311 et seq.). Tenant shall defend, indemnify, and hold harmless Landlord from and against any and all claims, damages, losses, risks, liabilities, and expenses (including attorney’s fees and costs) arising from or related to any breach of the foregoing representation, warranty and covenant. The breach of this representation, warranty and covenant by Tenant shall be an immediate Event of Default under this Lease without cure.

7. Effect of Amendment; Ratification. Landlord and Tenant hereby acknowledge and agree that, except as provided in this Amendment, the Lease has not been modified, amended, canceled, terminated, released, superseded or otherwise rendered of no force or effect. The Lease as hereby amended is hereby ratified and confirmed by the parties hereto, and every provision, covenant, condition, obligation, right, term and power contained in and under the Lease, as amended herein, shall continue in full force and effect, affected by this Amendment only to the extent of the amendments

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and modifications set forth above, and each shall continue to be binding upon and inure to the benefit of the heirs, executors, administrators, successors and assigns of each party hereto.

8. Authority. Each of Landlord and Tenant represents and warrants to the other that the individual executing this Amendment on such party’s behalf is authorized to do so.

IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment as of the date first above written.

WITNESS:	LANDLORD:
	BRANDYWINE GRANDE C, L.P.
	By:	Brandywine Grande C Corp.,
		its general partner
/s/ Rick Miller		By:	/s/ K. Suzanne Stump
		Name:	K. Suzanne Stump
		Title:	Vice President, Asset Management
		Date:	/s/ September 3, 2010
WITNESS:	TENANT:
	PPD DEVELOPMENT, LP
	By:	PPD GP, LLC
	Its:	General Partner
/s/ Hank Gerock		By:	/s/ William J. Sharbaugh
		Name:	William J. Sharbaugh
		Title:	Chief Operating Officer
		Date:	/s/ August 25, 2010

A-3

EXHIBIT A

LOCATION PLAN OF SUITE G

A-4

EXHIBIT B

CONFIRMATION OF LEASE TERM

THIS MEMORANDUM is made as of the      day of                 , 200    , between BRANDYWINE GRANDE C, L.P., a Delaware limited partnership, with an office at 555 East Lancaster Ave., Suite 100, Radnor, PA 19087 (“Landlord”) and PPD DEVELOPMENT, LP, a Texas limited partnership, as successor-in-interest to PPD Development, LLC (“Tenant”), who entered into a lease dated for reference purposes as of July 1, 2001, as amended by a First Amendment to Leased dated as of March 9, 2007, a Second Amendment to Lease dated as of January 10, 2008, a Third Amendment to Deed of Lease dated as of July 21, 2008, and a Fourth Amendment to Lease dated as of                     , 2010 (as amended, the “Lease”) covering certain premises located at 2240-2248 Dabney Road, Richmond, Virginia 23230. All capitalized terms, if not defined herein, shall be defined as they are defined in the Lease.

1. The parties to this Memorandum hereby agree that the date of October 1, 2010 is the Suite G Commencement Date, the date of October 1, 2010 is the Rent Commencement Date for Suite G, and the date June 30, 2015 is the expiration date of the Lease.

2. Tenant hereby confirms the following:

(a) That it has accepted possession of Suite G pursuant to the terms of the Lease;

(b) That the improvements, if any, required to be furnished according to the Lease by Landlord have been Substantially Completed;

(c) That Landlord has fulfilled all of its duties of an inducement nature or as otherwise set forth in the Lease;

(d) That there are no offsets or credits against rentals, and the $7,583.00 Security Deposit has been paid as provided in the Lease;

(e) That there is no default by Landlord or Tenant under the Lease and the Lease is in full force and effect.

3. Landlord hereby confirms to Tenant that its Building Number is 929 and its Lease Number is             . This information must accompany each Rent check or wire payment.

4. This Memorandum, each and all of the provisions hereof, shall inure to the benefit, or bind, as the case may require, the parties hereto, and their respective successors and assigns, subject to the restrictions upon assignment and subletting contained in the Lease.

[SIGNATURES ON FOLLOWING PAGE]

IN WITNESS WHEREOF, the parties hereto have executed this Memorandum, under Seal, the day and year first above written.

WITNESS:	LANDLORD:
	BRANDYWINE GRANDE C, L.P.
	By:	Brandywine Grande C Corp.,
		its general partner
		By:
		Name:
		Title:
		Date:
WITNESS:	TENANT:
	PPD DEVELOPMENT, LP
	By:	PPD GP, LLC
	Its:	General Partner
		By:
		Name:
		Title:
		Date:

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, David L. Grange, 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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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: November 5, 2010	By:	/s/ David L. Grange
		Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Daniel G. Darazsdi, 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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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: November 5, 2010	By:	/s/ Daniel G. Darazsdi
		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 September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David L. Grange, 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: November 5, 2010

/s/ David L. Grange

David L. Grange

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 September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel G. Darazsdi, 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: November 5, 2010

/s/ Daniel G. Darazsdi

Daniel G. Darazsdi

Chief Financial Officer