FORM 10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

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.

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: 113,685,115 shares of common stock, par value $0.05 per share, as of October 26, 2011.

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

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, 2010. The results of operations for the three-month and nine-month periods ended September 30, 2011 are not necessarily indicative of the results to be expected for the full year or any other period. The amounts in the December 31, 2010 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, 2010.

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 because the Company believes this transaction does not qualify for discontinued operations treatment due to the ongoing master development services agreement between the Company and Furiex. The Company does not have any equity or other form of ownership interest in Furiex subsequent to the separation.

Prior to the Company’s June 2010 spin-off, the Discovery Sciences segment included the compound partnering business, a preclinical toxicology research business, and a biomarker discovery services business. In 2009, the Company sold both its preclinical toxicology research and biomarker discovery businesses, which were part of the Discovery Sciences segment. In 2010, the Company discontinued the operations of its wholly owned subsidiary PPD Dermatology, Inc. The Company’s Discovery Sciences revenues were all generated in the United States.

The accompanying consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, and include the accounts of Pharmaceutical Product Development, Inc. and its majority-owned subsidiaries that it controls. Amounts pertaining to the noncontrolling ownership interests held by third parties in the operating results and financial position of the Company’s majority-owned subsidiaries are reported as noncontrolling interests. All intercompany balances and transactions have been eliminated in consolidation.

In connection with the formation of the Company’s subsidiary BioDuro Biologics Pte. Ltd., or BioDuro Biologics, the Company has contractual rights and restrictions related to certain activities of MAB Discovery GmbH, or MAB, a variable interest entity that provides services to BioDuro Biologics. The Company determined that it has a controlling financial interest in MAB because it directs the most significant activities that impact MAB’s economic performance and has an obligation to absorb certain losses that could potentially be significant to MAB. As a result, the Company consolidates the financial results of MAB into its financial statements. MAB creditors have no recourse against the Company in the event of a default by MAB. As of September 30, 2011, MAB had total assets of $6.1 million and total liabilities of $5.7 million, and the Company had a commitment to provide up to $8.7 million of credit to MAB for purposes of acquiring equipment, of which $3.9 million had been advanced.

In May 2011, the Financial Account Standards Board, or FASB, issued updated fair value measurement and disclosure guidance that clarifies how to measure fair value and requires additional disclosures regarding Level 3 fair value measurements, as well as any transfers between Level 1 and Level 2 fair value measurements. The updated accounting guidance is effective for fiscal years and interim periods beginning on or after December 15, 2011 on a prospective basis. The Company is currently evaluating the impact of adopting the updated fair value guidance, and it does not expect the adoption to have a material impact on its consolidated condensed financial statements.

In June 2011, the FASB amended the manner in which an entity presents the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single, continuous statement of comprehensive income or in two separate but consecutive statements. The amendment eliminates the option to present the components of other comprehensive income as part of the statement of equity. The amendment is effective for fiscal years and interim periods beginning on or after December 15, 2011 on a retrospective basis. The adoption of this guidance will not change the previously reported amounts of comprehensive income but will change the Company’s presentation of comprehensive income in the consolidated condensed financial statements for the period ending March 31, 2012.

In September 2011, the FASB issued an accounting standards update that amends the two-step goodwill impairment test by permitting an entity to first assess qualitative factors in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test is unnecessary. The amendment is effective for fiscal years and interim periods beginning on or after December 15, 2011 on a prospective basis. The Company does not believe the adoption of this guidance will have an impact on its consolidated condensed financial statements.

In October 2009, the FASB issued a new accounting standard related to accounting for revenue arrangements with multiple deliverables. This standard applies to all deliverables in contractual arrangements in all industries in which the 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 was effective on January 1, 2011 on a prospective basis. The adoption of this standard did not have a material impact on the Company’s consolidated condensed financial statements, other than requiring additional disclosures included below under “Revenue recognition.”

In March 2010, 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 standard applies to milestones in single or multiple-deliverable arrangements involving research and development transactions and was effective on January 1, 2011 on a prospective basis. The adoption of this standard did not have a material impact on the Company’s consolidated condensed financial statements, other than requiring additional disclosures included below under “Revenue recognition.”

In April 2011, the FASB issued an accounting standard update clarifying the guidance as to whether a restructuring of accounts receivable constitutes a troubled debt restructuring. The guidance applies to modifications of receivables when a debtor is experiencing financial difficulties. The updated guidance was effective on July 1, 2011 on a retrospective basis to January 1, 2011. The adoption of this standard did not have a material impact on the Company’s consolidated condensed financial statements because the Company did not modify any of its receivables.

The Company generally enters into contracts with clients to provide services with payments based on fixed and variable fee arrangements. The Company recognizes revenue for services, as rendered, only after persuasive evidence of an arrangement exists, the sales price is determinable and collectability is reasonably assured. Once the above criteria have been met, the Company recognizes revenue for the services provided based on the proportional performance methodology, which determines the proportion of outputs or performance obligations that have been completed or delivered compared to the total contractual outputs or performance obligations.

Some of the Company’s contractual arrangements with clients involve multiple service deliverables, such as developing testing methodologies, database management, investigator recruitment and clinical trial monitoring, among others. Upon entering into the contractual arrangement, the Company determines whether each deliverable has standalone value to the client. If the multiple deliverables within the arrangement each have standalone value to the client, then a separate unit of accounting is assigned to each separate deliverable. If the multiple deliverables are not considered to each have standalone value to the client because the separate deliverables can only be used together, then the deliverables are considered bundled and only one unit of accounting is assigned to the entire arrangement.

A newly adopted accounting standard related to the accounting for revenue arrangements with multiple deliverables requires the allocation of the contractual arrangement’s value based on the relative selling price of the separately identified units of accounting within the arrangement. The standard requires a hierarchy of evidence to be followed when determining the best evidence of the selling price of an item. The best evidence of selling price for a unit of accounting is vendor-specific objective evidence, or VSOE, or the price charged when a deliverable is sold routinely on a standalone basis. When VSOE is not available to determine selling price, relevant third-party evidence, or TPE, of selling price should be used, such as prices competitors charge for interchangeable services to similar clients. When neither VSOE nor TPE of selling price for similar deliverables exists, the Company must use its best estimate of selling price, or BESP, considering all relevant information that is available.

The Company generally is not able to establish TPE for its services, as its deliverables are highly customized and competitor pricing is not available. VSOE can often be established for certain deliverables based on the Company’s standard price lists used for unitized services or the unit price or hourly rates set forth in the customer arrangement. BESP for deliverables is generally established based on labor costs, risks, and expected profit margins developed from the competitive bidding process for client contracts. The Company allocates the contractual arrangement’s value at the inception of the arrangement using the relative selling prices of the deliverable services within the contract based upon VSOE when available but primarily upon BESP. Consistent with the Company’s accounting policies prior to the adoption of this standard, the Company recognizes revenue for the separate elements of its contracts in accordance with the revenue recognition criteria above. The adoption of this standard did not have a material impact on the Company’s consolidated condensed financial statements.

Under a small number of client contracts, a portion of the payments owed to the Company are contingent upon successful achievement of performance standards or research and development success milestones. These payments are not included in the total contract value used for the proportional performance calculations until the achievement of the performance standard or milestone is reasonably assured. Milestone payments on contracts entered into subsequent to January 1, 2011 were immaterial.

The accounting standards 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. The fair value measurement of a financial instrument and its classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Observable inputs are inputs that market participants would use in pricing the asset or liability developed 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:

The Company computes basic income per common share based on the weighted-average number of common shares outstanding during the period. The Company computes diluted income per common 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 7,033,229 shares and 6,651,821 shares from the calculation of diluted earnings per common share during the three months ended September 30, 2010 and 2011, respectively, and 8,644,124 shares and 6,681,751 shares from the calculation of diluted earnings per share during the nine months ended September 30, 2010 and 2011, respectively, because they were antidilutive. The antidilutive shares consist of shares underlying stock options, employee stock purchase plan subscriptions and restricted stock units that were antidilutive for the period.

The preparation of financial statements in conformity with U.S. 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.

In October 2010, the Company acquired 64 percent of the outstanding securities of X-Chem, Inc., which is developing proprietary small molecule drug discovery services capabilities, for total consideration of $15.5 million. The Company paid $7.0 million to acquire existing outstanding equity interests and $8.5 million to acquire newly issued shares. The Company recorded the transaction as an acquisition of a controlling interest and consolidates X-Chem’s operating results in the financial statements of the Company. As of the acquisition date, the Company recorded the assets, liabilities and noncontrolling interests at fair value, including accounts receivable, net of $0.6 million. The Company estimated the fair value of the noncontrolling interests in X-Chem by applying the income approach using discounted cash flows. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. At any time prior to October 31, 2014, the Company has the option to purchase the remaining 36 percent of X-Chem at an entity valuation of $70.0 million. If the Company does not exercise its option, the noncontrolling interest holders will have the right to purchase the Company’s ownership interests at an entity valuation of $20.0 million between November 1, 2015 and November 30, 2015. X-Chem is required to declare and pay dividends in the future based on a formula agreed to by the Company and the noncontrolling interest holders. As of September 30, 2011, the Company had paid $4.5 million of the total $7.0 million purchase price to acquire outstanding equity interests. The Company deposited the remaining $2.5 million of the purchase price into an escrow account to secure indemnification claims and the payment of other obligations. As of September 30, 2011, the Company recorded a liability to pay the escrowed funds, which are scheduled to be released in April 2013, as a component of other liabilities. Through the acquisition, the Company expanded its drug discovery services capabilities. This acquisition is included in the Company’s Laboratory Services segment.

Acquisition costs related to X-Chem were not significant and were included in selling, general and administrative costs in the consolidated condensed statements of income. The factors that contributed to the recognition of goodwill included securing new technologies and synergies that are specific to the Company’s business, access to new market segments which are expected to increase revenues and profits, and acquisition of a talented workforce. The Company will not be able to deduct this goodwill for tax purposes.

The Company accounted for this acquisition under the acquisition method of accounting. The total purchase price for this acquisition was allocated based on the estimated fair value of assets acquired and liabilities assumed, which are set forth in the following table:

The purchase price allocation of X-Chem was completed as of September 30, 2011. Pro forma results of operations prior to the date of acquisition have not been presented because those results are not materially different from the actual results presented.

As of September 30, 2011, the Company held $6.5 million in escrow relating to payments to be made for previous acquisitions, of which $2.3 million is reflected as cash held in escrow and $4.2 million is reflected as a component of other assets in the accompanying consolidated condensed balance sheet. These escrows secure the indemnification obligations contained in the definitive agreements governing these transactions. The Company recorded $6.5 million in liabilities related to these acquisitions of which $2.3 million is recorded as a component of other accrued expenses and $4.2 million is recorded as a component of other liabilities. The Company classified these balances as current or long-term based on the expected date of the release of the funds.

In December 2010, the Company formed BioDuro Biologics Pte. Ltd. to develop proprietary biological drug discovery services capabilities. The Company invested $5.0 million and sold a 25 percent interest in the entity in exchange for $1.7 million in intangible assets. The Company recorded the exchange of the 25 percent noncontrolling interests in the entity at the fair value of the intangible assets acquired. At any time between December 2014 and December 2016, the Company has the right to acquire the noncontrolling interests at fair value. If the Company fails to exercise its purchase option, then during the 183-day period following the expiration of this option the minority owners have the right to require the Company to purchase their noncontrolling interests at fair value. BioDuro Biologics is included in the Company’s Laboratory Services segment.

In May 2010, the Company discontinued the operations of its wholly owned subsidiary PPD Dermatology, Inc., which was part of the Company’s Discovery Sciences segment.

The results of PPD Dermatology are reported as discontinued operations within the consolidated condensed statements of income as set forth in the following table:

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:

For the three and nine months ended September 30, 2010 and 2011, the Company had the following gross realized gains and losses on 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.

At December 31, 2010, the Company held $78.7 million, net of unrealized losses of $14.2 million, in auction rate securities. The Company classified these securities as long-term investments. The Company concluded that the unrealized losses were temporary because of its ability and intent to hold the auction rate securities until the fair value recovered. In May 2011, the Company converted $14.2 million par value of its government-guaranteed student loan auction rate securities to $14.2 million par value of government-guaranteed student loan asset-backed securities from the same issuer. As a result of the pending Merger Agreement more fully described in Note 16, which requires the Company, at the request of Jaguar Holdings, LLC, or Parent, to sell all or part of the asset-backed and auction rate securities at a price equal or greater than the price proposed by the Parent, the Company classified all of these securities as short-term investments and recorded them at an estimated fair value as of September 30, 2011. Amounts ultimately received upon sale could vary from their estimated fair value; however, the Company does not believe the difference between the estimated fair value and the amounts ultimately received upon sale will be material. In addition, the Company concluded that the previously unrealized losses were other-than-temporary because the Company no longer had the intent to hold these securities until maturity or until their face value recovered. As a result, for the three and nine months ended September 30, 2011, the Company recognized other-than-temporary impairment losses of $17.7 million.

In 2009, the Company committed to invest up to $102.7 million in Celtic Therapeutics Holdings, L.P., or Celtic, as a limited partner. 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, 2011, the Company owned 49.6% of the outstanding partnership interests of Celtic. The Company accounts for this investment under the equity method of accounting because the Company is a limited partner and the general partner has all decision-making authority relating to investment decisions and fund operations. As such, the Company is deemed to lack the control of the entity required for consolidation. As of September 30, 2011, the Company had a remaining commitment of $55.0 million, which it expects to fund over a period of up to four years. During 2010, the Company loaned Celtic $10.0 million, of which $2.0 million was repaid in 2010 and the remaining $8.0 million was converted to additional equity in connection with the settlement of a $10.0 million capital call during the first quarter of 2011. For the three months ended September 30, 2010 and 2011, the Company recognized a loss of $4.6 million and income of $1.9 million, respectively, based on the allocation of profits and losses to the partners’ capital accounts. For the nine months ended September 30, 2010 and 2011, the Company recognized a loss of $8.4 million and income of $15.1 million, respectively, based on the allocation of profits or losses to the partners’ capital accounts. As of September 30, 2011, the Company had an investment balance of $58.3 million.

In April 2011, the Company committed to invest up to $50.0 million in venBio Global Strategic Fund, L.P., or venBio, as a limited partner over the next five years. venBio invests in early stage life sciences companies. The Company accounts for this investment under the equity method of accounting because the Company is a limited partner and the general partner has all decision-making authority relating to investment decisions and fund operations. As such, the Company is deemed to lack the control of the entity required for consolidation. As of September 30, 2011, the Company had a remaining commitment of $49.8 million. As of September 30, 2011, the Company had an investment balance of $0.2 million and had an ownership interest in venBio of 28.6%.

The Company is a limited partner in several venture capital funds established for the purpose of investing in life science 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 method investments, determining 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 method investment, determining realized and unrealized losses on a specific identification method.

The Company’s capital commitments in these funds as of September 30, 2011 were as follows:

In May 2010, the Company invested $5.0 million for an ownership interest in Liquidia Technologies, Inc. As of September 30, 2011, the Company’s ownership interest in Liquidia was 8.6%.

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

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

Depreciation expense was $14.8 million and $15.8 million for the three months ended September 30, 2010 and 2011, respectively, and $47.1 million and $47.5 million for the nine months ended September 30, 2010 and 2011, respectively.

Changes in the carrying amount of goodwill for the nine months ended September 30, 2011, by operating segment, were as follows:

During 2011, the Company recorded a $0.8 million adjustment to goodwill related to X-Chem resulting from information regarding the valuation estimates that became available after the preliminary purchase price allocation was established.

The Company reviews goodwill for impairment annually on October 1st, and more frequently if impairment indicators arise. An impairment indicator represents an event or change in circumstances that would more likely than not reduce the fair value of a goodwill reporting unit below its carrying amount. A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. The Company monitors events and changes in circumstances in between annual testing dates to determine if any events or changes in circumstances indicate impairment. In connection with the most recent annual impairment test on October 1, 2010, the Company reviewed goodwill for impairment and the analysis indicated a significant amount of fair value in excess of carrying value for each goodwill reporting unit. However, the fair value of goodwill could be impacted by future adverse changes such as a significant decline in operating results, a sustained decline in the valuation of pharmaceutical and biotechnology company stocks, including the valuation of the Company’s own common stock, a significant adverse change in legal factors or in the business climate, a further significant slowdown in the worldwide economy or the pharmaceutical and biotechnology industry, or the sustained failure to meet the performance projections included in the forecasts of future operating results for any of the Company’s goodwill reporting units. Any adverse change in these factors could have a significant impact on the recoverability of goodwill, and could have a material impact on the Company’s consolidated condensed financial statements. There were no such indicators of impairment during the first nine months of 2011.

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

The Company had total non-amortizing intangible assets of $10.2 million as of December 31, 2010 and September 30, 2011. Unamortized intangible assets consist of $8.2 million of in-process research and development and $2.0 million of other intangible asset.

Amortization expense for the three months ended September 30, 2010 and 2011 was $0.9 million and $1.0 million, respectively. Amortization expense for the nine months ended September 30, 2010 and 2011 was $2.8 million and $3.0 million, respectively. As of September 30, 2011, expected amortization expense for each of the next five years is as follows:

In April 2011, the Company entered into a $50.0 million revolving line of credit facility with Barclays Bank PLC. The facility has a term of one-year and the Company can use borrowings for general corporate purposes. The credit facility contains affirmative, negative and financial covenants. Outstanding borrowings under the credit facility bear interest at an annual fluctuating rate tied to certain financial indices plus an agreed upon margin. The credit facility is currently scheduled to expire in April 2012, at which time any outstanding balance will be due. As of September 30, 2011, no borrowings were outstanding under this credit facility.

The Company estimates the fair value of each award on the grant date using the Black-Scholes option-pricing model and recognizes it as expense over the employee’s requisite service period.

During the nine months ended September 30, 2011, the Company granted options to purchase approximately 1,896,000 shares with a weighted-average exercise price of $27.47. This amount includes options to purchase approximately 1,554,500 shares granted in the Company’s annual grant during the first quarter of 2011. All options have 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 and the aggregate fair value of options granted during the nine months ended September 30, 2010 and 2011 was $5.15 and $6.81 per share, and $16.5 million and $12.9 million, respectively. As of September 30, 2011, the Company had options outstanding to purchase 11.8 million shares of its common stock.

The Company has issued restricted stock units that are subject to a three-year linear vesting schedule with one-third of the grant vesting on each of the first, second and third anniversaries of the award date. The Company determines expense based on the market value of the restricted stock units on the award date, and recognizes expense on a straight-line basis over the vesting period.

During the nine months ended September 30, 2011, the Company awarded approximately 367,000 restricted stock units to employees. This amount includes restricted stock units of approximately 359,000 granted in the Company’s annual grant during the first quarter of 2011. The weighted-average award date fair value per unit and the aggregate fair value of units during the nine months ended September 30, 2011 was $27.31 per share and $10.0 million, respectively. As of September 30, 2011, approximately 355,000 restricted stock units were outstanding.

In February 2008, the Company’s Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to $350.0 million of its common stock from time to time. In February 2011, the Company entered into an accelerated share repurchase, or ASR, arrangement with Barclays Capital Inc., or Barclays, under which the Company used $200.0 million of the remaining amount to repurchase additional shares of its common stock. During the first quarter of 2011, the Company repurchased approximately 6.5 million shares of its common stock under this arrangement for an aggregate purchase price of $200.0 million. The agreement with Barclays for the ASR included a forward sale contract settlement date in December 2011, but it could be settled prior to that date. Under the terms of the forward sale contract, Barclays was required to purchase, in the open market, $200.0 million of the Company’s common stock during the term of the contract to fulfill its obligation and cover its position related to 6.5 million shares borrowed from third parties and sold to the Company during the first quarter of 2011 and for any additional shares payable upon settlement. The forward contract was settled in September 2011, and the Company received approximately 503,000 shares.

As of September 30, 2011, $60.7 million remained available for stock repurchases authorized by the Board of Directors. The manner of the purchases, the amount the Company spends and the number of shares repurchased will vary based on a variety of factors, including the stock price and blackout periods in which the Company is restricted from repurchasing shares. The Company’s October 2, 2011 Merger Agreement with Jaguar Holdings (see Note 16) does not allow it to repurchase additional shares.

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

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

The Company recognized an other-than-temporary impairment on its remaining asset-backed and auction rate securities as of September 30, 2011. As a result, the total accumulated unrealized losses and related tax benefits associated with the investment portfolio were recognized in earnings.

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 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 Company recognizes the ineffective portion of a derivative instrument in earnings in the current period as a component of other income, and measures it 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, 2010 and 2011 was a gain of $0.3 million and a loss of $0.1 million, respectively. Hedging portfolio ineffectiveness during the nine months ended September 30, 2010 and 2011 was a gain of $0.1 million and $44,000, respectively.

The Company also manages its exposure on receivables and payables denominated in currencies other than the entity’s functional currency through the use of natural hedges and foreign currency options and forwards, if necessary. The Company records foreign currency derivatives at fair value, with fluctuations in the fair value being included in the statements of income as a component of other income. There were two outstanding foreign currency options and forwards related to receivables and payables hedging outstanding as of September 30, 2011. The fair value of the derivative liability and the gains and losses reported in the statements of income were not significant.

As of September 30, 2011, the Company’s outstanding hedging contracts were scheduled to expire over the next 15 months. The Company expects to reclassify the current loss positions of $2.1 million, net of tax, within the next 12 months from OCI into the statement of income. As of December 31, 2010 and September 30, 2011, the Company’s foreign currency derivative portfolio resulted in the Company recognizing an asset of $6.7 million and $1.3 million, respectively, as a component of other current assets and a liability of $1.4 million and $5.4 million, respectively, as a component of other accrued expenses.

Net periodic pension costs for the U.K. pension plan included the following components:

During the nine months ended September 30, 2011, the Company did not make any contributions to the plan but expects to contribute approximately $3.0 million during the remainder of 2011.

From time to time, the Company causes 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 payable to the issuers of the letters of credit competitively determined in the marketplace. As of September 30, 2011, the Company had four letters of credit outstanding for a total of $1.8 million.

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 $0.4 million per member per year.

As of September 30, 2011, the Company had commitments to invest up to an aggregate additional $8.6 million in several venture capital funds, $0.8 million in other cost method investments and $104.8 million in equity method investments. For further details, see Note 3.

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 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, 2011, the Company had advanced $16.8 million to the borrower which is recorded as a component of other assets.

In 2010, the Company sold a noncontrolling interest in its BioDuro Biologics Pte. Ltd. subsidiary. During the 183-day period commencing in December 2016, the minority equity holders have the right to require the Company to purchase their noncontrolling interests at fair value.

As of September 30, 2011, the Company’s total gross unrecognized tax benefits were $29.4 million, of which $16.9 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 $5.7 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. As of September 30, 2011, the Company accrued $4.1 million of interest and $0.9 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.

Under most of its 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. A number of putative shareholder class actions have also been filed against the Company in connection with the merger described in Note 16. 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.

The Company has categorized its assets and liabilities recorded at fair value based upon a fair value hierarchy in accordance with the applicable accounting standards.

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

The following table provides a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs, or Level 3, for the nine months ended September 30, 2011:

The Company evaluates segment performance and allocates resources based on net revenue and operating income (loss). Depreciation and amortization expense is allocated to the business unit based on various operational metrics, such as headcount and space. 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:

As of September 30, 2011, the Company provided services to and owned 49.6% of Celtic Therapeutics Holdings, L.P., or Celtic, which is accounted for under the equity method. During 2010, the Company loaned Celtic $10.0 million, of which $2.0 million was repaid in 2010. During the first quarter of 2011, the outstanding loan was converted to additional equity in connection with the settlement of a $10.0 million capital call. The Company recognized $0.8 million and $1.3 million of net revenue from Celtic for the three months ended September 30, 2010 and 2011, respectively, and $1.3 million and $3.9 million in net revenue from Celtic for the nine months ending September 30, 2010 and 2011, respectively.

On October 2, 2011, the Company entered into an Agreement and Plan of Merger, or Merger Agreement, with Jaguar Holdings, LLC, or Parent, and Jaguar Merger Sub, Inc., a wholly-owned subsidiary of Parent, providing for the merger of Merger Sub with and into the Company. At the effective time of the merger, each outstanding share of the Company’s common stock (other than (i) shares owned by Parent, Merger Sub, the Company or any of their respective subsidiaries, (ii) equity awards previously agreed to roll over in the merger and (iii) shares owned by shareholders who have perfected appraisal pursuant to Article 13 of the North Carolina Business Corporation Act) shall be automatically cancelled and converted into the right to receive $33.25 in cash, without interest, on the terms and subject to the conditions set forth in the Merger Agreement. As a result, the Company will become a wholly-owned subsidiary of Parent and the Company’s common stock will cease to be publicly traded. Parent and Merger Sub were formed by affiliates of The Carlyle Group and affiliates of Hellman & Friedman LLC.

The closing of the merger transaction is subject to normal and customary conditions, including approval by the Company’s shareholders. Contingent upon the closing of the merger, the Company will be obligated to pay a financial advisor fee in connection with the merger of approximately $22.5 million. The Company expects the merger to close during the fourth quarter of 2011. However, the Merger Agreement may be terminated and the merger abandoned at any time prior to the effective time of the merger. If the Merger Agreement is terminated, the Company may be obligated to pay a termination fee of $58.1 million or $116.2 million, depending on the basis of the termination.

The Company has been notified of putative shareholder class action lawsuits by persons alleging to be shareholders of the Company, individually and on behalf of all others similarly situated, against the Company, the Sponsors, and each of the directors of the Company, seeking damages in unspecified amounts and injunctive relief. These lawsuits are alleging that the directors breached their fiduciary duties in entering into the Merger Agreement with Sponsors.

Additional similar lawsuits might arise. The Company and its board of directors believe these lawsuits are without merit and intend to vigorously defend them.

The following discussion and analysis is provided to increase the 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.

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, 2010. 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.

We are a leading global contract research organization providing drug discovery, development and lifecycle management services. Our clients include pharmaceutical, biotechnology, medical device, academic, non-profit and government organizations. We apply innovative technologies, therapeutic expertise and a commitment to quality to help our clients accelerate the development of safe and effective therapeutics and maximize the returns on their research and development investments.

We have been in the drug development business for more than 25 years. Our development services include preclinical drug discovery services, Phase I through Phase IV clinical development services and post-approval services, as well as bioanalytical, cGMP, global central laboratory and vaccines and biologics laboratory services. We have extensive clinical trial experience, including regional, national and global studies across a wide spectrum of therapeutic areas in over 100 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, observational studies, Phase IV monitored studies and prescription-to-over-the-counter, or Rx to OTC, programs. Our services offer our clients a way to identify and develop drug candidates more quickly and cost-effectively.

With 86 offices in 44 countries and more than 11,000 employees worldwide, our global infrastructure enables us to accommodate the multinational drug development needs of our clients. We have provided services to 47 of the top 50 pharmaceutical companies in the world as ranked by 2010 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 2010 annual net revenue generated from contract research organizations. For more detailed information on PPD, see our Annual Report on Form 10-K for the year ended December 31, 2010.

On October 2, 2011, we entered into an Agreement and Plan of Merger, or Merger Agreement, with Jaguar Holdings, LLC, or Parent, and Jaguar Merger Sub, Inc., a wholly-owned subsidiary of Parent, providing for the merger of Merger Sub with and into the Company. At the effective time of the merger, each outstanding share of our common stock (other than (i) shares owned by Parent, Merger Sub, us or any of their respective subsidiaries, (ii) equity awards previously agreed to roll over in the merger and (iii) shares owned by shareholders who have perfected appraisal pursuant to Article 13 of the North Carolina Business Corporation Act) shall be automatically cancelled and converted into the right to receive $33.25 in cash, without interest, on the terms and subject to the conditions set forth in the Merger Agreement. As a result, we will become a wholly-owned subsidiary of Parent and our common stock will cease to be publicly traded. Parent and Merger Sub were formed by affiliates of The Carlyle Group and affiliates of Hellman & Friedman LLC.

The closing of the merger transaction is subject to normal and customary conditions, including approval by our shareholders. We expect the merger to close in the fourth quarter of 2011.

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 – Trends Affecting the Drug Discovery and Development Industry” in our Annual Report on Form 10-K for the year ended December 31, 2010. We continue to believe in the fundamentals of the CRO services market. We expect many clinical trial sponsors to continue to narrow their drug discovery and development services vendor lists and outsource a greater percentage of their research and development budgets in the years ahead. For the remainder of 2011, we plan to continue to pursue and establish innovative and strategic client relationships, while enhancing our focus on execution and quality to differentiate our company and create value for our clients and our shareholders. We also expect to expand the scope of our discovery services offerings through new technologies that should differentiate us from our competitors. We continue to focus on all selling, general and administrative, or SG&A, expenses and on driving efficiencies, while selectively investing for future growth and productivity gains.

We review various metrics to evaluate our financial performance, including period-to-period changes in backlog, new authorizations, cancellation rates, revenue, revenue conversion, margins and earnings. In the third quarter of 2011, we had net authorizations, defined as new authorizations less cancellations and adjustments, of $542.2 million, a 22.4% increase over the same period in 2010. The cancellation rate for the third quarter of 2011 was 6.3% of beginning backlog compared to 6.9% for the same period in 2010. The average length of our contracts in backlog was 34 months as of September 30, 2011 and December 31, 2010. In the third quarter of 2011, revenue conversion, defined as revenue divided by prior periods’ ending backlog, averaged 10.4% compared to 10.5% for the same period in 2010.

Backlog by client type as of September 30, 2011 was 79.0%, pharmaceutical, 15.5% biotech and 5.5% government/other, as compared to 76.8% pharmaceutical, 16.6% biotech and 6.6% government/other as of September 30, 2010. Net revenue by client type for the quarter ended September 30, 2011 was 78.3% pharmaceutical, 16.7% biotech and 5.0% government/other, compared to 77.4% pharmaceutical, 18.7% biotech and 3.9% government/other for the same period in 2010.

For the third quarter of 2011, net revenue contribution by business segment was 76.3% from Clinical Development Services and 23.7% from Laboratory Services, compared to net revenue contribution for the third quarter of 2010 of 76.7% from Clinical Development Services and 23.3% from Laboratory Services. Our top therapeutic areas by net revenue for the quarter ended September 30, 2011 were oncology, infectious diseases, circulatory/cardiovascular, endocrine/metabolic and central nervous system. For a detailed discussion of our revenue, margins, earnings and other financial results for the third quarter of 2011, see “Results of Operations – Three Months Ended September 30, 2010 versus Three Months Ended September 30, 2011” below.

Our operating margin increased to 15.8% in the third quarter of 2011 from 15.6% in the third quarter of 2010. Our Clinical Development Services segment operating margin increased sequentially to 18.4% from 16.6% in the second quarter of 2011 and our Laboratory Services segment operating margin increased sequentially to 12.8% from 10.2% in the second quarter of 2011. Continued investment to support anticipated future growth of our drug discovery services business, BioDuro, and lower than expected net revenue in our Vaccine and Biologics unit continued to pressure the Laboratory Services segment gross and operating margins in the third quarter of 2011. We expect our Laboratory Services segment operating margin to continue to increase during the remainder of the year, driven by net revenue growth and operating efficiency.

Capital expenditures for the three months ended September 30, 2011 totaled $13.6 million. These capital expenditures were primarily for scientific equipment for our laboratory units and computer software and hardware. We made these investments to support growth in our businesses and to improve the efficiencies of our operations.

As of September 30, 2011, we had $480.3 million of cash, cash equivalents and short-term investments. In the third quarter of 2011, we generated $91.1 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 27 days for the nine months ended September 30, 2011, compared to 22 days for the year ended December 31, 2010. We plan to continue to monitor DSO and the various factors that affect it. However, we expect DSO will continue to fluctuate in the future depending on contract terms, the mix of contracts performed and our success in collecting receivables.

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 have and will continue to 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, 2010 and 2011 were $663.8 million and $775.9 million, respectively.

The dollar amount of our backlog consists of anticipated future net revenue from contracts, letters of intent and verbal commitments we consider highly reliable, 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, 2011, the remaining duration of the contracts in our backlog ranged from one to 173 months, with a weighted-average duration of 34 months. The weighted-average duration of the contracts in our backlog will fluctuate from period to period in the future based on the contracts constituting our backlog at any given time. The dollar amount of our backlog excludes net revenue that has been recognized previously in our statements of income and is adjusted each quarter for foreign currency fluctuations. Our backlog as of September 30, 2010 and 2011 was $3.4 billion and $3.8 billion, respectively. For various reasons discussed in “Item 1. Business – Backlog” of our Form 10-K, our backlog might never be fully recognized as net revenue and is not necessarily a meaningful predictor of future performance.

We generally enter into contracts with clients to provide services with payments based on fixed and variable fee arrangements. We recognize revenue for services, as rendered, only after persuasive evidence of an arrangement exists, the sales price is determinable and collectability is reasonably assured. Once the above criteria have been met, we recognize revenue for the services provided based on the proportional performance methodology, which determines the proportion of outputs or performance obligations that have been completed or delivered compared to the total contractual outputs or performance obligations.

Some of our contractual arrangements with clients involve multiple service deliverables, such as developing testing methodologies, database management, investigator recruitment and clinical trial monitoring, among other services. Upon entering into the contractual arrangement, we determine whether each deliverable has standalone value to the client. If the multiple deliverables within the arrangement each have standalone value to the client, then a separate unit of accounting is assigned to each separate deliverable. If the multiple deliverables are not considered to each have standalone value to the client because the separate deliverables can only be used together, then the deliverables are considered bundled and only one unit of accounting is assigned to the entire arrangement.

A newly adopted accounting standard related to the accounting for revenue arrangement with multiple deliverables requires the allocation of the contractual arrangement’s value based on the relative selling price of the separately identified units of accounting within the arrangement. The standard requires a hierarchy of evidence to be followed when determining the best evidence of the selling price of an item. The best evidence of selling price for a unit of accounting is vendor-specific objective evidence, or VSOE, or the price charged when a deliverable is sold routinely on a standalone basis. When VSOE is not available to determine selling price, relevant third-party evidence, or TPE, of selling price should be used, such as prices competitors charge for interchangeable services to similar clients. When neither VSOE nor TPE of selling price for similar deliverables exists, we must use our best estimate of selling price, or BESP, considering all relevant information that is available.

We generally are not able to establish TPE for our services, as our deliverables are highly customized and competitor pricing is not available. VSOE can often be established for certain deliverables based on our standard price lists used for unitized services or the unit price or hourly rates set forth in the customer arrangement. BESP for deliverables is generally established based on labor costs, risks, and expected profit margins developed from the competitive bidding process for client contracts. We allocate the contractual arrangement’s value at the inception of the arrangement using the relative selling prices of the deliverable services within the contract based upon VSOE when available but primarily upon BESP. Consistent with our accounting policies prior to the adoption of this standard, we recognize revenue for the separate elements of our contracts in accordance with the revenue recognition criteria above. The adoption of this standard did not have a material impact on our consolidated condensed financial statements.

Under a small number of client contracts, a portion of the payments owed to us are contingent upon successful achievement of performance standards or research and development success milestones. These payments are not included in the total contract value used for the proportional performance calculations until the achievement of the performance standard or milestone is reasonably assured. Milestone payments on contracts entered into subsequent to January 1, 2011 were immaterial.

For most clinical trial related service contracts in our Clinical Development Services segment and our Laboratory Services segment, we base measurement of performance on a comparison of 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 in which the change in estimate is determined. For time-and-material contracts, we recognize revenue as hours are worked, multiplied by the applicable hourly rate.

Additionally, the Laboratory Services segment enters into arrangements in which the performance obligation is a specified laboratory test. We recognize revenue under these arrangements based upon the number of samples tested times the contracted unit price.

In the event of changes in the scope, nature, duration, or volume of services of the contract with a client, we negotiate to modify our existing contract or establish a new contract to reflect the changes. We recognize renegotiated amounts as revenue by revision to the total contract value resulting from the renegotiated contract.

We often offer volume rebates to our large clients 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, 2010 and 2011, fees paid to investigators and other fees we paid as an agent and the associated reimbursements were approximately $104.9 million and $119.0 million, respectively.

Most of our contracts can be terminated by our clients either immediately or after a specified period following notice. Upon early termination, these contracts typically require the client to pay us the fees earned through the termination 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.

Prior to our June 2010 spin-off of the Discovery Sciences segment, we generated Discovery Sciences segment revenue from our compound partnering business in the form of upfront payments, development and regulatory milestone payments, and royalties. 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. 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.

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, will 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 for the Clinical Development Services and Laboratory Services segments consist of labor and related benefits charges, materials, supplies and technology costs related to the development of new services offerings for clients. R&D costs for the Discovery Sciences segment consisted primarily of costs associated with preclinical studies and the clinical trials of our product candidates, development materials, patent costs, labor and related benefit charges associated with personnel performing 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.

Depreciation and amortization expenses consist of facility and equipment depreciation and amortization of intangible assets. We record property and equipment at cost less accumulated depreciation. We record depreciation expense on a straight-line method. We depreciate leasehold improvements over the shorter of the respective lives of the leases or the useful lives of the improvements.

Three Months Ended September 30, 2010 versus Three Months Ended September 30, 2011

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, 2010 compared to the three months ended September 30, 2011.

Total net revenue increased $50.0 million to $415.4 million in the third quarter of 2011. Service revenue was $382.9 million, which accounted for 92.2% of total net revenue for the third quarter of 2011. The $43.5 million increase in service revenue was attributable to a $31.7 million increase in net revenue from our Clinical Development Services segment and an $11.8 million increase in net revenue from our Laboratory Services segment. The increase in net revenue from our Clinical Development Services segment was primarily related to an increase in authorizations over the last several quarters. Converting our third quarter of 2011 net revenue at third quarter of 2010 average foreign exchange rates, our Clinical Development Services segment net revenue would have been $3.6 million lower. The increase in net revenue from our Laboratory Services segment was primarily the result of the strong authorizations in our bioanalytical and cGMP laboratories over the last several quarters.

Direct costs increased $33.5 million to $223.5 million in the third quarter of 2011. The increase was mainly attributable to a $20.4 million increase in direct personnel costs, a $6.5 million increase in reimbursable out-of-pocket expenses, a $2.3 million increase in equipment and supply costs related to our laboratories and a $2.0 million increase in facilities costs. Direct personnel costs increased primarily due to an increase in utilization of resources for projects and additional employees to support revenue growth. Converting our third quarter of 2011 direct costs at third quarter of 2010 average foreign exchange rates, our direct costs would have been $4.2 million lower.

R&D expenses increased $1.6 million to $2.1 million in the third quarter of 2011. The increase in R&D expense was primarily due to increased spending in drug discovery services.

SG&A expenses increased $5.2 million to $107.6 million in the third quarter of 2011. The increase in SG&A expenses was primarily related to a $2.4 million increase in accounting and legal expenses primarily related to costs associated with our pending acquisition by Carlyle and Hellman & Freidman, a $1.3 million increase in other taxes related to foreign revenue, a $1.2 million increase in facilities and information systems costs and a $1.1 million increase in personnel costs. These costs were partially offset by a $1.3 million decrease in bad debt expense due to collections of previously reserved accounts receivables. The increase in personnel costs is the result of normal salary increases, partially offset by the increase in utilization of resources for projects noted above. Converting our third quarter of 2011 SG&A expenses at third quarter of 2010 average foreign exchange rates, our SG&A expenses would have been $2.3 million lower.

Depreciation and amortization expense increased $1.1 million to $16.8 million in the third quarter of 2011 related to property and equipment we acquired to accommodate growth.

(Loss) income from equity investment increased $6.5 million to income of $1.9 million in the third quarter of 2011. During the third quarter of 2011, we recorded a $1.9 million increase in our equity investee, Celtic Therapeutics Holdings, L.P., primarily due to an increase in the fair value of our share of the underlying investments in the fund. This increase was the result of the progress Celtic made on the development of the programs in its portfolio. As a result of the fact that the investments held by Celtic are recorded at fair value, we anticipate the potential for significant volatility in the amount of income or loss from equity method investments in the future.

Loss on investments was $17.7 million in the third quarter of 2011. At September 30, 2011, we classified all of our asset-backed and auction rate securities as short-term investments because of the provision in the Merger Agreement that requires us to sell all or part of these securities. In addition we concluded that the previously unrealized losses were other-than-temporary and recognized other-than-temporary impairment losses during the third quarter of 2011.

Other income (expense), net increased $0.2 million to income of $1.1 million in the third quarter of 2011.

Our provision for income taxes from continuing operations decreased $0.1 million to $15.1 million in the third quarter of 2011. Our effective income tax rate for the third quarter of 2010 and 2011 was 28.5% and 29.8%, respectively. Our effective rate was higher in the third quarter of 2011 primarily due to higher U.S. profitability taxed at a higher effective tax rate as compared to the tax rates applicable to our foreign operations.

Net income attributable to shareholders of $35.4 million in the third quarter of 2011 represents a decrease of 6.8% from $38.0 million in the third quarter of 2010. Net income per diluted share of $0.31 in the third quarter of 2011 represents a 3.1% decrease from $0.32 net income per diluted share in the third quarter of 2010. Net income changed for various reasons as explained above.

Nine Months Ended September 30, 2010 versus Nine Months Ended September 30, 2011

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, 2010 compared to the nine months ended September 30, 2011.

Total net revenue increased $124.2 million to $1.2 billion in the first nine months of 2011. Service revenue was $1.1 billion, which accounted for 92.5% of total net revenue for the first nine months of 2011. The $110.2 million increase in service revenue was attributable to a $98.2 million increase in net revenue from our Clinical Development Services segment and a $20.1 million increase in net revenue from our Laboratory Services segment. The first nine months of 2010 included $8.0 million in net revenue from our Discovery Sciences segment. The increase in net revenue from our Clinical Development Services segment was primarily related to an increase in authorizations over the last several quarters. Converting the first nine months of 2011 net revenue at the first nine months of 2010 average foreign exchange rates, our Clinical Development Services segment net revenue would have been $9.1 million lower. The increase in net revenue from our Laboratory Services segment was primarily the result of the strong authorizations in our bioanalytical and cGMP laboratories over the last several quarters.

Direct costs increased $86.8 million to $651.7 million in the first nine months of 2011. The increase was mainly attributable to a $60.9 million increase in direct personnel costs, a $14.0 million increase in reimbursable out-of-pocket expenses, a $4.1 million increase in supply costs related to our laboratories, a $3.6 million increase in facilities costs and a $2.5 million increase in contract labor and subcontractor costs. These costs were partially offset by a $1.5 million decrease in hedging gains in the first nine months of 2011 compared to the first nine months of 2010. Direct personnel costs increased primarily due to an increase in utilization of resources for projects and additional employees to support revenue growth. Converting the first nine months of 2011 direct costs at the first nine months of 2010 average foreign exchange rates, our direct costs would have been $10.8 million lower.

R&D expenses decreased $9.2 million to $6.1 million in the first nine months of 2011. The decrease in R&D expense was primarily due to the spin-off of the compound partnering business in June 2010, partially offset by increased spending in drug discovery services.

SG&A expenses decreased $4.4 million to $323.0 million in the first nine months of 2011. The decrease in SG&A expenses was primarily related to a $5.9 million decrease in SG&A expenses related to the spin-off of the compound partnering business, a $3.5 million decrease in non-billable travel and training costs and a $1.5 million decrease in bad debt expense due to collections of previously reserved accounts receivables. These costs were partially offset by a $3.0 million increase in personnel costs, a $2.4 million increase in accounting and legal expenses primarily related to costs associated with our pending acquisition by Carlyle and Hellman & Friedman, a $1.7 million increase in recruitment and relocation expense partially related to the recruitment of our new CEO and a $1.4 million increase in other taxes related to foreign revenue. The increase in personnel costs is the result of normal salary increases, partially offset by the increase in utilization of resources for projects noted above. Converting the first nine months of 2011 SG&A expenses at the first nine months of 2010 average foreign exchange rates, our SG&A expenses would have been $7.0 million lower.

Depreciation and amortization expense increased $0.6 million to $50.5 million in the first nine months of 2011 related to property and equipment we acquired to accommodate growth.

(Loss) income from equity investment increased by $23.5 million to income of $15.1 million in the first nine months of 2011. During the first nine months of 2011, we recorded a $15.1 million increase in our equity investee, Celtic Therapeutics Holdings, L.P., primarily due to an increase in the fair value of our share of the underlying investments in the fund. This increase was the result of the progress Celtic made on the development of the programs in its portfolio. As a result of the fact that the investments held by Celtic are recorded at fair value, we anticipate the potential for significant volatility in the amount of income or loss from equity method investments in the future.

Gain (loss) on investments decreased $21.3 million to a loss of $18.8 million due primarily to a $18.6 million investment impairment mainly attributable to our classification of our asset-backed and auction rate securities as short-term investments because of the provision in the Merger Agreement that requires us to sell all or part of these securities, and a $0.3 million net loss on the sale of investments in the first nine months of 2011, compared to a gain of $3.3 million on the sale of investments and a $0.8 million investment impairment in the first nine months of 2010.

Other income (expense), net decreased $1.2 million to income of $1.1 million in the first nine months of 2011. Changes in exchange rates from the time we recognize revenue until the client pays resulted in a net loss of $4.3 million in the first nine months of 2011, up from break even in the first nine months of 2010. This loss was partially offset by a $2.2 million increase in interest income due to higher interest rates earned on higher average cash balances.

Our provision for income taxes from continuing operations increased $12.7 million to $54.0 million in the first nine months of 2011. Our effective income tax rate for the first nine months of 2010 and 2011 was 34.1% and 31.3%. Our effective rate was higher in the first nine months of 2010 primarily due to $3.8 million of tax expense related to a valuation allowance for deferred tax assets for the compound partnering spin-off.

In the first nine months of 2010, we incurred a loss from discontinued operations, net of income taxes of $3.7 million. This loss was attributable to discontinuing the operations of our wholly owned subsidiary PPD Dermatology, Inc.

Net income attributable to shareholders of $119.6 million in the first nine months of 2011 represents an increase of 56.9% from $76.2 million in the first nine months of 2010. Net income per diluted share of $1.03 in the first nine months of 2011 represents a 60.9% increase from $0.64 net income per diluted share in the first nine months of 2010. Net income changed for various reasons as explained above.

As of September 30, 2011, we had $416.7 million in total cash and cash equivalents and $63.6 million of short-term investments. We invest our cash and cash equivalents in bank deposits and financial instruments that are issued or guaranteed by the U.S. government. 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.

Our cash balances are held in numerous locations throughout the world, most of which are currently outside of the United States. While historically our U.S. cash balances have been a much higher proportion of our total cash balances, the $200.0 million stock repurchase plan executed during the first quarter of 2011 decreased our U.S. cash balances to $119.2 million as of September 30, 2011. We intend to fund our U.S. operations from existing cash, cash flows from operations and if necessary, or appropriate, borrowings under our $50.0 million credit facility with Barclays.

Our investments are subject to general credit, liquidity, market and interest rate risks, which have been exacerbated by unusual events, such as the European sovereign debt crisis and the recent downgrade in the U.S.’s credit rating, which have led to global credit and liquidity issues. Although a downgrade in credit ratings generally is not unprecedented, a downgrade of the U.S. credit rating is, and the potential impact is uncertain. This downgrade could materially affect global and domestic financial markets and economic conditions, which may affect our financial condition and liquidity. Our short-term investment securities are classified as “available-for-sale” and, consequently, are recorded on our condensed consolidated balance sheet at fair value.

At December 31, 2010, we held $78.7 million net of unrealized losses of $14.2 million, in auction rate securities. We classified these securities as long-term investments. We concluded that the unrealized losses were temporary because of our ability and intent to hold the auction rate securities until the fair value recovered. In May 2011, we converted $14.2 million par value of our government-guaranteed student loan auction rate securities to $14.2 million par value of government-guaranteed student loan asset-backed securities from the same issuer. As a result of the Merger Agreement more fully described in Note 16 of the consolidated condensed financial statements, which requires us, at the request of Jaguar Holdings, LLC, or Parent, to sell all or part of the asset-backed and auction rate securities at a price equal or greater than the price proposed by the Parent, we classified all of these securities as short-term investments and recorded them at an estimated fair value as of September 30, 2011. Amounts ultimately received upon sale could vary from estimated fair value; however, we do not believe the difference between the estimated fair value and the amounts ultimately received upon sale will be material. In addition, we concluded that the previously unrealized losses were other-than-temporary because we no longer had the intent to hold these securities until maturity or until their face value recovered. As a result, for the three and nine months ended September 30, 2011, we recognized other-than-temporary impairment losses of $17.7 million.

In the first nine months of 2011, our operating activities provided $150.7 million in cash as compared to $169.4 million for the same period last year. The change in operating cash flow was due primarily to a net change in operating cash receipts and payments totaling $61.7 million, a net-of-tax gain from equity investment of $9.7 million in the current period as compared to a net-of-tax loss from equity investment of $5.4 million in the nine months ended September 30, 2010, a $5.1 million decrease in deferred tax asset and a $1.5 million decrease in the provision for doubtful accounts partially offset by a $42.2 million increase in net income in the first nine months of 2011 compared to the same period of 2010, a $17.7 million increase in impairment of investments, a $2.3 million increase in equity compensation expense and a $0.4 million gain on the sale of investments in the current period as compared to a $3.3 million gain in the nine months ended September 30, 2010. The change in adjustments for accruals of expected future operating cash receipts and payments includes unearned income of $26.3 million and payables to investigators of $9.1 million. The change in adjustments to deferrals of past operating cash receipts and payments includes accounts receivable and unbilled services, net, of ($71.6) million, accrued income taxes of ($13.7) million, other assets of ($4.2) million, accounts payable, other accrued expenses and deferred rent of ($4.2) million, and prepaid expenses, other current assets and advance payments of ($3.4) million. Fluctuations in receivables and unearned income occur on a regular basis as we perform services, achieve 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 period to period.

In the first nine months of 2011, our investing activities provided $13.6 million in cash. We used cash of $61.7 million for capital expenditures, $9.5 million to purchase investments and $7.6 million for advances to a related party. These amounts were offset by maturity and sale of investments of $91.8 million. Our capital expenditures in the first nine months of 2011 primarily consisted of $24.3 million for additional scientific equipment for our laboratory units, $20.0 million for various facility improvements and furnishings and $17.4 million for computer software and hardware.

In the first nine months of 2011, our financing activities used $220.1 million of cash. In the first nine months of 2011, we paid $200.0 million to repurchase common stock and $52.8 million of dividends to shareholders, which were partially offset by proceeds of $31.5 million from stock option exercises and purchases under our employee stock purchase plan.

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, 2010 to September 30, 2011.

Working capital as of September 30, 2011 was $451.8 million, compared to $520.0 million at December 31, 2010. The decrease in working capital was due primarily to a decrease in cash and cash equivalents and short-term investments of $62.8 million and $16.4 million, respectively, related to the repurchase of additional shares of our common stock and additional losses recognized on our auction rate securities, a decrease in other assets of $26.2 million, an increase in unearned income of $19.9 million, an increase in payables to investigators of $8.9 million and an increase in accounts payable of $7.9 million, partially offset by an increase in accounts receivable and unbilled services, net of $69.1 million.

For the nine months ended September 30, 2011, DSO was 27 days, compared to 22 days for the year ended December 31, 2010. We calculate DSO by dividing accounts receivable and unbilled services less unearned income by average daily gross revenue for the applicable period. DSO will continue to fluctuate in the future depending on contract terms, the mix of contracts performed within a period, the levels of investigator advances and unearned income, and our success in collecting receivables.

In April 2011, we entered into a $50.0 million revolving line of credit facility with Barclays Bank PLC. The facility has a term of one-year and we can use borrowings for general corporate purposes. The credit facility contains customary affirmative, negative and financial covenants. Outstanding borrowings under the credit facility bear interest at an annual fluctuating rate tied to certain financial indices plus an agreed upon margin. The credit facility is currently scheduled to expire in April 2012, at which time any outstanding balance will be due. As of September 30, 2011, no borrowings were outstanding under this credit facility.

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 February 2008, our Board of Directors approved a stock repurchase program authorizing us to repurchase up to $350.0 million of its common stock from time to time. In February 2011, we entered into an accelerated share repurchase, or ASR, arrangement with Barclays Capital Inc., under which we used $200.0 million of the remaining amount to repurchase additional shares of our common stock. During the first quarter of 2011, we repurchased approximately 6.5 million shares of our common stock under this arrangement for an aggregate purchase price of approximately $200.0 million. The agreement with Barclays for the ASR included a forward sale contract settlement date in December 2011, but it could be settled prior to that date. Under the terms of the forward sale contract, Barclays was required to purchase, in the open market, $200.0 million of our common stock during the term of the contract to fulfill its obligation and cover its position related to 6.5 million shares borrowed from third parties and sold to us during the first quarter of 2011 and for any additional shares payable upon settlement. The forward contract was settled in September 2011, and the Company received approximately 503,000 shares.

As of September 30, 2011, $60.7 million remained available for stock repurchases authorized by the Board of Directors. The manner of purchases, the amount we spend and the number of shares repurchased will vary based on a variety of factors including the stock price and blackout periods in which we are restricted from repurchasing shares. Our October 2, 2011 Merger Agreement with Jaguar Holdings (see Note 16 of our consolidated condensed financial statements) does not allow us to repurchase additional shares.

In 2009, we committed to invest up to $102.7 million in Celtic Therapeutics Holdings L.P., or Celtic, as a limited partner. 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, 2011, we had a remaining commitment of $55.0 million, which we expect to fund over a period of up to four years and had an investment balance of $58.3 million.

In April 2011, we committed to invest up to $50.0 million in venBio Global Strategic Fund, L.P., or venBio, as a limited partner over the next five years. venBio invests in early stage life sciences companies. We account for this investment under the equity method of accounting because we are a limited partner and the general partner has all decision-making authority relating to investment decisions and fund operations. As such, we are deemed to lack the control of the entity required for consolidation. As of September 30, 2011, we had a remaining commitment of $49.8 million.

As of September 30, 2011, we had commitments to invest up to an aggregate additional $8.6 million in several venture capital funds and $0.8 million in other cost method investments. For further details, see Note 3 of our consolidated condensed financial statements.

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 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, 2011, we had advanced $16.8 million to the borrower.

As of September 30, 2011, our total gross unrecognized tax benefits were $29.4 million, of which $16.9 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 $5.7 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. As of September 30, 2011, we accrued $4.1 million of interest and $0.9 million of penalties with respect to uncertain tax positions. To the extent interest and penalties are not assessed with respect to uncertain tax positions, we will reduce amounts accrued and reflect them as a reduction of the overall income tax provision.

We are subject to examination for the tax years between 2007 and 2011 in our primary tax jurisdictions and several of our foreign and state income tax returns are under examination by taxing authorities. We do not believe that the outcome of any examination will have a material impact on our financial condition or results of operations.

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 condition, results of operations or cash flows.

We expect to continue expanding our operations through internal growth, strategic acquisitions and investments. We expect to fund these activities and future cash dividends from existing cash, cash flows from operations and, if necessary or appropriate, borrowings under credit facilities. We believe that these sources of liquidity will be sufficient to fund our operations, dividends and stock repurchases 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 any 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, 2010.

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 payable to the issuers of the letters of credit competitively determined in the marketplace. As of September 30, 2011, 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 in the normal course of business.

Other than the financial advisor fee in connection with the merger of approximately $22.5 million which is contingent upon the closing of the merger and the potential termination fee of $58.1 million or $116.2 million, depending on the basis of the termination, if the Merger Agreement is terminated, 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, 2010.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP, requires management to make estimates and assumptions that affect 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 revenue and expenses during the reporting period. We discussed those estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K for the year ended December 31, 2010. Other than the adoption of the new accounting standard related to accounting for revenue arrangements with multiple deliverables and milestone payments, which requires additional disclosures, there were no material changes to our critical accounting policies and estimates in the first nine months of 2011. For detailed information on our critical accounting policies and estimates, see our Annual Report on Form 10-K for the year ended December 31, 2010.

In May 2011, the Financial Account Standards Board, or FASB, issued updated fair value measurement and disclosure guidance that clarifies how to measure fair value and requires additional disclosures regarding Level 3 fair value measurements, as well as any transfers between Level 1 and Level 2 fair value measurements. The updated accounting guidance is effective for fiscal years and interim periods beginning on or after December 15, 2011 on a prospective basis. We are currently evaluating the impact of adopting the updated fair value guidance, and we do not expect the adoption to have a material impact on our consolidated condensed financial statements.

In June 2011, the FASB amended the manner in which an entity presents the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single, continuous statement of comprehensive income or in two separate but consecutive statements. The amendment eliminates the option to present the components of other comprehensive income as part of the statement of equity. The amendment is effective for fiscal years and interim periods beginning on or after December 15, 2011 on a retrospective basis. The adoption of this guidance will not change the previously reported amounts of comprehensive income but will change our presentation of comprehensive income in the consolidated condensed financial statements for the period ending March 31, 2012.

In September 2011, the FASB issued an accounting standards update that amends the two-step goodwill impairment test by permitting an entity to first assess qualitative factors in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test is unnecessary. The amendment is effective for fiscal years and interim periods beginning on or after December 15, 2011 on a prospective basis. We do not believe the adoption of this guidance will have an impact on our consolidated condensed financial statements.

In October 2009, the FASB issued a new accounting standard related to accounting for revenue arrangements with multiple deliverables. This standard applies to all deliverables in contractual arrangements in all industries in which the 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 was effective on January 1, 2011 on a prospective basis. The adoption of this standard did not have a material impact on our consolidated condensed financial statements, other than requiring additional disclosures.

In March 2010, 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 standard applies to milestones in single or multiple-deliverable arrangements involving research and development transactions and was effective on January 1, 2011 on a prospective basis. The adoption of this standard did not have a material impact on our consolidated condensed financial statements, other than requiring additional disclosures.

In April 2011, the FASB issued an accounting standard update clarifying the guidance as to whether a restructuring of accounts receivable constitutes a troubled debt restructuring. The guidance applies to modifications of receivables when a debtor is experiencing financial difficulties. The updated guidance was effective on July 1, 2011 on a retrospective basis to January 1, 2011. The adoption of this standard did not have a material impact on our consolidated condensed financial statements because we did not modify any of our receivables.

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 U.S. 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, such as the receipt of nontaxable research benefits.

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.

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 study volunteers, participants and patients resulting from, among other things, possible unforeseen adverse side effects, 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 all our own actions, such as gross negligence. We currently maintain professional liability insurance coverage with limits we believe are adequate and appropriate.

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:

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 recent general economic and financial market conditions, could affect the market price of our common stock. These factors include ones beyond our control, such as announcements by competitors, stock market speculation about us, 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, 2010.

We are exposed to foreign currency risk by virtue of our international operations. We derived 42.6% and 44.4% of our net revenue for the three months ended September 30, 2010 and 2011, 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, Brazilian real and Argentina peso.

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, operating income 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, 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 time 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. If the exchange rate on accounts receivable balances denominated in pounds sterling and euros had increased by 10%, our foreign currency transaction loss would have increased by $4.7 million at September 30, 2011.

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, Brazilian real and Argentina peso in the third quarter of 2011, income from continuing operations, including the impact of hedging, would have been approximately $0.6 million lower 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 entered into hedges designed to cover a significant portion of our foreign currency exposure for 2011.

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:

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.

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 not currently provided for in our consolidated condensed balance sheet.

We are exposed to changes in interest rates on our cash, cash equivalents, investments and advances to and lines of credit with related parties. 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 2011.

We are also exposed to market risk related to our investments in auction rate securities. For further details, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” on our Form 10-K.

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 and that the information is accumulated and communicated to management to allow timely decisions regarding required disclosure. 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.

No change to our internal control over financial reporting occurred during the third quarter of 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

In connection with the merger, five putative shareholder class action lawsuits have been filed in The General Court of Justice, Superior Court Division of New Hanover County, in Wilmington, North Carolina seeking damages in unspecified amounts and injunctive relief. The first, styled Hilary Coyne v. Pharmaceutical Product Development, Inc., et al., No. 11 CVS 4186 was filed on October 5, 2011 against the Company, each member of the Company’s board of directors, Carlyle Partners V, LP and The Carlyle Group, LP (collectively “Carlyle”), and Hellman & Friedman LLC and Hellman & Friedman Capital Partners VII, LP (collectively “H&F”), asserting that the members of our board of directors breached their fiduciary duties and asserting that the Company, Carlyle and H&F aided and abetted the alleged breaches of fiduciary duties. The second lawsuit, styled The Edward J. Goodman Life Income Trust et al. v. Pharmaceutical Product Development, Inc., et al., No. 11 CVS 4252, was filed on October 10, 2011 against the Company, each member of the Company’s board of directors, Carlyle and H&F asserting that the members of our board of directors breached their fiduciary duties and asserting that the Company, Carlyle and H&F aided and abetted the alleged breaches of fiduciary duties. The third, fourth and fifth lawsuits, styled York County Employees’ Retirement Board v. Pharmaceutical Product Development, Inc., et al., No. 11 CVS 4331, Harold Litwin v. Pharmaceutical Product Development, Inc., et al., No. 11 CVS 4333, and Judah Neiditch v. Pharmaceutical Product Development, Inc., et al., No. 11 CVS 4334, were each filed on October 17, 2011 against the Company, each member of the Company’s board of directors, Carlyle and H&F, asserting that the members of our board of directors breached their fiduciary duties and asserting that the Company, Carlyle and H&F aided and abetted the alleged breaches of fiduciary duties. Certain of these actions also allege that the disclosures made in the Company’s proxy statement are deficient. These cases have been designated as Mandatory Complex Business Cases pursuant to N.C. Gen. Stat. § 7A-45.4 and transferred to the North Carolina Business Court, where each is assigned to North Carolina Business Court Judge James L. Gale.

On October 11, 2011, another putative shareholder class action lawsuit relating to the merger was filed against us and our board of directors in the United States District Court for the Eastern District of North Carolina, styled Mark Hendriks v. Pharmaceutical Product Development, Inc., et al., Case 4:11-cv-00176-BO and alleging that members of our board of directors breached their fiduciary duties in connection with the transaction. The lawsuit was amended on October 18, 2011 to seek a preliminary injunction against the merger, add Carlyle and H&F as defendants, assert claims against the individual defendants and the Company for violation of §§ 14(a) and 20(a) of the Securities Exchange Act of 1934, add a claim against the Company, Carlyle and H&F for aiding and abetting the alleged breaches of fiduciary duties, and raise additional allegations purportedly in support of the breach of fiduciary duty claims.

Additional similar lawsuits might arise. The Company and its board of directors believe these lawsuits are without merit and intend to vigorously defend them.

In February 2008, the Company’s Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to $350.0 million of its common stock from time to time. The timing and amount of any share repurchases under this program is determined by the Company’s management based on their evaluation of market conditions and other factors. The Company is not required to repurchase any specific number of shares or to make repurchases by any certain date under this program.

As of December 31, 2010, $260.7 million remained available under the stock repurchase program. In February 2011, the Company entered into an accelerated share arrangement with Barclays Capital Inc., as agent for Barclays Bank PLC, pursuant to which the Company paid $200.0 million from cash on hand to Barclays to repurchase outstanding shares of the Company’s common stock. The accelerated share arrangement was settled on September 26, 2011. The following table summarizes the Company’s repurchases for the three months ended September 30, 2011:


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

10.162		Severance Agreement dated January 1, 2001, between Pharmaceutical Product Development, Inc. and various individuals.

10.280		Thirteenth Amendment dated September 29, 2011, to Lease Agreement, dated April 30, 2001, by and between Greenway Office Center L.L.C. and PPD Development, LP.

10.281		Employment agreement, effective September 16, 2011, between Pharmaceutical Product Development, Inc. and Raymond H. Hill

10.282		Severance agreement, effective September 16, 2011, between Pharmaceutical Product Development, Inc. and Raymond H. Hill

101		Financials provided in XBRL format

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/ Raymond H. Hill
		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)


	Page

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Condensed Statements of Income for the Three and Nine Months Ended September 30, 2010 and 2011 (unaudited)		3

Consolidated Condensed Balance Sheets as of December 31, 2010 and September 30, 2011 (unaudited)		4

Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2011 (unaudited)		5

Notes to Consolidated Condensed Financial Statements (unaudited)		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		28

Item 3. Quantitative and Qualitative Disclosures about Market Risk		43

Item 4. Controls and Procedures		45

Part II. OTHER INFORMATION

Item 1. Legal Proceedings		46

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		47

Item 6. Exhibits		48

Signatures		49


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2011			2010			2011
Net revenue:
Service revenue	$	339,390		$	382,873		$	1,005,006		$	1,115,237
Reimbursed revenue		25,985			32,522			77,054			91,063

Total net revenue		365,375			415,395			1,082,060			1,206,300

Direct costs		189,979			223,507			564,948			651,720
Research and development expenses		470			2,069			15,253			6,081
Selling, general and administrative expenses		102,365			107,579			327,381			322,981
Depreciation and amortization		15,726			16,821			49,877			50,504

Total operating expenses		308,540			349,976			957,459			1,031,286

Operating income		56,835			65,419			124,601			175,014
(Loss) income from equity method investment		(4,562	)		1,915			(8,351	)		15,103
Gain (loss) on investments		—			(17,703	)		2,541			(18,808	)
Other income (expense), net		877			1,069			2,358			1,129

Income from continuing operations before provision for income taxes		53,150			50,700			121,149			172,438
Provision for income taxes		15,148			15,083			41,303			54,039

Income from continuing operations		38,002			35,617			79,846			118,399
Loss from discontinued operations, net of income taxes		—			—			(3,662	)		—

Net income		38,002			35,617			76,184			118,399
Net (income) loss attributable to noncontrolling interests		—			(181	)		—			1,157

Net income attributable to shareholders	$	38,002		$	35,436		$	76,184		$	119,556

Income per common share from continuing operations:
Basic	$	0.32		$	0.31		$	0.67		$	1.04

Diluted	$	0.32		$	0.31		$	0.67		$	1.03


Basic and diluted loss per common share from discontinued operations	$	—		$	—		$	(0.03	)	$	—


Net income per common share
Basic	$	0.32		$	0.31		$	0.64		$	1.04

Diluted	$	0.32		$	0.31		$	0.64		$	1.03


Dividends declared per common share	$	0.15		$	0.15		$	0.45		$	0.45


Weighted-average number of common shares outstanding:
Basic		118,814			113,891			118,607			114,708
Dilutive effect of stock options and restricted stock		991			1,298			964			1,320

Diluted		119,805			115,189			119,571			116,028


	December 31, 2010			September 30, 2011
Assets
Current assets:
Cash and cash equivalents	$	479,574		$	416,746
Short-term investments		79,976			63,580
Accounts receivable and unbilled services, net		435,876			505,007
Income tax receivable		12,327			17,469
Investigator advances		16,032			13,008
Prepaid expenses		24,535			25,699
Deferred tax assets		30,910			41,334
Cash held in escrow		10,304			2,288
Other current assets		44,172			17,979

Total current assets		1,133,706			1,103,110

Property and equipment, net		385,863			404,369
Goodwill		291,217			292,914
Long-term investments		78,747			—
Other investments		47,833			77,577
Intangible assets		31,444			28,207
Other assets		23,236			44,765


Total assets	$	1,992,046		$	1,950,942

Liabilities and Equity
Current liabilities:
Accounts payable	$	29,858		$	37,726
Payables to investigators		56,612			65,468
Accrued income taxes		1,918			6,064
Other accrued expenses		208,128			204,936
Unearned income		317,191			337,086

Total current liabilities		613,707			651,280

Accrued income taxes		32,924			34,924
Accrued pension liability		10,989			11,858
Deferred rent		16,411			15,285
Deferred tax liabilities		16,552			28,782
Other liabilities		10,796			8,118


Total liabilities		701,379			750,247


Redeemable noncontrolling interests		1,657			2,125

Total equity:
Shareholders’ equity:
Common stock		5,952			5,680
Paid-in capital		609,281			619,756
Retained earnings		682,160			583,411
Accumulated other comprehensive loss		(17,140	)		(17,593	)

Total shareholders’ equity		1,280,253			1,191,254
Noncontrolling interests		8,757			7,316

Total equity		1,289,010			1,198,570

Total liabilities and equity	$	1,992,046		$	1,950,942


	Nine Months Ended September 30,
	2010			2011
Cash flows from operating activities:
Net income	$	76,184		$	118,399
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		49,791			50,504
Equity compensation expense		13,728			15,332
Loss (income) from equity investment, net of taxes		5,403			(9,712	)
Provision (benefit) for deferred income taxes		221			(4,878	)
Impairment of investments		—			18,627
Net (gain) loss on sale of investments		(3,291	)		425
Other		2,382			(1,162	)
Net change in operating assets and liabilities		24,953			(36,793	)

Net cash provided by operating activities		169,371			150,742

Cash flows from investing activities:
Purchases of property and equipment		(41,295	)		(61,703	)
Proceeds from sale of property and equipment		98			67
Proceeds from sale of business		3,464			—
Purchases of investments		(46,590	)		(1,527	)
Maturities and sales of investments		109,294			91,801
Purchases of other investments		(7,893	)		(8,017	)
Proceeds from sale of other investments		3,339			539
Net cash paid for acquisitions		(10,169	)		(7,936	)
Changes in restricted cash		3,000			7,936
Advances to related party		(7,700	)		(7,550	)

Net cash provided by investing activities		5,548			13,610

Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan		11,387			31,477
Income tax benefit from exercise of stock options and disqualifying dispositions of stock		197			1,236
Cash and cash equivalents contributed to Furiex Pharmaceuticals, Inc.		(100,000	)		—
Repurchase of common stock		—			(200,000	)
Cash dividends paid		(53,423	)		(52,821	)

Net cash used in financing activities		(141,839	)		(220,108	)

Effect of exchange rate changes on cash and cash equivalents		(1,541	)		(7,072	)

Net increase (decrease) in cash and cash equivalents		31,539			(62,828	)
Cash and cash equivalents, beginning of the period		408,903			479,574

Cash and cash equivalents, end of the period	$	440,442		$	416,746


	X-Chem
Current assets	$	9,309
Property and equipment, net		22
Current liabilities		(1,011	)
Other liabilities		(3,592	)
Noncontrolling interests		(8,297	)
Identifiable intangible assets		9,030
Goodwill		10,039

Total	$	15,500


	Cash and Cash Equivalents		Short-term Investments		Long-term Investments		Other Investments		Unrealized Gains		Unrealized Losses
As of December 31, 2010
Cash	$	246,843
Money market funds		232,731
Auction rate securities					$	78,747					$	14,203
Municipal debt securities			$	32,707					$	122		24
Corporate debt securities – FDIC insured				9,160						105		1
Treasury securities				38,109						118		2

Equity method investment:
Celtic Therapeutics Holdings, L.P.							$	30,724

Cost method investments:
Bay City Capital Funds								7,069
A.M. Pappas Funds								3,486
Liquidia Technologies, Inc.								5,000
Other investments								1,554

Total	$	479,574	$	79,976	$	78,747	$	47,833	$	345	$	14,230


As of September 30, 2011
Cash	$	197,077
Money market funds		210,759
Certificates of deposit		8,910
Auction rate securities			$	50,374
Asset-backed securities				13,206

Equity method investments:
Celtic Therapeutics Holdings, L.P.							$	58,347
venBio Global Strategic Fund, L.P.								200

Cost method investments:
Bay City Capital Funds								8,751
A.M. Pappas Funds								3,546
Liquidia Technologies, Inc.								5,000
Other investments								1,733

Total	$	416,746	$	63,580	$	—	$	77,577	$	—	$	—


Fund	Ownership			Total Capital Commitment		Remaining Commitment		Commitment Expiration
Bay City Capital Fund IV, L.P.		2.9	%	$	10,000	$	705	September 2010⁽²⁾
Bay City Capital Fund V, L.P.		2.0	%		10,000		5,552	October 2012
A.M. Pappas Life Science Ventures III, L.P.		4.7	%		4,750		594	December 2009⁽²⁾
A.M. Pappas Life Science Ventures IV, L.P.		3.0	%		2,935		1,702	February 2014
Accelerator III and incubator companies⁽¹⁾		19.9	%		4,802		819	None


	December 31, 2010			September 30, 2011
Billed	$	276,240		$	320,167
Unbilled		168,037			190,081
Allowance for doubtful accounts		(8,401	)		(5,241	)

Total accounts receivable and unbilled services, net	$	435,876		$	505,007


	December 31, 2010			September 30, 2011
Land	$	8,201		$	8,201
Buildings and leasehold improvements		274,716			294,944
Fixed assets not placed in service		13,843			10,163
Information technology systems under development		28,808			32,636
Furniture and equipment		234,132			257,312
Computer equipment and software		203,867			222,854

Total property and equipment		763,567			826,110
Less accumulated depreciation		(377,704	)		(421,741	)

Property and equipment, net	$	385,863		$	404,369


	Clinical Development Services
			Laboratory
			Services			Total
Balance as of December 31, 2010	$	106,671	$	184,546		$	291,217
Adjustments to goodwill for prior year acquisitions		—		(825	)		(825	)
Translation adjustments		543		1,979			2,522

Balance as of September 30, 2011	$	107,214	$	185,700		$	292,914


	December 31, 2010							September 30, 2011
	Carrying Amount		Accumulated Amortization			Net		Carrying Amount		Accumulated Amortization			Net
Customer relationships	$	17,658	$	(2,844	)	$	14,814	$	18,013	$	(4,416	)	$	13,597
Non-compete agreements		2,047		(84	)		1,963		1,291		(261	)		1,030
Trade name		150		(150	)		—		140		(140	)		—
Backlog		7,217		(2,770	)		4,447		7,342		(3,982	)		3,360

Total	$	27,072	$	(5,848	)	$	21,224	$	26,786	$	(8,799	)	$	17,987


2011 (remaining three months)	$	977
2012		3,274
2013		3,097
2014		2,344
2015		1,769


	December 31, 2010			September 30, 2011
Translation adjustment	$	28		$	(2,987	)
Pension liability, net of tax benefit of $4,865		(11,705	)		(11,705	)
Fair value on hedging transactions, net of tax (expense) benefit of ($1,714) and $1,188, respectively		3,523			(2,901	)
Net unrealized losses on investments, net of tax benefit of $4,899 and $0, respectively		(8,986	)		—


Total	$	(17,140	)	$	(17,593	)


	Level 1		Level 2		Level 3		Total
As of December 31, 2010
Assets
Cash equivalents	$	232,731	$	—	$	—	$	232,731
Short-term investments:
Treasury securities		38,109		—		—		38,109
Municipal debt securities		—		32,707		—		32,707
Corporate debt securities		—		9,160		—		9,160
Long-term investments		—		—		78,747		78,747
Equity method investment		—		—		30,724		30,724
Derivative contracts		—		6,668		—		6,668

Total assets	$	270,840	$	48,535	$	109,471	$	428,846


Liabilities
Derivative contracts	$	—	$	1,373	$	—	$	1,373

Total liabilities	$	—	$	1,373	$	—	$	1,373


	Short-term Investments		Long-term Investments			Equity Method Investments
Balance as of December 31, 2010	$	—	$	78,747		$	30,724
Adjustment to previously recognized unrealized loss on investments included in other comprehensive income		—		(1,119	)		—
Income from equity method investment		—		—			2,549
Additional investment in equity method investment		—		—			8,012
Liquidation of investments		—		(75	)

Balance as of March 31, 2011		—		77,553			41,285
Adjustment to previously recognized unrealized loss on investments included in other comprehensive income		—		3,129
Realized loss on investments		—		(842	)
Income from equity method investment		—		—			10,639
Additional investment in equity method investments		—		—			200
Liquidation of investments		—		(10,625	)
Transfers out of Level 3⁽¹⁾		—		(13,357	)

Balance as of June 30, 2011		—		55,858			52,124
Adjustment to previously recognized unrealized loss on investments included in other comprehensive income		—		12,192
Other-than-temporary impairment on auction rate securities		—		(17,551	)
Liquidation of investments		—		(125	)
Transfers between long term and short term		50,374		(50,374	)
Income from equity method investment		—		—			1,915
Additional investment in equity method investments		—		—			4,508

Balance as of September 30, 2011	$	50,374	$			$	58,547


	Three Months Ended September 30,
(in thousands, except per share data)	2010			2011			$ Inc (Dec)			% Inc (Dec)
Net revenue:
Service revenue	$	339,390		$	382,873		$	43,483			12.8	%
Reimbursed revenue		25,985			32,522			6,537			25.2

Total net revenue		365,375			415,395			50,020			13.7

Direct costs		189,979			223,507			33,528			17.6
Research and development expenses		470			2,069			1,599			340.2
Selling, general and administrative expenses		102,365			107,579			5,214			5.1
Depreciation and amortization		15,726			16,821			1,095			7.0

Operating income		56,835			65,419			8,584			15.1

(Loss) income from equity method investment		(4,562	)		1,915			6,477			142.0
Loss on investments		—			(17,703	)		(17,703	)		NA
Other income (expense), net		877			1,069			192			21.9


Income from operations before provision for income taxes		53,150			50,700			(2,450	)		(4.6	)
Provision for income taxes		15,148			15,083			(65	)		(0.4	)

Net income		38,002			35,617			(2,385	)		(6.3	)
Net income attributable to noncontrolling interests		—			(181	)		(181	)		NA


Net income attributable to shareholders	$	38,002		$	35,436		$	(2,566	)		(6.8	)

Net income per diluted share	$	0.32		$	0.31		$	(0.01	)		(3.1	)


(in thousands)	December 31, 2010		September 30, 2011		$ Inc (Dec)
Current assets:
Cash and cash equivalents	$	479,574	$	416,746	$	(62,828	)
Short-term investments		79,976		63,580		(16,396	)
Accounts receivable and unbilled services, net		435,876		505,007		69,131
Income tax receivable		12,327		17,469		5,142
Investigator advances		16,032		13,008		(3,024	)
Prepaid expenses		24,535		25,699		1,164
Deferred tax assets		30,910		41,334		10,424
Cash held in escrow		10,304		2,288		(8,016	)
Other current assets		44,172		17,979		(26,193	)

Total current assets	$	1,133,706	$	1,103,110	$	(30,596	)


Current liabilities:
Accounts payable	$	29,858	$	37,726	$	7,868
Payables to investigators		56,612		65,468		8,856
Accrued income taxes		1,918		6,064		4,146
Other accrued expenses		208,128		204,936		(3,192	)
Unearned income		317,191		337,086		19,895

Total current liabilities	$	613,707	$	651,280	$	37,573


Working capital	$	519,999	$	451,830	$	(68,169	)


	Total Number of Shares Purchased			Average Price Paid Per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽¹⁾			Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs⁽¹⁾
Period

July 1, 2011 to July 31, 2011		—		$	—			—		$	60,700,000
August 1, 2011 to August 31, 2011		—			—			—			60,700,000
September 1, 2011 to September 30, 2011		502,526	⁽²⁾		28.70	⁽²⁾		502,526	⁽²⁾		60,700,000

Total		502,526		$	28.70			502,526		$	60,700,000