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

Forward-looking Statements

This Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These statements relate to future events or our future financial performance. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, expectations, predictions, assumptions and other statements that are not statements of historical facts. In some cases, you can identify forward-looking statements by terminology such as "might", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "intend", "potential" or "continue", or the negative of these terms, or other comparable terminology. These statements are only predictions. These statements rely on a number of assumptions and estimates that could be inaccurate and that are subject to risks and uncertainties. Actual events or results might differ materially due to a number of factors, including those listed in "Potential Volatility of Quarterly Operating Results and Stock Price" below and in "Item 1A. Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2007. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Company Overview

We are a leading global contract research organization providing drug discovery and development services, post-approval expertise and compound partnering programs. Our clients and partners include pharmaceutical, biotechnology, medical device, academic and government organizations. Our corporate mission is to help clients and partners maximize returns on their research and development investments and accelerate the delivery of safe and effective therapeutics to patients.

We have been in the drug development business for more than 22 years. Our development services include preclinical programs and Phase I to Phase IV clinical development services as well as bioanalytical product testing and clinical laboratory services. We have extensive clinical trial experience, including regional, national and global studies across a multitude of therapeutic areas and in various parts of the world. In addition, for marketed drugs, biologics and devices, we offer support such as product launch services, medical information, patient compliance programs, patient and disease registry programs, product safety and pharmacovigilance, Phase IV monitored studies and prescription-to-over-the-counter programs.

With 72 offices in 33 countries and more than 10,500 professionals worldwide, we have provided services to 46 of the top 50 pharmaceutical companies in the world as ranked by 2007 healthcare research and development spending. We also work with leading biotechnology and medical device companies and government organizations that sponsor clinical research. We are one of the world's largest providers of drug development services to pharmaceutical, biotechnology and medical device companies, and government organizations based on 2007 annual net revenue generated from contract research organizations.

Building on our outsourcing relationship with pharmaceutical and biotechnology clients, we established our Discovery Sciences segment in 1997. This segment primarily focuses on preclinical evaluations of anticancer therapies, biomarker discovery and patient sample analysis services, and compound development and commercialization collaborations. We have developed a risk-sharing research and development model to help pharmaceutical and biotechnology clients develop compounds. Through collaborative arrangements based on this model, we assist our clients by sharing the risks and potential rewards of the development and commercialization of drugs at various stages of development.

Our integrated drug discovery and development services offer our clients a way to identify and develop drug candidates more quickly and cost-effectively. In addition, with global infrastructure, we are able to accommodate the multinational drug discovery and development needs of our clients. As a result of having core areas of expertise in discovery and development, we provide integrated services across the drug development spectrum. We use our

proprietary informatics technology to support these services. For more detailed information on PPD, see our Annual Report on Form 10-K for the year ended December 31, 2007.

Executive Overview

Our revenues are dependent on a relatively small number of industries and clients. As a result, we closely monitor the market for our services. For a discussion of the trends affecting the market for our services, see "Item 1. Business - Industry Overview - Trends Affecting the Drug Discovery and Development Industry" in our Annual Report on Form 10-K for the year ended December 31, 2007. Although we cannot forecast with certainty the demand for CRO services for the remainder of 2008, particularly in light of current general economic conditions and uncertainties, the global financial crisis and FDA regulatory developments, the overall market for these services appears to be solid. This is supported by, among other factors, the increase in the volume and size of requests for proposals for our Phase II-IV clinical development services. For the remainder of 2008, we plan to continue our focus on operational performance and sales execution.

We believe there are specific opportunities for growth and improvement in certain areas of our core development business. In total, the four Phase II-IV geographic regions showed continued strength in the third quarter of 2008 demonstrated by a 35.3% increase in authorizations and a 20.0% increase in backlog compared to the third quarter of 2007. In addition, as we expand our global footprint, we expect our ex-United States Phase II-IV units to continue to grow at a higher rate than our overall revenue growth. Our central laboratory's net revenue was 14.3% above the third quarter of 2007. In October 2008, we announced plans to expand our global central lab services into Southeast Asia in response to growing client demand, which should provide an opportunity for future growth in this business unit.

We review various metrics to evaluate our financial performance, including period-to-period changes in backlog, new authorizations, cancellation rates, revenue, margins and earnings. In the third quarter of 2008, we had new authorizations of $705.1 million, an increase of 23.6% over the third quarter of 2007. The cancellation rate for the third quarter of 2008 was 29.5% of new authorizations. Excluding a foreign currency adjustment to backlog, the cancellation rate for the quarter was 24.2%. Backlog grew to $3.0 billion as of September 30, 2008, up 20.0% over September 30, 2007. The average length of our contracts continued to increase, reaching 35 months as of September 30, 2008 up from 32 months as of September 30, 2007 due to several new contracts with longer than average duration. In the third quarter of 2008, selling, general and administrative costs, or SG&A, as a percentage of net revenue was 25.5% compared to 24.4% in the third quarter of 2007. Included in SG&A costs is an additional $2.5 million of bad debt expense, which equates to 0.6% of net revenue in the third quarter of 2008. While a significant portion of the SG&A cost is related to growth in mature and emerging markets, we are focused on decreasing SG&A as a percentage of net revenue in the future. In addition, our operating margin improved sequentially as income from operations as a percentage of net revenue increased from 17.4% in the second quarter of 2008 to 17.9% in the third quarter of 2008.

Backlog by client type as of September 30, 2008 was 54.1% pharmaceutical, 35.0% biotech and 10.9% government/other, as compared to 51.1% pharmaceutical, 35.9% biotech and 13.0% government/other as of September 30, 2007. This change in the composition of our backlog was primarily a result of an increase in authorizations from pharmaceutical companies. Net revenue by client type for the quarter ended September 30, 2008 was 56.0% pharmaceutical, 30.8% biotech and 13.2% government/other compared to 58.9% pharmaceutical, 29.3% biotech and 11.8% government/other for the quarter ended September 30, 2007.

For the third quarter of 2008, net revenue contribution by service area was 80.3% for Phase II-IV services, 14.3% for laboratory services, 3.3% for the Phase I clinic and 2.1% for Discovery Sciences, compared to net revenue contribution for the year ended December 31, 2007 of 81.0% for Phase II-IV services, 14.1% for laboratory services, 3.3% for the Phase I clinic and 1.6% for Discovery Sciences. Top therapeutic areas by net revenue for the quarter ended September 30, 2008 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 quarter ended September 30, 2008, see "Results of Operations - Three Months Ended September 30, 2007 versus Three Months Ended September 30, 2008" below.

Capital expenditures for the three months ended September 30, 2008 totaled $18.4 million. These capital expenditures were primarily for our new building in Scotland and various other leasehold improvements, computer software and hardware, and scientific equipment for our laboratory units. We expect our capital expenditures for 2008

to be approximately $80 million to $90 million, primarily associated with facility expansion and improvements, as well as investments in information technology and new laboratory equipment.

As of September 30, 2008, we had $612.1 million of cash and cash equivalents and short- and long-term investments. In the third quarter of 2008, we generated $81.8 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, for the third quarter of 2008 was 42 days, bringing it to 44 days for the nine months ended September 30, 2008, compared to 51 days for the year ended December 31, 2007. DSO decreased during the first nine months of 2008 due to improved cash collections, the mix of contracts performed and their payment terms. We plan to continue to monitor DSO and the various factors that affect it. However, we expect DSO will continue to fluctuate from quarter to quarter depending on contract terms, the mix of contracts performed and our success in collecting receivables.

With regard to our compound partnering arrangements, Johnson & Johnson's marketing authorization application for dapoxetine is under regulatory review in seven European countries. The dipeptidyl peptidase, or DPP-4, program in type 2 diabetes with Takeda is also under regulatory review in several countries. Takeda submitted the new drug application, or NDA, for alogliptin to the FDA in December 2007. In February 2008, the alogliptin NDA was accepted for filing by the FDA, triggering a $15.0 million milestone payment to us. In October 2008, the FDA notified Takeda that it would not be able to complete its review of the alogliptin NDA before the Prescription Drug Use Fee Act date of October 27, 2008 due to the lack of internal resources. The FDA did not provide any timelines for its ongoing review of the alogliptin NDA. In September 2008, Takeda submitted an NDA for alogliptin in Japan, triggering an additional $3.0 million milestone payment to us. Takeda also submitted an NDA for a single tablet product with alogliptin and Actos with the FDA in September 2008. If additional filings/approvals and launch occur for alogliptin, we will receive additional regulatory milestones, sales-based milestones and royalties.

With regard to our collaboration on the statin compound, PPD10558, as previously announced, we have completed a high dose comparator study in healthy volunteers. The drug was well-tolerated and a preliminary review of results suggests the statin compound compares favorably to currently marketed statins. We continue to review the data from this trial, identify potential development and commercialization partners and evaluate the future development of this compound. We continue to conduct limited development activities with respect to the statin compound and expect to incur additional R&D expenses in future periods, but the level of expenditures should be lower than in prior periods.

We believe these drug development collaborations allow us to leverage our resources and global drug development expertise to create new opportunities for growth and to share the risks and potential rewards of drug development with our collabrators. For a background discussion of our compound partnering arrangements, see "Item 1. Business - Our Services - Our Discovery Sciences Group - Compound Collaboration Programs" in our Annual Report on Form 10-K for the year ended December 31, 2007. We believe our compound partnering strategy uses our cash resources and drug development expertise to drive mid- to long-term shareholder value. For the remainder of 2008, we plan to continue advancing our existing collaborations and evaluate new potential strategies and opportunities in this area.

New Business Authorizations and Backlog

New business authorizations, which are sales of our services, are added to backlog when we enter into a contract or letter of intent or receive a verbal commitment. Authorizations can vary significantly from quarter to quarter and contracts generally have terms ranging from several months to several years. We recognize revenue on these authorizations as services are performed. Our new authorizations for the three months ended September 30, 2007 and 2008 were $570.6 million and $705.1 million, respectively.

Our backlog consists of new business authorizations for which the work has not started but is anticipated to begin in the future and contracts in process that have not been completed. As of September 30, 2008, the remaining duration of the contracts in our backlog ranged from one to 111 months, with a weighted average duration of 35 months. We expect the weighted average duration of the contracts in our backlog to fluctuate from quarter to quarter in the future, based on the contracts constituting our backlog at any given time. Amounts included in backlog represent potential future revenue and exclude revenue that we have recognized. We adjust backlog on a monthly basis to account for fluctuations in exchange rates. Our backlog as of September 30, 2007 and 2008 was $2.5 billion and $3.0 billion, respectively. For various reasons discussed in "Item 1. Business - Backlog" in our Annual Report on Form 10-K for the

year ended December 31, 2007, our backlog might never be recognized as revenue and is not necessarily a meaningful predictor of future performance.

Results of Operations

Revenue Recognition

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

In connection with the management of clinical trials, we pay, on behalf of our clients, fees to investigators and test subjects as well as other out-of-pocket costs for items such as travel, printing, meetings and couriers. Our clients reimburse us for these costs. Amounts paid by us as a principal for out-of-pocket costs are included in direct costs as reimbursable out-of-pocket expenses and the reimbursements we receive as a principal are reported as reimbursed out-of-pocket revenue. In our statements of operations, we combine amounts paid by us as an agent for out-of-pocket costs with the corresponding reimbursements, or revenue, we receive as an agent. During the three months ended September 30, 2007 and 2008, fees paid to investigators and other fees we paid as an agent and the associated reimbursements were approximately $83.9 million and $75.2 million, respectively.

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

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

Recording of Expenses

We generally record our operating expenses among the following categories:

• direct costs;

• research and development;

• selling, general and administrative; and

• depreciation and amortization.

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

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

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

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

Three Months Ended September 30, 2007 versus Three Months Ended September 30, 2008

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, 2007 compared to the three months ended September 30, 2008.

                                                  Three Months Ended
                                                     September 30,
(in thousands, except per share data)              2007         2008          $ Inc (Dec)       % Inc (Dec)
Net revenue:
Development                                     $  323,769    $ 358,674      $      34,905             10.8 %
Discovery Sciences                                   4,694        7,773              3,079             65.6
Reimbursed out-of-pockets                           28,732       32,020              3,288             11.4

Total net revenue                                  357,195      398,467             41,272             11.6
Direct costs:
Development                                        163,221      173,748             10,527              6.5
Discovery Sciences                                   2,775        2,741                (34 )           (1.2 )
Reimbursable out-of-pocket expenses                 28,732       32,020              3,288             11.4

Total direct costs                                 194,728      208,509             13,781              7.1
Research and development expenses                    8,353        1,657             (6,696 )          (80.2 )
Selling, general and administrative expenses        87,129      101,684             14,555             16.7
Depreciation and amortization                       14,135       15,332              1,197              8.5

Income from operations                              52,850       71,285             18,435             34.9

Impairment of investments                               -        (2,092 )           (2,092 )         (100.0 )
Interest and other income, net                       4,224        6,635              2,411             57.1

Income before provision for income taxes            57,074       75,828             18,754             32.9
Provision for income taxes                          18,834       24,644              5,810             30.9

Net income                                      $   38,240    $  51,184      $      12,944             33.9

Net income per diluted share                    $     0.32    $    0.43      $        0.11             34.4

Total net revenue increased $41.3 million to $398.5 million in the third quarter of 2008. The increase in total net revenue resulted primarily from an increase in our Development segment revenue. The Development segment generated net revenue of $358.7 million, which accounted for 90.0% of total net revenue for the third quarter of 2008. The 10.8% increase in Development segment net revenue was primarily attributable to an increase in the level of Phase II-IV services and an increase in net revenue from our laboratory units in the third quarter of 2008 as compared to the same period in 2007.

The Discovery Sciences segment generated net revenue of $7.8 million in the third quarter of 2008, an increase of $3.1 million from the third quarter of 2007. The higher 2008 Discovery Sciences segment net revenue was mainly attributable to the $3.0 million milestone payment we earned in the third quarter of 2008 as a result of Takeda's submission of the alogliptin NDA in Japan.

Total direct costs increased $13.8 million to $208.5 million in the third quarter of 2008 primarily as the result of an increase in Development segment direct costs. Development segment direct costs increased $10.5 million to $173.7 million in the third quarter of 2008 primarily due to an increase in personnel costs of $9.6 million.

R&D expenses decreased $6.7 million to $1.7 million in the third quarter of 2008. The decrease in R&D expense was primarily due to a decrease in development costs associated with the statin compound we licensed from Ranbaxy and are developing as a potential treatment for dyslipidemia. We are solely responsible for all costs and expenses for the development, manufacture, marketing and commercialization of this compound. We continue to

conduct limited development activities with respect to the statin compound and expect to incur additional R&D expenses in future periods, but at lower levels than in prior periods. We also plan to continue evaluating other compound partnering strategies and opportunities, which could result in additional R&D expenses in future periods.

SG&A expenses increased $14.6 million to $101.7 million in the third quarter of 2008. As a percentage of total net revenue, SG&A expenses increased to 25.5% in the third quarter of 2008 as compared to 24.4% for the same quarter in 2007. The increase in SG&A expenses in absolute terms was primarily related to additional personnel costs of $13.3 million and higher bad debt costs of $2.5 million, partially offset by a $1.4 million decrease in recruitment and relocation costs.

Depreciation and amortization expense increased $1.2 million to $15.3 million in the third quarter of 2008. The increase was related to property and equipment we acquired to accommodate our growth. Capital expenditures were $18.4 million in the third quarter of 2008. Our capital expenditures in the third quarter of 2008 primarily consisted of $3.5 million for our new building in Scotland and various other leasehold improvements, $11.4 million for computer software and hardware and $2.9 million for additional scientific equipment for our laboratory units.

Impairment of investments of $2.1 million in the third quarter of 2008 consisted of a write-down for an other-than-temporary decline in the fair market value of our equity investment in Accentia. The write-down was based on a decrease in the publicly quoted market price of Accentia's common stock on September 30, 2008. For further details, see Note 2 in the notes to the consolidated condensed financial statements.

Interest and other income, net increased $2.4 million to $6.6 million in the third quarter of 2008. This increase was due primarily to gains from intercompany long-term loan settlements offset by the change in foreign currency exchange rates from the time invoices are prepared until payment is received from the client, resulting in a net gain on foreign currency transactions of $1.1 million. Interest and other income, net increased an additional $0.9 . . .