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, 2008. 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 23 years. Our development services include preclinical programs and Phase I to Phase IV clinical development services, as well as bioanalytical, cGMP, biomarker product analysis and global central laboratory services. We have extensive clinical trial experience, including regional, national and global studies across a wide spectrum of therapeutic areas and in 102 countries spanning six continents. In addition, for marketed drugs, biologics and devices, we offer support such as 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 77 offices in 38 countries and approximately 10,000 employees worldwide, we have provided services to 46 of the top 50 pharmaceutical companies in the world as ranked by 2008 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 based on 2008 annual net revenue generated from contract research organizations.

Building on our outsourcing relationship with pharmaceutical and biotechnology clients, we established our Discovery Sciences business in 1997. This business primarily focuses on 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. For more detailed information on PPD, see our Annual Report on Form 10-K for the year ended December 31, 2008.

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, 2008. In the first nine months of 2009, we experienced lower demand for our services, high cancellation rates and significant project delays. We believe this was primarily due to the current general economic conditions and the global financial crisis, increased competition, and consolidation of several large pharmaceutical and biotechnology companies, which delayed decisions on research and development spending. Despite these conditions and uncertainties about the level of and delays in R&D spending by pharmaceutical and biotech companies, we continue to believe in the fundamentals of the market and that it will rebound in future periods. For the remainder of 2009, we plan to focus on sales execution, operational performance and building strategic partnerships with pharmaceutical and biotechnology companies. We also expect to continue to pursue strategic acquisitions that would expand our geographic presence or complement and broaden our service offerings.

Despite the current market for CRO services, we continue to expand our operations. During the third quarter of 2009, we opened our global central laboratory in Singapore, strengthening our ability to provide biopharmaceutical clients an extensive range of customized laboratory services around the world. We continue to make progress on our new laboratory in Ireland, expecting it to be operational in the first quarter of 2010. In October 2009, we entered into an agreement to acquire Excel PharmaStudies, Inc., one of the largest contract research organizations in China. Excel is headquartered in Beijing, China and has offices in more than 15 cities throughout China. When closed, this acquisition should strengthen our global footprint, significantly expand our presence and reach within China and improve our ability to offer Phase II-IV clinical, data management, biostatistics, regulatory and quality assurance services. Also in October 2009, we signed an agreement to invest up to $100.0 million in the Celtic Therapeutics Holdings LP, an investment partnership organized for the purpose of identifying, acquiring and investing in a diversified portfolio of 10 to 15 novel therapeutic product candidates. This investment is intended to set the stage for a strategic drug development alliance between Celtic and us. Finally, we believe there are opportunities to grow our vaccine lab, which we acquired at the end of 2008.

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 2009, we had new authorizations of $425.5 million, a decrease of 39.5% over the same period in 2008. The cancellation rate for the third quarter of 2009 was 5.1% of backlog compared to 5.7% for the third quarter in 2008. Backlog was $3.2 billion as of September 30, 2009, up 5.2% over September 30, 2008. The average length of our contracts was 36 months as of September 30, 2009, up slightly from 35 months as of September 30, 2008 due primarily to several new contracts with longer than average duration.

Backlog by client type as of September 30, 2009 was 68.8% pharmaceutical, 26.0% biotech and 5.2% government/other, as compared to 54.1% pharmaceutical, 35.1% biotech and 10.9% government/other as of September 30, 2008. This change in the composition of our backlog is primarily a result of an increase in authorizations from pharmaceutical companies during the 12-month period ended September 30, 2009. Net revenue by client type for the quarter ended September 30, 2009 was 63.2% pharmaceutical, 29.4% biotech and 7.4% government/other, compared to 56.0% pharmaceutical, 30.8% biotech and 13.2% government/other for the quarter ended September 30, 2008.

For the third quarter of 2009, net revenue contribution by service area was 78.9% for Phase II-IV services, 18.6% for laboratory services, 2.2% for the Phase I clinic and 0.3% for Discovery Sciences, compared to 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 for the same period in 2008. Top therapeutic areas by net revenue for the quarter ended September 30, 2009 were oncology, circulatory/cardiovascular, infectious diseases, 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, 2009, see "Results of Operations - Three Months Ended September 30, 2008 versus Three Months Ended September 30, 2009" below.

In July 2009, we reduced our Development segment workforce in North America by approximately 270 employees. We treated the resulting expenses including transition pay and benefits along with outplacement services as restructuring costs. In the third quarter of 2009, we accrued and paid restructuring costs of $3.9 million.

As of September 30, 2009, we had $682.9 million of cash and cash equivalents and short- and long-term investments, after giving effect to the payment of our third quarter dividend of $17.7 million and capital expenditures of $14.2 million. In the third quarter of 2009, we generated $55.2 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 33 days for the nine months ended September 30, 2009, compared to 42 days for the year ended December 31, 2008. DSO decreased in the first nine months of 2009 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.

In May 2009, we completed our disposition of substantially all of the assets of our wholly owned subsidiary, Piedmont Research Center, LLC, to Charles River Laboratories International, Inc., for total consideration of $46.0 million. Due to the unique service offering of Piedmont Research Center, we felt this business unit was not a long-term strategic fit.

In October 2009, we entered into a definitive agreement to sell our wholly owned subsidiary, PPD Biomarker Discovery Sciences, LLC, which owns and operates a biomarker discovery business in Menlo Park, California.

With regard to our existing compound partnering arrangements, Johnson & Johnson's marketing authorization application for dapoxetine is under regulatory review in several countries. To date, Finland, Sweden, Portugal, Austria, Italy, Spain, Germany, Korea and Mexico have approved dapoxetine for marketing under the trade name Priligy. In the first quarter of 2009, we received a $2.5 million milestone payment on each of the first two national approvals, for a total of $5.0 million. We are entitled to royalties on net sales of Priligy and sales-based milestones if requisite sales levels are reached. We recorded the first royalties from sales of Priligy in the second quarter of 2009.

Takeda submitted the new drug application, or NDA, for alogliptin to the Food and Drug Administration, or FDA, in December 2007 and the NDA for fixed dose combination of alogliptin and ACTOS™ in September 2008. They also submitted the NDA for alogliptin in Japan in September 2008. In June 2009, the FDA issued a complete response to Takeda on its alogliptin NDA and requested Takeda to conduct an additional cardiovascular safety trial that satisfies the FDA's December 2008 guidance on anti-diabetes therapies. In September 2009, the FDA issued a complete response to Takeda on its fixed dose combination of alogliptin and ACTOS stating that further review would be dependent on the cardiovascular safety data that would be submitted in support of the alogliptin monotherapy NDA. If additional filings and approvals occur for alogliptin, we will receive additional regulatory milestones, royalties on sales and sales-based milestones if specified sales levels are achieved.

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 the results suggest that it compares favorably to currently marketed statins. We continue to evaluate the future development of this compound.

In April 2009, we acquired Magen BioSciences, Inc., a biotechnology company focused on the development dermatologic therapies, for total consideration of $14.9 million. Through the acquisition, we are expanding our compound partnering program into dermatology and gaining screening capability for dermatologic compounds. Since the acquisition, Magen BioSciences was renamed PPD Dermatology. We filed an investigational new drug, application, or IND, for our lead dermatology candidate MAG-131 in October 2009. This compound will be evaluated as potential treatments for psoriasis, atopic dermatitis and acne. We are currently screening additional compounds in our dermatology laboratory to identify additional drug development candidates for other dermatological indications.

In October 2009, our board of directors authorized management to proceed with preparations to spin-off our compound partnering business from its core contract research organization business. If completed, the spin-off will result in two independent public companies. The compound partnering company resulting from the spin-off is expected to have the following compounds, rights and investments:
Prilogy; alogliptin; our statin compound licensed from Ranbaxy; our dermatology business acquired from Magen; and rights to all potential new compounds acquired by us prior to the spin-off. We currently expect to accomplish the spin-off through a tax-free, pro rata dividend distribution of stock to our shareholders. Completion of the proposed spin-off is subject to numerous conditions, including the final approval of our board of directors, receipt of a private letter ruling or independent opinion that the spin-off will be tax-free to the us and our shareholders, and the filing and effectiveness of a Form 10 with the SEC.

New Business Authorizations and Backlog

We add new business authorizations, which are sales of our services, to backlog when we enter into a contract or letter of intent or receive a verbal commitment. Authorizations 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, 2009 and 2008 were $425.5 million and $702.7 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 the portion of contracts in process that have not been completed. As of September 30, 2009, the remaining duration of the contracts in our backlog ranged from one to 89 months, with a weighted-average duration of 36 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 future potential revenue and exclude revenue that we have recognized. We adjust backlog on a monthly basis to account for fluctuations in exchange rates, cancellations of contracts and adjustments to the scope of contracts. Our backlog as of September 30, 2009 and 2008 was $3.2 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, 2008, including contract cancellations, our backlog might never be recognized as revenue and is not necessarily a meaningful predictor of future performance.

Results of Operations

Revenue Recognition

We record revenue from contracts, other than time-and-material contracts, on a proportional performance basis 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 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 income, we combine amounts paid by us as an agent for out-of-pocket costs with the corresponding reimbursements, or revenue, we receive as an agent. During the three months ended September 30, 2009 and 2008, fees paid to investigators and other fees we paid as an agent and the associated reimbursements were $79.2 million and $81.0 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:

• 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.

Selling, general and administrative, or SG&A, expenses consist primarily of administrative payroll and related benefit charges, sales, advertising and promotional expenses, recruiting and relocation expenses, 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 the following estimated useful lives:

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

We depreciate leasehold improvements over the shorter of the 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, 2008 versus Three Months Ended September 30, 2009

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, 2008 compared to the three months ended September 30, 2009.

                                              Three Months Ended
                                                September 30,
(in thousands, except per share data)        2008           2009       $ Inc (Dec)       % Inc (Dec)
Net revenue:
Development                                $ 358,674      $ 315,841   $     (42,833 )          (11.9 )%
Discovery Sciences                             3,441          1,099          (2,342 )          (68.1 )
Reimbursed out-of-pockets                     32,020         24,119          (7,901 )          (24.7 )

Total net revenue                            394,135        341,059         (53,076 )          (13.5 )

Direct costs:
Development                                  173,748        150,347         (23,401 )          (13.5 )
Discovery Sciences                               379            550             171             45.1
Reimbursable out-of-pocket expenses           32,020         24,119          (7,901 )          (24.7 )

Total direct costs                           206,147        175,016         (31,131 )          (15.1 )

Research and development expenses              1,629          4,604           2,975            182.6
Selling, general and administrative
expenses                                     101,223         94,077          (7,146 )           (7.1 )
Depreciation and amortization                 15,203         16,570           1,367              9.0
Restructuring costs                               -           3,892           3,892            100.0

Income from continuing operations             69,933         46,900         (23,033 )          (32.9 )

Impairment of investments, net                (2,092 )           -            2,092            100.0
Other income, net                              6,635          1,246          (5,389 )          (81.2 )


Income from continuing operations before
provision for income taxes                    74,476         48,146         (26,330 )          (35.4 )
Provision for income taxes                    24,000         10,472         (13,528 )          (56.4 )

Income from continuing operations             50,476         37,674         (12,802 )          (25.4 )
Discontinued operations, net of
provision for income taxes                       708             -             (708 )         (100.0 )

Net income                                 $  51,184      $  37,674   $     (13,510 )          (26.4 )


Income per diluted share from continuing
operations                                 $    0.42      $    0.32   $       (0.10 )          (23.8 )


Income per diluted share from
discontinued operations                    $    0.01      $    0.00   $       (0.01 )         (100.0 )


Net income per diluted share               $    0.43      $    0.32   $       (0.11 )          (25.6 )

Total net revenue decreased $53.1 million to $341.1 million in the third quarter of 2009. The decrease in total net revenue resulted primarily from a decrease in our Development segment revenue. The Development segment generated net revenue of $315.8 million, which accounted for 92.6% of total net revenue for the third quarter of 2009. The $42.8 million decrease in Development segment net revenue was primarily attributable to a $41.3 million decrease in net revenue from our Phase II-IV services, of which $2.7 million was due to the strengthening of the U.S. dollar relative to the euro, Brazilian real and pound sterling. Overall net revenue from Phase II-IV services decreased from the third quarter of 2008 mainly due to a 41.5% decrease in net authorization for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008. Our Phase I clinic also had a decrease in net revenue in the

third quarter of 2009 as compared to the same period in 2008, which was offset by a net increase in net revenue from our laboratory units primarily due to revenue generated from our vaccine lab acquired in December 2008.

Total direct costs decreased $31.1 million to $175.0 million in the third quarter of 2009 primarily as the result of a decrease in Development segment direct costs. Development segment direct costs decreased $23.4 million to $150.3 million in the third quarter of 2009 due to the decrease in net revenue mentioned above. This decrease was mainly attributable to a decrease in personnel costs of $16.6 million, a decrease in contract labor and subcontractor costs of $6.6 million and a decrease of $1.4 million related to losses on our foreign currency hedging position, partially offset by an increase of $1.0 million in facility costs. Of the $23.4 million decrease in Development segment . . .