10-K 1 d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2010

OR

 

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

For the transition period from             to             

Commission file number 0-27570

 

 

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.

(Exact name of registrant as specified in its charter)

 

North Carolina   56-1640186
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification No.)

929 North Front Street

Wilmington, North Carolina

  28401
(Address of principal executive offices)   (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, par value $0.05 per share   Nasdaq Global Select Market
(Title of each class)   (Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  ¨    No  x

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, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

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

The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $2.7 billion as of June 30, 2010, based on the closing price of the Common Stock on that date on the Nasdaq Global Select Market. Shares of common stock held by each executive officer and director and by each person who owns 10% or more of the outstanding common stock have been excluded in that such person might be deemed to be an affiliate. This determination of affiliate status might not be conclusive for other purposes.

As of February 15, 2011, there were 115,201,466 shares of the registrant’s common stock outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

The Company’s definitive Proxy Statement for its 2011 Annual Meeting of Stockholders (certain parts, as indicated in Part III).

 

 

 


Table of Contents

TABLE OF CONTENTS

 

              Page  

Part I.

  
 

Item 1.

  

Business

     1   
 

Item 1A.

  

Risk Factors

     19   
 

Item 1B.

  

Unresolved Staff Comments

     27   
 

Item 2.

  

Properties

     28   
 

Item 3.

  

Legal Proceedings

     29   
 

Item 4.

  

[Removed and Reserved]

     29   
 

Executive Officers

     30   

Part II.

  
 

Item 5.

  

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     32   
 

Item 6.

  

Selected Financial Data

     33   
 

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     34   
 

Item 7A.

  

Quantitative and Qualitative Disclosures about Market Risk

     52   
 

Item 8.

  

Financial Statements and Supplementary Data

     53   
 

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     53   
 

Item 9A.

  

Controls and Procedures

     54   
 

Item 9B.

  

Other Information

     56   

Part III.

  
 

Item 10.

  

Directors, Executive Officers and Corporate Governance

     57   
 

Item 11.

  

Executive Compensation

     57   
 

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     58   
 

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

     58   
 

Item 14.

  

Principal Accounting Fees and Services

     58   

Part IV.

  
 

Item 15.

  

Exhibits, Financial Statement Schedules

     59   


Table of Contents

PART I

Statements in this Report that are not descriptions of historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management’s current view with respect to future events and financial performance, but are subject to risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors, including those set forth herein and in our other SEC filings, and including, in particular, the factors discussed in Item 1A, “Risk Factors.”

 

Item 1. Business

Overview

We are a leading global contract research organization providing drug discovery, development and lifecycle management services. Our clients and partners include pharmaceutical, biotechnology, medical device, academic, non-profit and government organizations. We apply innovative technologies, therapeutic expertise and a commitment to quality to help clients and partners 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, programs, 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 and 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 43 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 49 of the top 50 pharmaceutical companies in the world as ranked by 2009 healthcare research and development spending. We also work with leading biotechnology companies and government organizations that sponsor clinical research. We are one of the world’s largest providers of drug development services based on 2010 annual net revenue generated from contract research organizations.

Founded upon principles of excellence and passion, PPD shares its clients’ focus on delivering life-changing therapies to help people live healthier lives. We are committed to bringing scientific and clinical expertise, quality and speed to every drug discovery and development program to help our clients develop safe and effective products.

Industry Overview

Drug discovery and development is the process of creating drugs for the treatment of human disease. The drug discovery process aims to identify potential drug candidates, while the drug development process involves the testing of these drug candidates in animals and humans to meet regulatory requirements. Discovering and developing new drugs is an extremely expensive, complex, high-risk and time-consuming process. Multiple industry sources estimate the fully capitalized cost of developing and commercializing a new pharmaceutical product ranges from $800 million to over $1 billion. In addition, it generally takes between 10 and 15 years to develop a new prescription drug and obtain approval to market it in the United States.

The drug development services industry provides independent product development services to pharmaceutical, biotechnology companies, and government organizations. This industry has evolved from providing limited clinical trial services in the 1970s to a full-service industry today characterized by broader relationships with clients and by service offerings that encompass the entire drug development process, including preclinical evaluations, study design, clinical trial management, data collection, biostatistical analyses, regulatory consulting, clinical laboratory and diagnostic services, pre- and post-approval safety analysis, product registration and post-approval support.

 

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Over the past 25 years, technological advances, as well as the emergence of the biotechnology industry, have dramatically changed the drug discovery process. New and improved technologies have evolved such as ultra high-throughput screening, new in vitro and in vivo preclinical profiling techniques and the gene-based drug research commonly referred to as genomics. The objective of these innovations is to find more drug targets and to screen chemical compounds against targets much more quickly, with literally millions of compounds possible. This process is expected to produce many more molecules having the ability to affect biological activity. These molecules then need to be tested quickly and economically to determine their viability as potentially safe and effective drug candidates.

The Drug Discovery Process

Targets. Historically, scientists have used classical cellular and molecular biology techniques to map biological pathways in cells to provide a cellular basis for understanding disease processes and to identify key proteins involved in the disease. Proteins that are increased, decreased or altered in some manner in a disease are potential drug targets and can be confirmed in a genetic in vivo animal model that knocks out expression of the protein or over-expresses the protein. Scientists also use genomics to pinpoint the genes responsible for cellular disease functions. The preferred genes encode proteins that are used as drug targets in chemical screens.

Screening. After identifying a potential drug target, researchers develop tests, or assays, to screen chemicals for their ability to alter the functional activity of the target. Ones that do so are called “hits.” High-throughput screening processes can quickly evaluate thousands of chemicals.

Lead Generation. Once a hit is identified in a functional assay, the compound is profiled for drug characteristics such as solubility, metabolism, chemical and metabolic stability and feasibility for commercial production. Scientists now also design compound libraries to provide a starting point to identify leads in the drug discovery process and to better understand the biochemistry and therapeutic relevance of targets. High quality libraries contain compounds of known purity, structure and weight, and also have diverse structural variations. Hits that have good potency and selectivity are called “leads” and are then tested for their potential as drug development candidates.

Lead Optimization. The process of “lead optimization” involves refining the chemical structure of a lead to improve its drug characteristics, with the goal of producing a preclinical drug candidate. Lead optimization typically combines empirical and rational drug design. In empirical design procedures, large numbers of related compounds are screened for selected chemical characteristics. In rational drug design, chemicals are optimized based on the three-dimensional structure of the target. A lead that has been optimized to meet particular drug candidate criteria and is ready for toxicity testing is called a preclinical candidate.

Process Research and Development. Compounds created for screening in lead generation and lead optimization are made in relatively small, milligram quantities. Before a drug candidate can be taken into preclinical and clinical trials, larger quantities must be produced. The goal of process research is to improve production of drug candidates in these larger quantities, typically by minimizing the number of production steps, and to determine how to reduce the time and cost of production. Process development refers to the production scale-up and further refinement required for clinical trials and commercial manufacturing.

The Drug Development Process

The drug development process consists of two stages: preclinical and clinical. In the preclinical stage, the new drug is tested in vitro, or in a test tube, and in vivo, or in animals, generally over a one- to three-year period to assess and optimize potential use in humans. After successful preclinical testing, the new drug can be advanced to the clinical development stage, which involves testing in humans. The following discussion describes the role of the U.S. Food and Drug Administration, or FDA, in the clinical drug development process. Similar regulatory processes exist in other countries.

Prior to commencing human clinical trials in the United States, a company must file with the FDA an investigational new drug application, or IND, containing information about animal toxicity and distribution studies, manufacturing and control data, stability data and a clinical development plan for the product, and a study protocol for the initial proposed clinical trial of the drug or biologic in humans. The design of these trials, also referred to as the study protocols, is essential to the success of the drug development effort. The protocols must correctly anticipate the nature of

 

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the data to be generated and results that the FDA will require before approving the drug. If the FDA does not comment within 30 days after an IND filing, human clinical trials may begin.

The clinical stage is the most time-consuming and expensive part of the drug development process. The drug undergoes a series of tests in humans, including healthy volunteers as well as participants with the targeted disease or condition. Human trials usually start on a small scale to assess safety and then expand to larger trials to test efficacy and safety in the target population. These trials are generally conducted in the following three phases, with multiple trials generally conducted within each phase:

 

   

Phase I trials involve testing the drug on a limited number of healthy individuals, typically 20 to 80 people, to determine the drug’s basic safety data, including tolerance, absorption, metabolism and excretion. This phase lasts an average of six months to one year. In some therapeutic areas such as oncology, where cytotoxic compounds are being investigated, it is sometimes necessary to run Phase I trials in diagnosed patients instead of healthy volunteers.

 

   

Phase II trials involve testing a small number of volunteer participants, typically 100 to 200 people, who suffer from the targeted disease or condition, to determine the drug’s effectiveness and how different doses work. This phase lasts an average of one to two years.

 

   

Phase III trials involve testing large numbers of participants, typically several hundred to several thousand people, to verify efficacy on a large scale, as well as long-term safety. These trials involve numerous sites and generally last two to three years.

After the successful completion of all clinical phases, a company submits to the FDA a new drug application, or NDA, for a drug, or a biologic license application, or BLA, for a biologic, requesting that the product be approved for marketing. The NDA/BLA is a comprehensive, multivolume filing that includes, among other things, the results of all preclinical and clinical studies, information about how the product will be manufactured and tested, additional stability data and proposed labeling. Manufacturing and quality control procedures must conform to rigorous standards in order to receive FDA approval and the validation of these procedures is a costly endeavor. The FDA’s review can last from several months to several years, with the median approval time historically lasting approximately 13 months, although review times appear to have increased in recent years. Drugs that successfully complete this review may be marketed in the United States. As a condition to its approval of a drug, the FDA may require post-approval clinical trials following receipt of approval in order to monitor long-term risks and benefits, to study different dosage levels or to evaluate different safety and efficacy parameters in target populations. In recent years, the FDA has increased its reliance on these trials, and with the passage of the Food and Drug Administration Amendments Act, or FDA Act, in late 2007, the FDA is likely to require sponsors to run more post-approval trials in the future.

Trends Affecting the Drug Discovery and Development Industry

The drug discovery and development services industry has been and will continue to be affected by, among others, the following trends:

Rapid Technological Change and Increased Data. Scientific and technological advancements are rapidly changing the drug discovery and development processes, requiring industry participants to make significant investments to keep pace with competition. The technology to understand gene function, known as functional genomics, is dramatically increasing the number of identified potential drug targets within the human body. Pharmaceuticals on the market today target approximately 500 human gene products. With an estimated 20,000 to 25,000 human protein-coding genes, an enormous number of targets for therapeutic intervention remain untapped. The number of targets increases the need for companies to use state-of-the-art technologies to effectively validate and optimize promising targets and lead candidates. These evolving technologies and the expertise to manage them are costly and involve significant investments in expertise, capital, intellectual property and sophisticated instrumentation. Thus, drug development service firms that have the capability and expertise required to provide early-stage research and development services offer the potential to offset some of these investments and reduce the financial risk of drug discovery efforts.

Changes in the Regulatory Environment. The drug discovery and development process is heavily regulated by the FDA and its Center for Drug Evaluation and Research. Recent product safety concerns, increases in drug and general healthcare costs and the emergence of importation issues have placed the FDA and other regulatory agencies under

 

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increased scrutiny. The war on terror, the risk of global vaccine shortages and the threat of new potential pandemics have elevated the FDA’s focus on research in the areas of bioterrorism and vaccine development. As a result of these and other events, drug safety, cost and availability are under intense monitoring and review by Congress, the FDA and other government agencies. In 2007, primarily in response to the FDA’s handling of postmarket data and recent drug safety concerns, the FDA Act was signed into law. In addition to reauthorizing and amending various provisions that were scheduled to expire, this Act provided the FDA with new regulatory authority to require drug sponsors to run post-approval studies and clinical trials and develop and implement risk evaluation and mitigation strategies. It is also likely that additional legislation will be passed that will impact the FDA and drug development and approval process in the United States. The FDA Act, continued drug safety issues and future legislation could have a lasting and pronounced impact on the drug discovery and development industry.

Government-Sponsored Drug Research and Development. Government agencies continue to be a significant source of funding for new drug and vaccine research and development. The total budget of the National Institutes of Health, or NIH, for fiscal year 2011 is approximately $32.3 billion, including significant appropriations for drug research and development initiatives in the areas of cancer, vaccines, AIDS and chronic diseases such as diabetes. The total budget request for fiscal year 2011 for the CDC, or Center of Disease Control, dedicates several billion dollars for infectious diseases, pandemic flu and vaccines for children. As a result, drug research and development service providers and contractors, including CROs, should continue to benefit from government-sponsored research and development initiatives.

Increase in Potential New Drug Candidates. The number of drug compounds in various stages of development has increased steadily over the past five years, with particularly strong growth in the number of compounds in early stages of development. While research and development spending and the number of drug candidates are increasing, the time and cost required to develop a new drug candidate also have increased. Many pharmaceutical and biotechnology companies do not have sufficient internal resources to pursue development of all of these new drug candidates on their own. Consequently, these companies are looking to the drug discovery and development services industry for cost-effective, innovative and rapid means of developing new drugs.

Research and Development Productivity. While the total number of compounds in clinical development has increased in the last several years, thereby increasing the aggregate spending on research and development programs associated with new drug candidates, the number of novel new drugs approved for marketing remained relatively flat or even declined in recent years. Pharmaceutical and biotechnology companies have responded by focusing on efforts to extend the value of existing products, improve clinical success rates, restructure and re-engineer business processes and business units and lower clinical study costs. Furthermore, many pharmaceutical and biotechnology companies have also responded to the productivity challenge by increasing their focus on licensing and collaborative arrangements to improve new drug pipelines and gain financing for future development and marketing programs.

Biotechnology Industry Growth. The U.S. biotechnology industry has grown rapidly over the last decade and has emerged as a key client segment for the drug discovery and development services industry. While the biotechnology industry accounts for a smaller percentage of total industry R&D expenditure, the rate of biotechnology companies’ spending is higher than traditional pharmaceutical companies. In recent years, this industry has generated significant numbers of new drug candidates that will require development and regulatory approval. Many biotechnology companies do not have the necessary staff, operating procedures, experience or expertise to conduct clinical trials on their own. Because of the time and cost involved, these companies rely heavily on CROs to conduct clinical research for their drug candidates. The ability of small and mid-sized biotech companies to attract the funding needed to sustain operations and advance clinical candidates to subsequent stages in the development process was significantly and adversely affected by the global financial crisis and can affect the growth of the development services industry.

Globalization of Clinical Trials. Clinical trials have become increasingly global as sponsors seek to accelerate patient recruitment, broaden access to trained investigators, reduce costs and gain access to new sources of market expertise. Moreover, pharmaceutical and biotechnology companies are increasingly seeking to file drug registration packages in multiple countries to expand drug product markets. More clinical study work is being conducted in Asia, Eastern Europe, and Latin America, as well as other geographic regions. The clinical studies to support these registration packages frequently include a combination of multinational and domestic trials. This trend puts an emphasis on global experience and coordination throughout the development process, including the collection, analysis, integration and reporting of clinical trial data.

 

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Cost Pressures of Introducing New Drugs. Market forces, healthcare reform and other governmental initiatives place significant pressures on pharmaceutical and biotechnology companies to reduce drug prices. In addition, increased competition as a result of patent expiration, market acceptance of generic drugs, and governmental and privately managed care organization efforts to reduce healthcare costs have added to drug pricing pressures. The industry is responding by consolidating, streamlining operations, decentralizing internal discovery and development processes, and minimizing fixed costs. In addition, increased pressures to differentiate products and justify drug pricing are resulting in an increased focus on healthcare economics, safety monitoring and commercialization services. Moreover, pharmaceutical and biotechnology companies are attempting to increase the speed and efficiency of internal new drug discovery and development processes.

PPD’s Solution

We address the needs of the pharmaceutical, biotechnology industries, as well as academic, non-profit and government organizations, for drug discovery and development by providing integrated services to help our clients maximize the return on their research and development investments. Our application of innovative technologies, therapeutic expertise and commitment to quality throughout the drug discovery and development process offers our clients a way to identify and develop successful drugs and devices more quickly and cost-effectively. We have obtained significant drug development expertise from more than 25 years of operation. Finally, with global infrastructure and expertise in key regions throughout the world, we are able to accommodate the multinational development needs of our clients.

Our Strategy

Our corporate mission is to help clients maximize the return on their R&D investments and accelerate the development of safe and effective therapeutics to patients. The key parts of our strategy to accomplish this mission include the following:

 

   

Build our core competencies. We are an established company led by professionals with significant drug development and post-approval experience helping bring successful products to market throughout the world and continuing to support those products after market. This experience and expertise constitute our core operational strengths. Our performance in development services has made us one of the largest providers of those services globally. We are continually building our competencies by seeking to hire top professionals in key markets around the world.

 

   

Provide a broad range of integrated drug discovery and development services and products. We offer a broad range of integrated services that are designed to address our clients’ needs from the preclinical through post-approval phase. By integrating extensive drug discovery and development services across our clients’ product life cycles, we can more effectively serve existing clients and attract new clients. We believe that our range of drug discovery and development services is one of the most extensive available within a single company.

 

   

Incorporate advanced technologies into our service offerings. We have broad experience in the use of technology to improve quality while creating cost efficiencies and accelerating the drug discovery and development processes. We offer our clients a wide range of technology-based services and products, using a mixture of commercially available third-party systems and internally developed software to help expedite the drug discovery and development processes for both drugs and devices. As new technologies develop, we equip and train our employees to make use of the innovations. We also plan to continue to leverage and build strategic technology relationships.

 

   

Expand globally to meet client needs. We currently have operations in Africa, the Americas, Asia Pacific, Europe and Middle East, which position us to meet our clients’ multinational needs. We intend to further expand globally when we deem it appropriate to meet our existing and prospective clients’ demands.

 

   

Pursue strategic acquisitions and investments. We will continue to actively seek strategic acquisitions and investments, both within and complementary to our current business. Our criteria for acquisitions and investments include complementary client lists, ability to increase market share within and across clients,

 

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complementary therapeutic area and service segment strengths, strategic geographic capabilities, particular process expertise and complementary services, products or technologies.

Our Services

We provide services designed to increase efficiency, reduce time and save costs through our global infrastructure, integrated R&D technologies experience, and client-focused communications. We operate in two segments: Clinical Development Services and Laboratory Services. See Note 16 in the notes to consolidated financial statements for segment information regarding net revenue and operating income (loss).

Our Clinical Development Services Segment

We have designed our various global services to be flexible and integrated in order to assist our clients in optimizing their R&D spending through the clinical stages of the development process. We provide a broad range of clinical development services to meet clients’ needs.

Global Product Development Services. We specialize in developing integrated product development strategies that provide companies with interdisciplinary preclinical; chemistry, manufacturing and controls, or CMC; medical; and regulatory road maps for the development of their products through global marketing approvals and the post-marketing life-cycle. Our experienced physicians and scientists supplement our clients’ program teams to develop and execute an integrated product development plan designed to speed the product to market with reduced risk. Our awareness of the biopharmaceutical industry’s early-stage program needs allows for rapid initiation of the development planning from preclinical testing into the clinic. Our global footprint allows us to provide high quality development services to achieve development goals that meet our clients’ expectations.

Phases II-IV Clinical Trial Management. The core of our clinical development business is a comprehensive package of services for Phases II-IV clinical trials which allows us to offer our clients an integrated package of clinical management services. We have significant clinical trials experience in the following areas:

 

General Areas of Expertise

  

Specific Areas of Expertise

Analgesia

   Acute and chronic pain, cancer break-through pain

Cardiovascular

   Hypertension, angina pectoris, stroke, peripheral arterial disease, congestive heart failure, atrial fibrillation, acute coronary syndrome, thromboembolic disorders

Central nervous system

   Schizophrenia, depression, epilepsy, chronic pain, anxiety, panic disorders, insomnia, multiple sclerosis, Alzheimer’s disease, Parkinson’s disease, acute pain, neuropathic pain, mood disorders, anxiety, attention-deficit hyperactivity disorder, psychotic disorders, substance abuse disorders

Critical care

   Sepsis, acute respiratory distress syndrome, trauma

Dermatology

   Wound healing, acne, hair loss, psoriasis

Gastroenterology

   Duodenal ulcer, gastric ulcer, gastro-esophageal reflux disease, H.pylori, nonsteroidal anti-inflammatory drug-induced ulcers, inflammatory bowel disease, irritable bowel syndrome

Genitourinary

   Incontinence, sexual dysfunction, overactive bladder

Hematology

   Leukemia, hemophilia, lymphoma, myeloma, anemia

HIV/AIDS

   Primary disease, treatment/prophylaxis of opportunistic infections

Infectious diseases

   Clostridium difficile, bacteremia, community-acquired pneumonia, resistant pathogens, complicated skin and skin structure infection, sepsis, human papilloma virus, herpes simplex, chronic hepatitis B, chronic hepatitis C, genital herpes, respiratory syncytial virus, influenza, vaccines

Metabolic/endocrine

   Diabetes (both Type 1 and Type 2), growth hormone, hyperlipidemia

Oncology

   Genitourinary, gastrointestinal, thoracic, hematologic, supportive, breast/gynecological and other cancers

Pulmonary/allergy

   Asthma, allergic rhinitis, chronic sinusitis, neonatal RSV treatment, prophylaxis

Rheumatology/immunology

   Rheumatoid arthritis, osteoarthritis, lupus, gout, psoriasis

 

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Urology

   Sexual dysfunction, urinary incontinence, overactive bladder

Women’s health

   Osteoporosis, hormone replacement therapy

We provide our clients with one or more of the following Phase II-IV clinical trial management services:

Study Protocol and Case Report Form Design. The protocol defines the medical issue the study seeks to examine and the statistical methods that will be used. Accordingly, the protocol specifies, for example, the frequency and type of laboratory and clinical measures that are to be tracked and analyzed, the number of participants required to produce a statistically valid result, the period of time over which they must be tracked, and the frequency and dosage of drug administration. To be successful and for the product to make it to market, the protocol must fulfill requirements of regulatory authorities. Once the study protocol has been finalized, the case report form, or CRF, must be developed. The CRF is the critical document for investigative sites to record the necessary clinical data as dictated by the study protocol. If necessary, the protocol and CRF change at different stages of a trial. A CRF for one participant in a given study might consist of 100 or more pages. We serve our clients in the critical area of study design by applying our experience in the preparation of study protocols and CRFs and providing the associated study-specific training. More recently, the industry has shifted towards electronic data capture, or EDC. In this case, the paper-based CFR is replaced by custom data capture screens that enable real-time data entry and facilitate remote monitoring by our clinical team. We believe we are an industry leader in EDC and provide a variety of EDC solutions for the majority of our customers.

Clinical Trial Feasibility Assessment. We offer comprehensive feasibility assessment for clinical trials and programs to assist with refinement of study design, operational planning and preliminary site identification. We use a variety of data sources during feasibility assessment, including our own experience in the indication, information collected from medical literature and information from global investigator surveys. To facilitate investigator survey conduct globally, we have created the eFeasibility system, which allows investigators to receive relevant study information and provide feedback in a secure online environment without having to provide repetitive information that is unlikely to change over time. We also supplement our own data with commercially available information on clinical trial experience and current patterns of care for the condition. The result of this evaluation is a complete picture of the planned trial or program, including how it fits into the current therapeutic landscape, the competitive trial environment, optimal choice of sites and countries, potential regulatory hurdles and enrollment projections.

Site and Investigator Recruitment. Independent physicians, referred to as investigators, administer the compound under investigation to participants at hospitals, clinics or other locations, referred to as sites. A significant portion of a trial’s success depends on the identification and recruitment of experienced investigators with an adequate base of participants who satisfy the requirements of the study protocol. We recruit these investigators to participate in clinical trials and have access to a database of over 40,000 investigators who have conducted clinical trials for us in the past. In addition to this database, we license a commercial investigator database, supplementing our internal resources to provide qualified investigators for clinical trials in any therapeutic area. We also work closely with clients to identify additional investigative sites with a proven record in managing and overseeing clinical studies. We are continually looking for new investigative sites around the world that have the ability to recruit patients in the therapeutic area of the trial, to comply with GCPs, or good clinical practices, and GPPs, or good pharmacoepidemiology practices, and to meet our expectations for data quality and ethical trial conduct.

Patient Enrollment. The investigators, with our assistance, find and enroll patients suitable for the study. The speed with which trials can be completed is significantly affected by the rate at which patients are enrolled. Prospective patients are required to review information about the drug or device and its possible side effects, and sign an informed consent form to record their knowledge and acceptance of potential side effects. Patients also undergo a medical examination to determine whether they meet the requirements of the study protocol. Those who qualify and agree to participate are then randomized to study treatment as specified by the study protocol, or they might be studied naturalistically according to the approved label in post-marketing studies. Participants undergo follow-up examination by the investigator as specified by the study protocol. We supplement investigator enrollment for studies with comprehensive patient recruitment services. These services consist of site and patient-facing information to increase awareness of trials that we are conducting on behalf of our sponsors. Examples of these services include development of study branding and materials to promote awareness of the trial at sites, creation of aids such as flip charts and videos to assist in the informed consent process, patient resource guides, referral outreach, advertising through traditional media (newspaper, radio, television) and the development of study websites with internet and social media network advertising.

 

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Interactive Voice and/or Web Response Systems. We provide computer-automated systems to conduct various real-time interactive transactions within clinical trials. Investigators, site personnel and study participants may contact the interactive system via phone or internet and have access to role-specific functionality based on their unique, password-secured identity. The transactional functionality of our interactive systems includes any combination of the following: participant screening; randomization; study treatment assignment; study supplies management; study visit scheduling; participant diary data collection; emergency study treatment unmasking; and study participant status updating. We can also include additional protocol-specific functionality. The interactive systems also provide frequently-updated reports. These reports provide important real-time status information for clinical monitoring and project management staff, as well as our clients. Our support services for these interactive systems include 24/7/365 access to support assistance for callers, and high-reliability, high-availability management of the computer, web-hosting and telephone equipment for the systems.

Global Clinical Supplies. We provide global clinical supply management services for study treatments (drugs, biologics or devices) being evaluated within clinical trials. These services include inventory planning and management, regional warehouse depot storage in various locations around the world, management of third-party primary packaging and labeling, product re-labeling, total investigative product accountability, purchase of ancillary and commercially available products, import/export coordination and management of product return and destruction. We operate a full-service import, storage and distribution depot in each of the following locations: Kiev, Ukraine; Moscow, Russia; Johannesburg, South Africa; Sao Paulo, Brazil; Athlone, Ireland; and scheduled to open in 2011, Beijing, China.

Study Monitoring and Data Capture. As they examine participants and conduct tests in accordance with the study protocol, investigators record data on CRFs or enter data into an EDC system. Specially trained persons known as monitors visit sites regularly to ensure that CRFs are completed correctly and to verify that the study has been conducted in compliance with the protocol and GCP. We offer data capture technologies that can significantly enhance both the quality and timeliness of clinical data collection while achieving real time data assessment of trial progress. Our study monitoring and data collection and cleaning services are designed to comply with the safety reporting guidelines of the FDA and other relevant regulatory agencies, as well as provide timely reviews for independent data monitoring safety committees. With significant experience conducting large global clinical trials, we have monitored thousands of clinical trials, including many large international trials with hundreds of sites and thousands of participants per trial. Our project management services are key to providing leadership and direction, across our global team, utilizing systems and processes to assure quality, effective delivery and accuracy throughout the project. Our global risk management process addresses potential obstacles, provides strategic intervention solutions and determines escalation pathways for further discussion, if needed.

We monitor our clinical trials in compliance with government regulations and guidelines. We have adopted global standard operating procedures intended not only to satisfy regulatory requirements in the United States and in many foreign countries, but also to serve as a tool for controlling and enhancing the quality of our clinical trials. All of our standard operating procedures comply with GCP requirements and the International Conference on Harmonisation, or ICH, standards. The FDA has adopted these standards in its guidance documents and the members of the European community and Japan have codified these standards into their clinical research regulations. We compile, validate, analyze, interpret and submit data generated during clinical trials to the FDA or other relevant regulatory agencies for purposes of assisting our clients in obtaining regulatory approval. We also provide consulting on the conduct of clinical trials for simultaneous regulatory submissions to multiple countries.

Government Services. We have an extensive history of working with the NIH, particularly with the National Institute of Allergy and Infectious Diseases, or NIAID. We have experience working as the clinical site monitoring group for the Division of AIDS, or DAIDS, at NIAID since 1990. The initial clinical site contract requirements were for monitoring services at domestic sites; however, this has been expanded over the years to include both domestic and international sites as well as GCP training for the sites, laboratory audits and GLP training and quality management. In addition to the monitoring contract with DAIDS, we provide support to all DAIDS clinical research programs. Other groups we support within NIAID include the Division of Microbiology and Infectious Diseases and the Division of Allergy Immunology and Transplantation. In the past year, we have assisted the Division of Microbiology and Infectious Disease with their H1N1 pandemic response by providing protocol development, essential document collection, clinical monitoring and safety services. In addition to work with the NIH, we were awarded a contract with the FDA to assess their spontaneous adverse event safety surveillance system.

Data Management and Biostatistical Analysis. We provide clients with design input for product development plans, protocol design, CRF design and database development. In addition, we have in-depth experience building data

 

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capture systems and our database structures comply with established industry standards and government regulations. Our experienced data management staff works with monitors and sites to clean the CRF data in real time. We prepare statistical planning and analysis summaries for interim and final analyses, data safety monitoring committees, endpoint adjudication committees and regulatory submissions, including NDAs, BLAs and premarket approval applications, or PMAs. We deliver real-time analysis presentations to clients seeking to have frequent review of their data through the life of their projects. We have supported clients in integrated data for submissions as well as full delivery of regulatory-compliant data files.

Our biostatistics technology infrastructure allows us to streamline processes and enable true global integration of our staff, services and solutions, ensuring future compliance and scalable operations. Our statistical science services streamlines and improves the development of investigative drugs through the implementation of innovative and advanced statistical methodology in clinical trials. Our clients rely on our statistical scientists to plan and perform the highly technical, specialized statistical methods that can be required to submit drug marketing applications to regulatory agencies, publish manuscripts in medical and statistical journals, complete post-marketing clinical trials and observational studies, and evaluate medical treatments on behalf of government agencies.

Global Regulatory and Medical Writing Services. We provide comprehensive global regulatory strategic planning and consulting services for product development from preclinical phase through post approval life cycle optimization and management for all product platforms including drugs, biologics, vaccines, devices and generics. These services include preclinical, chemistry, manufacturing and controls, or CMC, regulatory agency liaison and facilitation of client meetings with regulatory authorities, and product development strategy through all phases and clinical protocol considerations, all enhanced with strategic regulatory intelligence. With multinational global clinical trials, we plan, capture and track the critical regulatory agency activities, milestones and timelines through an electronic tool, RESULT, which offers added efficiency and precision. These services are complemented by full medical writing services, including clinical study report writing, protocol development, application authoring, program management and other regulatory services designed to reduce overall development time. We have full service electronic publishing and submissions outfit for regulatory dossiers and reports with extensive experience in the preparation, assembly, publication and submission of dossiers such as clinical trial and marketing applications and reports to regulatory agencies.

In addition, our global operations enable effective navigation of regulatory agencies with strong relationships with boards of health and up-to-date knowledge of the dynamic and evolving regulatory landscape worldwide. We capture this extensive regulatory intelligence in a database from which strategic information is derived to augment clinical trials and enhance accuracy and value of services delivered to clients to enable successful outcomes.

Our preclinical experts integrate pharmacology, metabolism, pharmacokinetic and toxicology expertise to provide preclinical program design and project management services. We provide a broad range of preclinical services including:

 

   

preclinical program design;

 

   

toxicology consulting; and

 

   

technical writing and regulatory submissions.

To support the clinical development program, we write the toxicology study protocols; identify qualified GLP testing facilities; manage the placement and conduct of studies; and prepare and review pharmacology, toxicology, absorption and metabolism data for regulatory submissions.

Our technical writers, alongside our toxicologists, prepare pharmacology and toxicology summaries for regulatory submissions. They also work with regulatory authorities to develop preclinical plans. We offer a full range of regulatory support services, including document preparation, review and submission for all preclinical regulatory filings required by regulatory agencies, and facilitation of meetings with regulatory agencies to ensure successful outcomes.

Safety/Pharmacovigilance. We provide comprehensive pharmacovigilance services to the pharmaceutical, biotechnology and medical device industry. In addition to full safety case processing, data entry and analysis, we offer full medical support, data safety and endpoint committee coordination, endpoint dossier preparation and product complaint management. Our global medical staff provides ongoing support to all of the clinical development functions. Our global

 

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reach enables us to offer services such as Senior Medical Officer support for Health Canada and expedited safety report submissions in the Americas, Europe and Asia Pacific region.

Post-Approval Services. We provide custom-designed post-approval services for pharmaceutical and biotechnology clients. The portfolio of services we offer in this area can be divided into two distinct segments: Late Phase Services, which includes Phase IIIb/IV studies, observational studies and registries, database studies, epidemiology, health economics and reimbursement planning, health outcomes, and risk evaluation and mitigation strategies, or REMS; and Pharmacovigilance and Medical Communications Services, which includes pharmacovigilance, adverse event reporting, literature surveillance, signal detection, regulatory submission, professional call center services, drug information, patient persistency, safety and REMS call center and writing and editorial services. We deliver our late phase research through an innovative operational model that combines remote site management and real time data review with on-site monitoring. This approach enables cost-efficient alternative monitoring solutions and results in increased site communication and satisfaction.

PPD GlobalView, our proprietary web-based data capture system, provides our post-approval studies with a customizable, intuitive system for investigators to fulfill their study objectives. Due to the relative size of such studies and their objective to evaluate product use in a real-world setting after approval, late phase studies sometimes also recruit investigators without research experience. PPD GlobalView provides such sites with an easy-to-use study tool that integrates into the workflow of busy medical practices. Applying advanced technologies and experience, we combine health outcomes such as epidemiology, psychometrics and economics with clinical research to measure and compare risks, benefits, economic impact and quality-of-life impact of drug therapies. Our Phase IV monitoring studies can produce valuable safety and efficacy data analyses, as well as provide information for participant education programs. Our registries and observational studies collect real-world data on how a product is used in a non-controlled setting. Data can be used to determine actual prescriber use or treatment patterns, to collect potential safety signals for further investigation, and to evaluate effectiveness and participant quality of life. Our participant adherence programs can optimize real-world outcomes and indicate ways to help enhance proper use of a drug by the physician and participant.

In July 2010, we announced an agreement with Microsoft Corp. to jointly implement an innovative technology solution designed to improve efficiency in managing FDA-mandated REMS programs. When completed, this first-of-its kind technology solution will provide biopharmaceutical companies with a long-term system for managing operational components of REMS programs while tracking large amounts of information collected from multiple sources, including patients, healthcare providers and pharmacies. REMS programs are required by the FDA for certain marketed drugs to ensure the benefits of the product offered to consumers outweigh the risks.

eClinical Initiatives. We continue to invest in technology to support our business. In 2010, we implemented a web portal strategy designed to integrate our applications for our internal staff, clients, investigator sites and patients. We are also investing in identification and access management technology designed to provide streamlined access to our systems, increase security and offer more effective management of user accounts. These technologies should improve our transparency to data and offer a greater ability to integrate with our sponsors.

As of December 31, 2010, our web portals were supporting more than 400 client studies across more than 90 pharmaceutical, biotechnology, clinical, laboratory and government clients, with more than 11,000 external users. This technology has become a core part of how we provide secure, timely access to key study information to our clients. We continue to expand our use of a web-based document management system across the enterprise. This system enables us to utilize resources across disparate locations through the use of workflow automation, electronic signatures and content sharing for global project and departmental teams.

As trials continue to move to EDC, PPD is committed to offering the best solutions available. Our preferred remote deposit capture, or RDC, technology is the Oracle® Clinical’s RDC platform, but we offer our clients access to other industry leading EDC platforms such as Medidata’s Rave®. Supporting web portal and EDC platforms, our technical operation group provides end-user support, study set-up, maintenance and solution development. All of these efforts support our goal of alignment to a global business providing enabling technologies to our staff and clients based on proactive, intelligent and consumable data.

 

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We provide consulting services to help pharmaceutical and biotechnology companies assess and resolve clinical data management and safety system challenges, such as integrating and customizing systems, migrating clinical and safety data, providing computer systems validation services that include compliance evaluation, and updating or replacing legacy systems to meet regulatory guidance. We provide expertise on the Oracle Health Sciences suite of products with a full range of support services including installation, training, validation, technical support and custom development. Also, leveraging our technical infrastructure, we provide application service provider hosting services for the entire Oracle Health Sciences suite of products.

Our Laboratory Services Segment

We provide our clients with one or more of the following laboratory services:

Phase I Clinic. Having conducted Phase I studies for more than 21 years, we are one of the industry’s most experienced Phase I trial providers. Our 330+ bed Phase I clinic in Austin, Texas, capitalizes on our strengths in conducting first-in-man studies, cardiac safety monitoring and large, complex, procedure-intensive Phase I trials. Our professional physicians and highly trained research staff administer general Phase I safety tests, special population studies and bioavailability and bioequivalence testing. Bioavailability and bioequivalence testing involves administration of test compounds and obtaining biological fluids sequentially over time to measure absorption, distribution, metabolism and excretion of the drug. Our Phase I unit also includes a dental surgical and research clinic to evaluate the safety and effectiveness of new analgesic compounds in third molar extraction models. Our Phase I clinic has on-site capabilities for flow cytometry measurement, allowing rapid measurement of cell surface biomarkers immediately following blood sample collection to evaluate critical pharmacological actions and central laboratory capabilities for small to medium U.S. Phase II through IV multicenter safety studies. Our Phase I clinic integrates supporting data management, biostatistics and medical writing services within its program management. We have the capability to fully support comprehensive early clinical development programs. Our Phase I program can also be integrated with other services that we provide, such as bioanalytical for the measurement of the pharmaceutical compound and its metabolites in blood products and cGMP, or good manufacturing practices, to qualify clinical supplies that support our custom pharmacy compounding. In 2010, our Phase I Clinic entered into agreements with four independent North American patient clinics to extend our Phase I capabilities and allow us to undertake and schedule trials in special patient populations and also conduct a greater number of Phase I trials with biological, monoclonal antibody and protein-based pharmaceuticals.

Global Central Laboratories. With laboratory facilities in Highland Heights, Kentucky, Brussels, Belgium, Singapore and Beijing, China, our global central laboratories provide highly standardized safety and biomarker testing services with customized results databases for pharmaceutical and biotechnology companies engaged in clinical drug development, as well as government-funded studies. We focus on providing long-term, large-scale studies where laboratory measurement of clinically relevant endpoints is critical. Our global central laboratories utilize the same standard operating procedures and maintain identical instruments in every facility. All of our facilities are College of American Pathologists, or CAP accredited, and National Glycohemoglobin Standardization Program, or NGSP, and CDC certified. All of our facilities run the same CAP proficiency testing on a quarterly basis. In addition to these international quality standards we run our own unique Global Laboratory Assay Standardization Survey, or GLASS, program weekly on most common analytes, ensuring continuity and consistency of data at all stages of a clinical project. We also standardize data collection and reporting on a global basis utilizing the same software platform, ConneXion. This platform provides real time data and eliminates the need to merge data sets from different regions. This platform also provides clinical teams with a live, real-time database access via a secure web interface.

Vaccines and Biologics Laboratory. Our vaccines and biologics testing facility located in Wayne, Pennsylvania performs immunogenicity testing to establish efficacy of new vaccine candidates in inducing cellular and humoral immune responses and employs molecular detection methods such as polymerase chain reaction, or PCR, testing to detect the absence of pathogens following administration of a vaccine. Our laboratory is involved in vaccine testing for influenza, Human Immunodeficiency Virus, or HIV, haemophilus influenza type B, human papillomavirus, pneumococcus, staphylococcus, hepatitis A and B, measles, mumps and rubella, varicella zoster virus and rotavirus, as well as other viruses and bacteria. Our laboratory recently completed development of a multiplex assay to measure diphtheria, pertussis and tetanus antibodies and is developing assays for meningococcal A, C, Y and W-135 groups to round out their portfolio of assays for concomitant use testing according to the CDC’s recommended immunization schedules. Our laboratory also includes an on-site biorepository facility that enables storage and archiving of samples for future testing, including specialized biomarker testing of specific patient populations to speed drug discovery and development efforts.

 

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Bioanalytical Laboratories. We provide bioanalytical services through GLP, or good laboratory practices, FDA Guidance-compliant laboratories in Richmond, Virginia and Middleton, Wisconsin. Our bioanalytical laboratories analyze biological fluid and tissue samples from animal preclinical and human clinical studies. The latter studies include those conducted by our Phase I unit as well as those conducted on behalf of our clients from Phase I through IV for drug and metabolite content and concentration and generic bioequivalence studies. We currently have more than 3,000 validated assays available for our clients’ use in conducting laboratory analyses. Our bioanalytical methods include liquid chromatography/mass spectrometry (LC/MS), high performance liquid chromatography (HPLC), radioimmunoassay (RIA) and enzyme-linked immunosorbent assay (ELISA). Our bioanalytical lab can now support the complete service necessary for macromolecular drug development. This includes pharmacokinetic evaluation of the therapeutic agent, immunogenicity testing to determine the presence of antibodies, and cell-based assays to determine the neutralizing antibody affect of the antibodies. The Richmond bioanalytical laboratory added the capability to quantify macromolecules by LC/MS and extend the measurement of biomarkers using flow cytometry. Support services include handling HIV-positive samples, managing data for pharmacokinetic studies from multicenter trials, and archiving samples and data. Our service offerings also include providing dedicated laboratory space to conduct complex immunologic Opsonophagocytic Assay, or OPA, bioassays for the vaccine industry. The bioanalytical labs implemented an electronic notebook, or eNotebook, program in 2010. This initiative has been designed for PPD’s procedures and has been fully validated. eNotebooks should greatly improve automation while maintaining the highest levels of study conduct quality. eNotebooks were put into limited practice in 2010, with full implementation expected in 2011.

cGMP Laboratory. We provide early preclinical development to post-approval testing services and product analysis laboratory services through our cGMP compliant laboratories located in Middleton, Wisconsin, Althone, Ireland and Wayne, Pennsylvania. Our product analysis services include analytical method development and validation, stability and quality control testing of product and pharmaceutical ingredients and impurities characterization for small and large molecules for all dosage forms. These analyses are necessary to characterize dosage form release patterns and stability under various environmental conditions in the intended package for clinical studies and marketing. These evaluations must be carried out from preclinical through Phase IV testing and the resulting data maintained over the commercial life of a product. New formulations, as well as generics and prescription products going to over-the counter status such that they no longer require physician prescription for consumer use, all require the same set of studies as the original dosage form. Our cGMP lab in Athlone, Ireland offers the advantage of proximity to our growing number of European clients and allows us to conduct release testing of products to be marketed in Europe for our global clients. We also have similar testing capabilities within our Wayne, Pennsylvania laboratory to offer these services to our east coast clients who require closer oversight of their contract labs.

Drug Discovery Services. We provide fully integrated drug discovery services through our BioDuro subsidiary located in an 110,000 square foot facility in Beijing, China. BioDuro provides the following discovery services:

 

   

medicinal, library and process chemistry;

 

   

custom synthesis;

 

   

drug metabolism and pharmacokinetic analysis;

 

   

discovery biology;

 

   

pharmacology; and

 

   

drug safety evaluations

We have also entered into two strategic relationships to provide proprietary chemistry and biologics discovery services. We made these investments to strengthen and differentiate our drug discovery services going forward. The first investment is a joint venture with Taijitu Biologics. Through this joint venture, we are developing an innovative and differentiated technology platform to discover and develop for clients monoclonal antibodies with enhanced potency and clinical efficacy while reducing the potential of undesired immune responses. With a greater proportion of R&D pipelines comprised of biologics, and particularly MAbs, we feel our investment and the surrounding business model will satisfy an unmet need for our clients. Completion of this automated technology platform is targeted for mid-2011. Second is our equity investment in X-Chem. PPD is the majority owner of X-Chem, which is creating and screening large and diverse small molecule libraries using a proprietary technology platform. Completion and validation of the platform is targeted for mid-2011. Both of these investments build on our ability to offer differentiated and integrated laboratory services across drug discovery for small and large molecules.

 

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Clients and Marketing

We provide a broad range of drug discovery and development services and products to help pharmaceutical and biotechnology companies as well as academic, non-profit and government organizations develop pharmaceuticals and biologics and gain regulatory approval in the markets in which they plan to sell these products. We believe we are recognized among our clients as a leading global CRO.

Client Identification and Mix

We provide Phase I through Phase IV clinical development and post-approval services. We market these services in Africa, Asia Pacific, the Americas, Europe and Middle East. The key differentiators that help us win development business from pharmaceutical and biotechnology companies and academic, non-profit and government organizations include our global infrastructure, quality-driven execution, dedicated therapeutic expertise and service delivery. In addition, our post-approval services combine epidemiological, safety and health outcomes expertise to help pharmaceutical, biotechnology and device companies implement a wide range of strategies to study the long-term safety and effectiveness of products, capitalize on their strengths and maximize their life cycle. PPD also provides laboratory services that are designed to increase drug discovery and development speed and precision. We offer state-of-the-art laboratory technology, instruments and equipment, a commitment to quality results and strict compliance with regulatory standards. Our Vaccines and Biologics Center of Excellence is a first-of-its-kind network of world-class laboratory services devoted solely to vaccines and biologics drug development.

From a geographic perspective, 55.8% of our net revenue in 2010 was derived from the United States, with the remaining balance primarily from Europe. For additional information on the geographic distribution of our net revenue, see Note 16 in the notes to consolidated financial statements included elsewhere in this report.

For the year ended December 31, 2010, total net revenue for all of our services was derived from various industries approximately as follows:

 

Source

   Percentage of
Net Revenue
 

Pharmaceutical

     76.9

Biotechnology

     16.8

Government and other

     6.3

For purposes of classifying net revenue, we define pharmaceutical to include companies with the majority of their research and development related to chemical entities, and biotechnology to include companies with the majority of their research and development related to biologically engineered compounds. Other includes companies primarily focused upon diagnostics and generic formulations. We refer to the Standard Industry Classification, or SIC, codes for publicly traded companies to determine their classification.

Concentration of business among large clients is not uncommon in our industry. Our diverse client mix, in which no single client in 2010 accounted for more than 10% of our net revenue, limits our exposure to significant risks associated with industry consolidation and major product cancellations. However, we have experienced higher concentration in the past and might experience it in the future. Approximately 50.1% of our 2010 net revenue was derived from clients headquartered outside the United States, particularly Europe and Japan. Approximately 44.2% of our 2010 net revenue was generated from services provided by our employees located in countries outside the United States. See Note 16 in the notes to consolidated financial statements included elsewhere in this report for the breakdown of this net revenue.

Marketing Strategy

With a primary focus on both large and small pharmaceutical and biotechnology companies, we promote our services through concentrated business development efforts, scientist-to-scientist communications and centralized corporate marketing programs.

 

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We use corporate marketing to support the efforts of our centralized business development staff, calling on pharmaceutical, biotechnology and device companies. Our sales teams focus on client segments and service areas. In addition, while service area representatives call on particular functional groups within a given biopharmaceutical or device client, our strategic account directors are responsible for managing the relationship and book of business with clients across our portfolio of services.

The top 50 publicly traded pharmaceutical companies, as ranked by 2009 research and development expenses, accounted for a majority of all pharmaceutical research and development spending in 2009, so we concentrate on these companies. Of the top 100 biotechnology companies in 2009, the top 50 accounted for 97% of the total biotechnology research and development expenditures. To appropriately focus our sales and marketing efforts among biotechnology companies, we consider additional factors such as the stage of a drug’s development and the financial stability of a potential client’s business.

Our business development personnel consult with potential pharmaceutical and biotechnology clients early in the project consideration stage in order to determine their requirements. Along with the appropriate operational, technical or scientific personnel, our business development representatives invest significant time to determine the optimal means to design and execute the potential client’s program requirements. As an example, recommendations we make to a potential client with respect to a drug development study design and implementation are an integral part of our bid proposal process and an important aspect of the integrated services we offer. Our preliminary efforts relating to the evaluation of a proposed clinical protocol and implementation plan enhance the opportunity for accelerated initiation and overall success of the trial.

Our global marketing initiatives include integrated, multi-channel campaigns designed to help differentiate and promote our expertise and services. Through trade events, online and print advertising in trade publications, direct communication, newsletters, our website and educational programs, we provide our perspective on current industry challenges or developments to create an ongoing dialogue with our clients and to promote our industry expertise, quality, technology and innovation. We reinforce key messages and selling points through client presentations, corporate material, at trade events and speaking engagements at industry conferences.

We encourage and sponsor the participation of our scientific and technical personnel in a variety of professional endeavors, including speaking and the presentation of papers at national and international professional trade meetings and the publication of scientific articles in medical and pharmaceutical journals. Through these presentations and publications, we seek to further our reputation for professional excellence.

Backlog

Our backlog consists of anticipated net revenue from contracts and letters of intent and, to a limited degree, 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. Amounts included in backlog represent anticipated future net revenue, exclude net revenue that has been recognized previously in our statement of income, and have been adjusted for foreign currency fluctuations. Net revenue is defined as gross revenue, less fees and associated reimbursements. Once contracted work begins, net revenue is recognized over the life of the contract. Our backlog was $3.4 billion in anticipated net revenue at December 31, 2010, compared to $3.0 billion at December 31, 2009. As of December 31, 2010, approximately 13.4% of our backlog was denominated in currencies other than the U.S. dollar.

Our backlog as of any date is not necessarily a meaningful predictor of future results because backlog can be affected by a number of factors, including the size and duration of contracts, many of which are performed over several years, and the changes in labor utilization that typically occur during a study. Additionally, contracts relating to our clinical development business are subject to early termination by the client and clinical trials can be delayed or canceled for many reasons, including unexpected test results, safety concerns, regulatory developments, economic issues, availability of clinical trial material and protocol design matters. Also, the scope of a contract can change significantly during the course of a study. If the scope of a contract is revised, the adjustment to backlog occurs when the revised scope is approved by the client. For these and other reasons, we might not fully realize our entire backlog as net revenue.

 

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Intellectual Property

In the course of conducting our business, we from time to time create inventions. Obtaining, maintaining and protecting our inventions, including seeking patent protection, might be important depending on the nature of the invention. To that end, we seek to implement patent and other intellectual property strategies to appropriately protect our intellectual property.

As of December 31, 2010, we owned or co-owned 14 issued U.S. patents, four pending U.S. patent applications, six issued foreign patents, one pending foreign patent application and one pending international application. We also have obtained licenses to patents from an academic institution. As of December 31, 2010, we had rights to two issued U.S. patents and four issued foreign patents. None of the patents or applications we own or have a license to is individually material to our business.

Pursuant to the terms of the Uruguay Round Agreements Act, patents issued from applications filed on or after June 8, 1995, have a term of 20 years from the date of filing, no matter how long it takes for the patent to issue. Because patent applications in the pharmaceutical industry often take a long time to issue, this method of patent term calculation can result in a shorter period of patent protection afforded to us compared to the prior method of term calculation, which was 17 years from the date of issue. Our issued U.S. patents expire between 2011 and 2025. We seek full patent term adjustment following allowance of a patent, where appropriate. However, we might not be successful in obtaining a patent term adjustment from the U.S. Patent Office for any issued patent.

While we file and prosecute patent applications to protect our inventions, our pending patent applications might not result in the issuance of patents or issued patents might not provide competitive advantages. Also, our patent protection might not prevent others from developing competitive products using related or other technology.

In addition to seeking the protection of patents and licenses, we rely on trade secrets, know-how and continuing technological innovation, which we seek to protect, in part, by confidentiality agreements with employees, consultants, suppliers and licensees. If these arrangements are not honored, we might not have adequate remedies for breach. Additionally, our trade secrets might otherwise become known or patented by our competitors.

The scope, enforceability and effective term of issued patents can be highly uncertain and often involve complex legal and factual questions. No consistent policy has emerged regarding the breadth of claims in pharmaceutical patents, so that even issued patents might later be modified or revoked by the relevant patent authorities or courts. Moreover, the issuance of a patent in one country does not assure the issuance of a patent with similar claim scope in another country, and claim interpretation and infringement laws vary among countries, so we are unable to predict the extent of patent protection in any country. The patents we obtain and the unpatented proprietary technology we hold might not afford us significant commercial protection or advantage.

Competition

The drug development outsourcing industry is highly competitive and fragmented, consisting of hundreds of smaller, limited-service providers and a number of full-service global development companies. In the past, the industry experienced some consolidation and a group of large, full-service competitors emerged, and consolidations and acquisitions have continued. These consolidations and other transactions could potentially increase competition in our industry for clients, experienced clinical personnel, geographic markets and acquisition candidates. Additional business combinations by competitors or clients are possible and could have a significant impact on the competitive landscape of the drug development outsourcing industry.

In addition to competing with a number of other global, full-service companies, we also compete against some medium-sized companies, in-house R&D departments of pharmaceutical and biotechnology companies, universities and teaching hospitals. Newer, smaller entities with specialty focuses, such as those aligned to a specific disease or therapeutic area, compete aggressively against larger companies for clients. Increased competition might lead to price and other forms of competition that could adversely affect our operating results.

Providers of outsourced drug development services compete on the basis of a number of factors. These factors include:

 

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the reputation for on-time quality performance;

 

   

expertise and experience in specific therapeutic areas;

 

   

scope of service offerings;

 

   

staff expertise and qualifications;

 

   

price;

 

   

strengths in various geographic markets;

 

   

technological expertise and systems;

 

   

data management capabilities;

 

   

ability to acquire, process, analyze and report data in a time-saving, accurate manner; and

 

   

ability to manage large-scale clinical trials both domestically and internationally.

Over the past few years, our clients have increasingly pursued strategic outsourcing partnerships under which development services providers compete for selection as a vendor, with only a limited number of providers being chosen and therefore eligible to win future business from the client. While such partnerships are no guarantee of business, service providers that are not selected will have limited opportunities to secure work from that client. In addition, providing drug discovery and development services are labor-intensive and we compete for a limited pool of professionals to provide these services. Although there can be no assurance that we will continue to do so, we believe we compete favorably in these areas.

Despite recent consolidation, our industry remains highly fragmented, with several hundred smaller, limited-service providers and a small number of full-service companies with global capabilities. Although there are few barriers to entry for smaller, limited-service providers, there are significant barriers to becoming a global provider offering a broad range of services. These barriers include:

 

   

the cost and experience necessary to develop broad therapeutic expertise;

 

   

the ability to manage large, global, complex clinical trials;

 

   

the ability to deliver high quality services consistently for large drug development projects;

 

   

the experience to prepare regulatory submissions throughout the world; and

 

   

the infrastructure and knowledge to respond to the global needs of clients.

For specialty areas such as drug information, post-approval services and analytical laboratory services, we compete in a market that has a myriad of niche providers as well as larger, established firms. For the most part, these niche providers offer specialty services with a focus on a specific geographic region, a particular service or function and/or a specific stage or phase of drug development. By contrast, we provide our services on a global basis across functional areas.

Government Regulation

The development, testing, manufacturing, labeling, storage and approval of pharmaceutical products are subject to rigorous regulation by numerous governmental authorities in the United States and other countries at the federal, state and local level, including the FDA. The process of obtaining approval for new pharmaceutical products and additional therapeutic indications for approved products is heavily regulated and requires expenditure of substantial resources and usually takes several years. Companies in the pharmaceutical and biotechnology industries, including our clients, have suffered significant setbacks in various stages of clinical trials, even in advanced clinical trials after promising results had been obtained in earlier studies. These regulations apply to our clients and are generally applicable to us when we are providing services to our clients. Consequently, we must comply with relevant laws and regulations in the conduct of our business.

Prior to commencing human clinical trials in the United States, a company developing a new drug must file an IND with the FDA. The IND must include information about animal toxicity and distribution studies, manufacturing and control data, stability data and a clinical development plan for the product, and a study protocol for the initial proposed clinical trial of the drug or biologic in humans. If the FDA does not object within 30 days after the IND is filed, human clinical trials may begin. The study protocol must be reviewed and approved by the institutional review board, or IRB, in each institution in which a study is conducted and each IRB may impose additional requirements on the way in which the study is conducted in its institution.

 

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Human trials usually start on a small scale to assess safety and then expand to larger trials to test both efficacy and safety in the target population. The trials are generally conducted in three phases, which sometimes overlap, although the FDA may require a fourth phase as a condition of approval. After the successful completion of the first three clinical phases, a company requests approval for marketing its product by submitting an NDA for a drug or a BLA for a biologic. The NDA/BLA is a comprehensive, multivolume filing that includes, among other things, the results of all preclinical and clinical studies, information about how the product will be manufactured and tested, additional stability data and proposed labeling. The FDA’s review can last from several months to several years, with the median approval time historically lasting approximately 13 months, although review times appear to have increased in recent years. Once the NDA/BLA is approved, the product may be marketed in the United States, subject to any conditions imposed by the FDA as part of its approval. In addition, pursuant to the FDA Act that was signed into law in September 2007, the FDA can require drug companies to conduct post-approval clinical trials and implement REMS.

Laboratories such as ours that provide information included in IND applications and NDAs must conform to regulatory requirements that are designed to ensure the quality and integrity of the testing process. For example, our bioanalytical laboratories in Richmond, Virginia and Middleton, Wisconsin follow the FDA’s GLPs. These GLPs have also been adopted by the Ministry of Health in the United Kingdom and by similar regulatory authorities in other countries. Our product analysis lab in Middleton, Wisconsin, also follows the FDA’s cGMPs. Both GLPs and cGMPs require standardization procedures for all equipment, processes and analytical tests, for recording and reporting data, and for retaining appropriate records. To help ensure compliance with GLPs and cGMPs, we have established quality assurance at our laboratory facilities to audit test data and we conduct regular inspections of testing procedures and our laboratory facilities.

In addition, laboratories that analyze human blood or other biological samples for the diagnosis and treatment of study subjects must comply with the Clinical Laboratory Improvement Act, or CLIA. CLIA requires laboratories to meet staffing, proficiency and quality standards. Our laboratory in Austin, Texas and our central laboratory in Highland Heights, Kentucky are CLIA-certified.

The industry standard for the conduct of clinical research is embodied in the FDA’s regulations for IRBs, investigators and sponsor/monitors, which collectively are termed GCPs by industry, and the GCP guidelines issued by ICH, which have been agreed upon by industry and regulatory representatives from the United States, European Union, or EU, and Japan. Our global standard operating procedures are written in accordance with all FDA and ICH requirements. This enables our work to be conducted locally, regionally and globally to standards that meet all currently applicable regulatory requirements.

In the past several years, both the U.S. and foreign governments have become increasingly concerned about the privacy, security and disclosure of confidential personal data. The EU has adopted comprehensive regulation on the use and disclosure of personal information, including extra safeguards for medical data. These regulations place restrictions on the export of personal information outside the EU. Companies in the United States can satisfy these data export requirements by filing for safe harbor status according to a self-certification procedure agreed to by the EU and the United States. We monitor and implement procedures to comply with privacy, security and disclosure obligations, which include maintaining our safe harbor status.

The Department of Health and Human Services, or HHS, has promulgated final regulations under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, which governs the disclosure of confidential medical information in the United States. In 2009, the HHS issued draft regulations requiring notification to individuals when their health information is breached. These regulations, if finalized, will implement provisions of the Health Information Technology for Economic and Clinical Health Act, or HITECH, passed as part of the American Recovery and Reinvestment Act of 2009. Since January 2001, we have had a global privacy policy in place that includes a designated privacy officer, and we comply with the current HIPAA and proposed HITECH requirements. We plan to continue to monitor our compliance with these regulations and take necessary steps to ensure continued compliance with these and other applicable privacy regulations.

We are also subject to regulations enforced by the following agencies, among others:

 

   

Occupational Safety and Health Administration;

 

   

Nuclear Regulatory Commission;

 

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Environmental Protection Agency;

 

   

Department of Transportation;

 

   

International Civil Aviation Organization; and

 

   

Drug Enforcement Administration.

We also must comply with other related international, federal, state and local regulations that govern the use, handling, disposal, packaging, shipment and receipt of certain drugs or unknown compounds, chemicals and chemical waste, toxic substances, biohazards and biohazardous waste, and radioactive materials and radioactive waste. In order to comply with these regulations, we have provided procedures, necessary equipment and ongoing training for our employees involved in these activities.

The failure on our part to comply with applicable regulations could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities. Furthermore, the issuance of a notice of finding by a governmental authority against either us or our clients, based upon a material violation by us of any applicable regulation, could materially and adversely affect our reputation and business.

Employees

As of December 31, 2010 we employed approximately 11,000 employees, of whom approximately 200 were in corporate operations functions. Approximately 48% of our employees are located outside of the United States. Of our staff, approximately 670 hold Ph.D., M.D., Pharm.D. or D.V.M. degrees and approximately 2,200 hold other master’s or other postgraduate degrees. None of our employees are subject to a collective bargaining agreement. Employees in some of our non-U.S. locations are represented by works councils as required by local laws. We believe that our relations with our employees are generally good.

We believe that our success is based on the quality and dedication of our employees. We strive to hire, develop and retain the best available people in terms of ability, experience, attitude and fit with our performance philosophy and standard operating procedures. The dedicated resources in our Global Learning and Performance group are focused on improving the skills, proficiency and capability of all of our employees to enable us to meet and exceed expectations of our clients. We invest heavily in new employees and believe we are an industry leader in both the thoroughness and effectiveness of our training programs. Our leadership development curriculum provides our top emerging leaders worldwide with strategic and global management skills they need to be our leaders of tomorrow. In addition, we encourage all employees to continually grow and broaden their skills through internal and external development opportunities and take ownership for their personal and professional development.

Available Information

Our corporate website address is www.ppdi.com. Information on our website is not incorporated by reference herein. We promptly post important information on our website, and make available free of charge through our web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

 

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Item 1A. Risk Factors

Risks Related to Our Business

Changes in trends in the pharmaceutical and biotechnology industries, including difficult market conditions, could adversely affect our operating results.

Industry trends and economic and political factors that affect pharmaceutical and biotechnology companies and academic, non-profit and government entities that sponsor clinical research also affect our business. For example, the practice of many companies in these industries and government organizations has been to hire companies like us to conduct large development projects. If these industries reduce their tendency to outsource those projects in light of difficult conditions in credit markets and the economy in general, or for any reason, our operations, financial condition and growth rate could be materially and adversely affected. In the past, mergers, product withdrawal and liability lawsuits, and other factors in the pharmaceutical industry appear to have slowed decision-making by pharmaceutical companies and delayed drug development projects. Continuation or increases in these trends could have an adverse effect on our business. In addition, numerous governments have undertaken efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and pharmaceutical companies. If future cost-containment efforts limit the profits that can be derived on new drugs, our clients might reduce their drug discovery and development spending, which could reduce our revenue and have a material adverse effect on our results of operations.

Our revenue depends on a small number of industries and clients.

We provide services to the pharmaceutical and biotechnology industries and academic, non-profit and government organizations that sponsor clinical trials, and our revenue is highly dependent on expenditures by these clients. Accordingly, our operations could be materially adversely affected by consolidation in these industries or other factors resulting in a decrease in the number of our potential clients, including business reductions or failures due to a lack of financing. If the number of our potential clients declines even further, they might be able to negotiate price discounts or other terms for our services that are less favorable to us than has historically been the case. We have experienced client concentration in the past and could again in the future. The loss of business from a significant client could have a material adverse effect on our results of operations.

Neither request for proposal, or RFP, activity nor backlog necessarily result in revenue, and to the extent the mix of contracts in our backlog continues to shift toward larger contracts with a more global component, this might cause the rate at which this backlog converts into revenue to lengthen when compared to historical trends.

Neither request for proposal, or RFP, activity nor backlog as of any date is necessarily a meaningful predictor of future results. Clients can reduce the size of RFPs and also withdraw them. We also might not win RFPs for any number of reasons. Likewise, backlog can be affected by a number of factors, including the size and duration of contracts, many of which are performed over several years, and the changes in labor utilization that typically occur during a study. Additionally, the majority of our contracts are subject to early termination by the client and preclinical projects and clinical trials can be delayed or canceled for many reasons, including unexpected results, safety concerns, regulatory developments, economic issues, availability of clinical trial material and protocol design matters. Also, the scope of a contract can change significantly during the course of a study. If the scope of a contract is revised, the adjustment to backlog occurs when the revised scope is approved by the client. For these and other reasons, we might not fully realize our entire backlog as net revenue.

As we increasingly compete for and enter into large contracts that are more global in nature, we expect the rate at which this backlog converts into revenue, to increase or lengthen. An increase in this conversion rate means that the rate of revenue recognized on these large contract awards may be slower than what we have experienced in the past, which could impact our net revenues and results of operations on a quarterly and annual basis. The revenue recognition on larger, more global projects could be slower than on smaller, less global projects for a variety of reasons, including but not limited to an extended period of time between contract award and study start, as well as an increased timeframe for obtaining the necessary regulatory approvals.

 

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The majority of our clients’ contracts can be delayed, terminated or reduced in scope upon short notice.

Most of our contracts are terminable by the client upon 30 to 90 days’ notice. Clients delay, terminate or reduce the scope of their contracts for a variety of reasons, including but not limited to:

 

   

lack of available financing;

   

products being tested fail to satisfy safety requirements;

   

products have undesired clinical results;

   

the client decides to forego a particular study;

   

inability to enroll enough patients in the study;

   

inability to recruit enough investigators;

   

production problems cause shortages of the drug; and

   

actions by regulatory authorities.

The delay, loss or reduction in scope of a large contract or multiple smaller contracts could adversely affect our operating results. Cancellation or delay of a large contract or multiple smaller contracts could result in under-utilized resources and require an adjustment to our backlog, negatively affecting our net revenue and results of operations. For example, in 2009, we experienced very high cancellation rates which significantly affected our revenue and backlog.

We might not be able to recruit and retain the experienced personnel we need to compete in the drug development industry.

Our future success depends on our ability to attract, retain and motivate highly skilled personnel. Competition for personnel in our industry is intense and we must have good people to succeed.

Management

Our future success depends on the personal efforts and abilities of the principal members of our senior management and scientific staff to provide strategic direction, develop business, manage our operations, and maintain a cohesive and stable work environment. For example, we rely on the services of Fredric N. Eshelman, our executive chairman, William J. Sharbaugh, our chief operating officer, Daniel G. Darazsdi, our chief financial officer, and our other officers, particularly in light of the previously announced May 2011 retirement of our chief executive officer, David L. Grange. We have initiated a search for a successor, and our success will depend, in part, on our ability to recruit, integrate and retain a new chief executive officer, and on our ability to manage our business effectively until we do. Although we have employment agreements with most of our executives, they are generally only for one or two years and do not assure that these named executives or any other executive with whom we have an employment agreement will remain with us. We do not have employment agreements with all of our key personnel.

Healthcare Providers

Our ability to maintain, expand or renew existing business with our clients and to get business from new clients, particularly in the drug development sector, depends on our ability to subcontract and retain healthcare providers with the skills necessary to keep pace with continuing changes in drug development technologies. Competition for experienced healthcare providers is intense. We compete with pharmaceutical and biotechnology companies, including our clients, other contract research companies and academic and research institutions, to recruit healthcare providers.

Scientists and Other Technical Professionals

Our ability to maintain, expand or renew existing business with our clients and to get business from new clients in the drug discovery and development area also depends on our ability to hire and retain scientists with the skills necessary to keep pace with continuing changes in drug discovery and development technologies. We face the same risks, challenges and competition in attracting and retaining experienced scientists as we do with healthcare providers.

Any inability to hire additional qualified personnel might also require an increase in the workload for both existing and new personnel. We might not be successful in attracting new healthcare providers, scientists or management, or in retaining or motivating our existing personnel. The shortage of experienced healthcare providers and scientists, or other factors, might lead to increased recruiting, relocation and compensation costs for these professionals, which might exceed our forecasts. These increased costs might reduce our profit margins or make hiring new healthcare providers or scientists impracticable. If we are unable to attract and retain any of these personnel, our ability to execute our business plan will be adversely affected.

 

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Our future success depends on our ability to keep pace with rapid technological changes that could make our services less competitive or obsolete.

The biotechnology and pharmaceutical industries generally and drug discovery and development more specifically are subject to increasingly rapid technological changes. Our competitors or others might develop technologies, services or products that are more effective or commercially attractive than our current or future technologies, services or products, or that render our technologies, services or products less competitive or obsolete. If competitors introduce superior technologies, services or products and we cannot make enhancements to ours to remain competitive, our competitive position, and in turn our business, revenue and financial condition, would be materially and adversely affected.

Hardware or software failures, delays in the operations of our computer and communications systems or the failure to implement system enhancements could harm our business.

Our success depends on the efficient and uninterrupted operation of our computer and communications systems. A failure of our network or data gathering procedures could impede the processing of data, delivery of databases and services, client orders and day-to-day management of our business and could result in the corruption or loss of data. While some of our operations have disaster recovery plans in place, they might not adequately protect us, particularly because we currently do not have redundant facilities everywhere in the world to provide information technology capacity in the event of a system failure. Despite any precautions we take, damage from fire, floods, hurricanes, power loss, telecommunications failures, computer viruses, break-ins and similar events at our various computer facilities could result in interruptions in the flow of data to our servers and from our servers to our clients. In addition, any failure by our computer environment to provide our required data communications capacity could result in interruptions in our service. In the event of a delay in the delivery of data, we could be required to transfer our data collection operations to an alternative provider of server hosting services. Such a transfer could result in delays in our ability to deliver our products and services to our clients. Additionally, significant delays in the planned delivery of system enhancements, improvements and inadequate performance of the systems once they are completed could damage our reputation and harm our business. Finally, long-term disruptions in the infrastructure caused by events such as natural disasters, the outbreak of war, the escalation of hostilities and acts of terrorism, particularly involving cities in which we have offices, could adversely affect our businesses. Although we carry property and business interruption insurance, our coverage might not be adequate to compensate us for all losses that may occur.

Any failure by us to comply with existing regulations could harm our reputation and operating results.

We are subject to extensive regulation by federal, state and foreign governments. We must adhere to all regulatory requirements including the FDA’s current Good Clinical Practices, Good Laboratory Practice or Good Manufacturing Practice requirements. If we or these suppliers fail to comply with applicable regulations, including FDA pre-or post-approval inspections and cGMP requirements, then the FDA could sanction us. These sanctions could include fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of products, delay, suspension or withdrawal of approvals, license revocation, product seizures or recalls, operational restrictions or criminal prosecutions, any of which could significantly and adversely affect our reputation, operating results and future prospects. For example, if we were to fail to verify that informed consent is obtained from participants in connection with a particular clinical trial or grant deviations from the inclusion or exclusion criteria in a study protocol, the data collected from that trial could be disqualified and we might be required to conduct the trial again at no further cost to our client, but at a substantial reputational and financial cost to us.

If our operations are found to violate any applicable law or other governmental regulations, we might be subject to civil and criminal penalties, damages and fines. Similarly, if the hospitals, physicians or other providers or entities with which we do business are found non-compliant with applicable laws, they might be subject to sanctions, which could also have a negative impact on us. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations, and additional legal or regulatory change. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and damage our reputation.

We expend significant resources on compliance efforts and such expenses are unpredictable and might adversely affect our results. Changing laws, regulations and standards might also create uncertainty, higher expenses and increase

 

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insurance costs. We are committed to compliance and maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment might result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

Changes in the U.S. and international healthcare industry, including reimbursement rates, could adversely harm our customers’ businesses, increase the cost of our business resulting in loss of business opportunities or limit our service offerings.

The U.S. and international healthcare industry is subject to changing political, economic and regulatory influences that may significantly affect the purchasing practices and pricing of pharmaceuticals. The laws and regulations governing the healthcare industry may change and additional government regulations might be enacted, which could prevent or delay regulatory approval of product candidates. In March 2010, the U.S. Congress enacted healthcare reform legislation intended over time to expand health insurance coverage and impose health industry cost containment measures. This legislation might significantly impact the pharmaceutical industry, which could hurt our business. The U.S. Congress has also considered and might adopt other legislation that could have the effect of putting downward pressure on the prices that pharmaceutical and biotechnology companies can charge for prescription drugs. Cost-containment measures, whether instituted by healthcare providers or imposed by government health administration regulators or new regulations, could result in greater selectivity in the purchase of drugs. As a result, third-party payers might challenge the price and cost-effectiveness of products. In addition, in many major markets outside the United States, pricing approval is required before sales might commence. As a result, significant uncertainty exists as to the reimbursement status of approved healthcare products. In addition to healthcare reform proposals, the expansion of managed care organizations, which focus on reducing healthcare costs by limiting expenditures on pharmaceuticals and medical devices could result in pharmaceutical, biotechnology and medical device companies spending less on research and development. If this were to occur, we would have fewer business opportunities and our revenues could decrease, possibly materially. Any of these factors could harm customers’ businesses, which would hurt our business.

Federal or state authorities might also adopt healthcare legislation or regulations that are more burdensome than existing regulations. For example, recent product safety concerns and the creation of the Drug Safety Oversight Board could change the regulatory environment for drug products, including the process for FDA product approval and post-approval safety surveillance. These and other changes in regulation could increase our expenses or limit our ability to offer some of our services. For example, the confidentiality of patient-specific information and the circumstances under which it may be released for inclusion in our databases or used in other aspects of our business are subject to substantial government regulation. Additional legislation or regulation governing the possession, use and dissemination of medical record information and other personal health information might require us to implement new security measures that require substantial expenditures or limit our ability to offer some of our services. These regulations might also increase costs by creating new privacy requirements for our informatics business and mandating additional privacy procedures for our clinical research business.

The drug discovery and development services industry is highly competitive.

The CRO industry is highly competitive and we face numerous competitors. If we fail to compete effectively, we might lose clients, which would cause our business to suffer.

We primarily compete against in-house departments of pharmaceutical companies, other full service CROs, small specialty CROs, and, to a lesser extent, universities, teaching hospitals, and other site organizations. Some of the larger CROs against which we compete include Quintiles Transnational Corporation, Covance Inc., Parexel International Corp., Kendle Inc. and Icon plc. Some of these competitors, including the in-house departments of pharmaceutical companies, have greater capital, technical and other resources than we have. In addition, our competitors that are smaller specialized companies might compete effectively against us based on price and their concentrated size and focus.

In recent years, a number of the large pharmaceutical companies have established formal or informal alliances with one or more CROs relating to the provision of services over extended time periods. These alliances differ in purpose, scope and term, but they have generally resulted in fewer CROs being approved or selected to perform work for the pharmaceutical company. Our success depends in part on successfully establishing and maintaining these kinds of

 

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relationships on terms acceptable to us. If we fail to do so, our revenues and results of operations could be adversely affected, possibly materially.

Our business has experienced substantial expansion and contraction in the past and we might not properly manage any expansion or contraction in the future.

Rapid expansion or contraction could strain our operational, human and financial resources and facilities. If we fail to properly manage any changes, our expenses might grow more than revenue and our results of operations and financial condition might be negatively affected. In order to manage expansion or contraction, we must, among other things, do the following:

 

   

continue to improve our operating, administrative and information systems;

 

   

accurately predict our future personnel, resource and facility needs to meet our commitments;

 

   

track the progress of ongoing projects; and

 

   

attract and retain qualified management, sales, professional, scientific and technical operating personnel.

In addition, we have numerous business groups, subsidiaries and divisions, and recently reorganized our business segment reporting. If we cannot properly manage these groups, subsidiaries, divisions or segments, it will disrupt our operations. We also face additional risks in expanding our foreign operations. Specifically, we might find it difficult to:

 

   

assimilate differences in foreign business practices and regulations;

 

   

properly integrate systems and operating procedures;

 

   

hire and retain qualified personnel; and

 

   

overcome language and cultural barriers.

Future acquisitions or investments could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our business.

We anticipate that a portion of any future growth of our business might be accomplished by acquiring existing businesses, products or technologies. The success of any acquisition will depend upon, among other things, our ability to integrate acquired personnel, operations, products and technologies into our organization effectively, to retain and motivate key personnel of acquired businesses and to retain their clients. In addition, we might not be able to identify suitable acquisition opportunities or obtain any necessary financing on acceptable terms. We might also spend time and money investigating and negotiating with potential acquisition or investment targets, but not complete the transaction. Any future acquisition could involve other risks, including the assumption of additional liabilities and expenses, issuances of potentially dilutive securities or interest-bearing debt, transaction costs, reduction in our stock price as a result of any of these or because of market reaction to a transaction and diversion of management’s attention from other business concerns.

We have made and plan to continue to make investments in other companies. In many cases, there is no public market for the securities of these companies and we might not be able to sell these securities on terms acceptable to us, if at all. In addition, if these companies encounter financial difficulties, we might lose all or part of our investment. For example, in 2009 and 2010 we recorded an investment impairment of $2.1 million and $5.0 million, respectively, to write down the carrying value of certain investments due to an other-than-temporary decline in fair value. See Note 3 in the notes to consolidated financial statements included elsewhere in this report for a more detailed discussion of these impairments.

We have also made an investment in the Celtic Therapeutics Holdings, L.P. fund, which we account for using the equity method of accounting. This investment could have a significant impact on our financial results as our equity in the earnings of this investment can fluctuate significantly quarter to quarter based on the fund’s investments, new programs and the changes in fair market value of the investment portfolio. For example, we incurred losses of $2.1 million, $1.7 million and $4.6 million due to the expenditures of the fund during the first three quarters of 2010 and then recognized a $7.7 million gain in the fourth quarter due to additional third party investments in the fund and an increase in fair value of the fund’s investment portfolio.

 

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The investment of our cash and cash equivalents, short-term and long-term investments balance are subject to risks which may cause losses and affect the liquidity of these investments.

At December 31, 2010, we had $479.6 million in cash and cash equivalents, $80.0 million in short-term investments and $78.7 in long-term investments. These investments are subject to general credit, liquidity, market and interest rate risks, which have been exacerbated by the global financial crisis. We classified our entire balance of auction rate securities as long-term investments at December 31, 2010 due to continuing uncertainties about the liquidity of the auction rate securities market. These risks might have a material adverse effect on our liquidity and financial condition, which could harm our business or our ability to pay dividends.

The fixed price nature of our development contracts could hurt our operating results

The majority of our contracts for the provision of development services are at fixed prices or fixed unit prices, and therefore have set limits on the amounts we can charge for our services. As a result, variations in the timing and progress of large contracts can materially affect our operating results. In addition, we bear the risk of cost overruns unless the scope of activity is revised from the contract specifications and we are able to negotiate a contract modification with the client shifting the additional cost to the client. If we fail to adequately price our contracts in total or at the unit level, or if we experience significant cost overruns, our operating results could be materially adversely affected. From time to time, we have had to commit unanticipated resources to complete projects, resulting in lower gross margins on those projects. We might experience similar situations in the future, which could have a material adverse impact on our operating results.

If we are unable to attract suitable willing investigators and enroll a sufficient number of participants for our clinical trials, our development business might suffer.

The clinical research studies we run rely upon the ready accessibility and willing participation of physician investigators and participant subjects. Investigators are typically located at hospitals, clinics or other sites and supervise administration of the study drug to participants during the course of a clinical trial. The rate of completion of clinical trials is significantly dependent upon the rate of participant enrollment. Participant enrollment is a function of many factors, including:

 

   

the size of the patient population;

 

   

perceived risks and benefits of the drug under study;

 

   

availability of competing therapies, including those in clinical development;

 

   

availability of clinical drug supply;

 

   

availability of qualified clinical trial sites;

 

   

availability and willingness of potential participants to enroll in clinical trials;

 

   

design of the protocol;

 

   

proximity of and access by participants to clinical sites;

 

   

participant referral practices of physicians;

 

   

eligibility criteria for the study in question; and

 

   

efforts of the sponsor of and clinical sites involved in the trial to facilitate timely enrollment.

We might have difficulty obtaining sufficient patient enrollment or clinician support to conduct our clinical trials as planned, and we might need to expend substantial additional funds to obtain access to resources or delay or modify our plans significantly. These considerations might result in our being unable to successfully achieve our projected development timelines, or potentially even lead us to consider the termination of ongoing clinical trials or development of a product for a particular indication.

Our business exposes us to potential liability for personal injury or product liability claims that could affect our financial condition.

Our business involves the testing of new drugs on human volunteers and, if marketing approval is received for any of our drug candidates, their use by participants. This exposes us to the risk of liability for personal injury or death to patients resulting from, among other things, possible unforeseen adverse side effects or improper administration of a drug

 

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or device. Many of these volunteers and participants are already seriously ill and are at risk of further illness or death. For example, we have from time to time been sued by individuals alleging personal injury due to their participation in a clinical trial and seeking damages from us under a variety of legal theories. If we are required to pay damages or incur defense costs in connection with any personal injury claim that is outside the scope of indemnification agreements we have with clients and collaborative partners, if any indemnification agreement is not performed in accordance with its terms or if our liability exceeds the amount of any applicable indemnification limits or available insurance coverage, we could be materially and adversely affected both financially and reputationally. We might also not be able to get adequate insurance for these risks at reasonable rates in the future.

Our business uses biological and hazardous materials, which could injure people or violate laws, resulting in liability that could hurt our financial condition and business

Our drug development activities involve the controlled use of potentially harmful biological materials, as well as hazardous materials, chemicals and various radioactive compounds. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and waste used in our operations. As a result, we might be required to incur significant costs to comply with laws and regulations. We cannot eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident, we could be held liable for any resulting damages and incur liabilities, which exceed our resources. In addition, we cannot predict the extent of the adverse effect on our business or the financial and other costs that might result from any new government requirements arising out of future legislative, administrative or judicial actions.

Our business is subject to international economic, currency, political and other risks that could negatively affect our revenue and results of operations.

Because we provide our services worldwide, our business is subject to risks associated with doing business internationally. Our net revenue from our non-U.S. operations represented approximately 44.2% of our total net revenue for the year ended December 31, 2010. We anticipate that revenue from international operations will grow in the future, particularly in light of our recent acquisitions and expansion in Central and Eastern Europe and China. Accordingly, our future results could be harmed by a variety of factors, including:

 

   

changes in foreign currency exchange rates, which could result in foreign currency losses;

 

   

changes in a specific country or region’s political or economic conditions;

 

   

potential negative consequences from changes in tax laws affecting our ability to expatriate profits;

 

   

difficulty in staffing and managing widespread operations, including risks of violations of local laws or the U.S. Foreign Corrupt Practices Act by employees overseas; and

 

   

unfavorable labor regulations, including specifically those applicable to our European operations.

For example, in 2010 our operating income would have been higher by approximately $1.1 million, net of hedging gain, if the U.S. dollar had not strengthened relative to the euro, British pound and Brazilian real. Although we attempt to manage this risk through provisions in our contracts with our clients and other methods, including foreign currency hedging contracts, we might not be able to eliminate or manage these risks in the future and our operating income could be materially and adversely affected by a significant decline in the value of the U.S. dollar.

Our inability to adequately protect our intellectual property rights could hurt our business. The drug development industry has a history of patent and other intellectual property litigation, and we might be involved in costly intellectual property lawsuits.

Our success is dependent on our ability to protect the proprietary software, compositions, processes and other technologies we develop during the drug development process along with our ability to develop and protect patent and other intellectual rights and operate without infringing the intellectual property rights of others. The drug discovery and development industry has a history of patent and other intellectual property litigation and these lawsuits will likely continue. Accordingly, we face potential claims by companies alleging infringement of their intellectual property rights. Legal proceedings relating to intellectual property could be expensive, take significant time and divert management’s attention from other business concerns, whether we win or lose. If we do not prevail in an infringement lawsuit brought

 

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against us, we might have to pay substantial damages and we could be required to stop the infringing activity or obtain a license to use technology on unfavorable terms.

Any patents that we own or license might not provide valuable protection in the future for the covered technology or products. Our pending patent applications might not result in the issuance of valid patents or the claim scope of our issued patents might not provide competitive advantages. Also, our patent protection might not prevent others from developing competitive products using related or other technology that does not infringe our patent rights. The scope, enforceability and effective term of patents can be highly uncertain and often involve complex legal and factual questions and proceedings. No consistent policy has emerged regarding the breadth of claims in pharmaceutical or biotechnology patents, so that even issued patents might later be modified or revoked by the relevant patent authorities or courts. These proceedings could be expensive, last several years and either prevent issuance of additional patents to us or result in a significant reduction in the scope or invalidation of our patents. Moreover, the issuance of a patent in one country does not assure the issuance of a patent with similar claim scope in another country, and claim interpretation and infringement laws vary among countries, so we are unable to predict the extent of patent protection in any country.

In addition to seeking the protection of patents and licenses, we also rely upon trade secrets, know-how and continuing technological innovation that we seek to protect, in part, by confidentiality agreements with employees, consultants, suppliers and licensees. If these agreements are not honored, we might not have adequate remedies for any breach. Additionally, our trade secrets might otherwise become known or patented by our competitors. Any inability to protect our intellectual property rights could materially and adversely affect our business.

Our operations might be affected by the occurrence of a natural disaster or other catastrophic event.

We depend on our clients, investigators, laboratories and other facilities for the continued operation of our business. Although we have contingency plans in effect for natural disasters or other catastrophic events, these events, including terrorist attacks, pandemic flu, hurricanes and ice storms, could still disrupt our operations or those of our clients, investigators and collaboration partners, which could also affect us. In particular, our headquarters are in Wilmington, North Carolina where hurricanes might occur. Even though we carry business interruption insurance policies and typically have provisions in our contracts that protect us in certain events, we might suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies or for which we do not have coverage. Any natural disaster or catastrophic event affecting us or our clients, investigators or collaboration partners could have a significant negative impact on our operations and financial performance.

Our operations might be affected if there was a disruption to the air travel system.

Our global central laboratories and some of our other services rely heavily on air travel for transport of clinical trial kits, other materials and people, and disruption to the air travel system could have a material adverse effect on our business. While we have developed contingency plans for a variety of events that could disrupt or limit available air transportation, these plans might not be effective or sufficient to avert such a material adverse effect.

Risks Related to Owning Our Stock

You might not receive any dividends, and the reduction or elimination of dividends might negatively affect the market price of our common stock.

We began paying dividends as a public company in late 2005. Future dividend payments are not guaranteed and are within the absolute discretion of our board of directors. You might not receive any dividends as a result of any of the following factors:

 

   

we are not obligated to pay dividends;

 

   

our board of directors could modify or revoke the dividend policy at any time and for any reason;

 

   

even if the dividend policy is not modified or revoked, our board of directors could decide to reduce dividends or not to pay any dividends at all, at any time and for any reason;

 

   

the amount of dividends distributed is subject to state law restrictions;

 

   

new credit facilities or other agreements could limit the amount of dividends we are permitted to pay; and

 

   

our stockholders have no contractual or other legal right to dividends.

 

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Our dividend policy is based upon our assessment of the cash needs of our business and the environment in which it operates. That assessment could change due to, among other things, changes in general economic and financial market conditions, our results of operations, cash requirements, financial condition, contractual restrictions, growth opportunities, acquisitions, competitive or technological developments, provisions of applicable law and other factors that our board of directors might deem relevant. The reduction or elimination of dividends might negatively affect the market price of our common stock.

Our dividend policy and stock repurchase plan might limit our ability to pursue other growth opportunities.

Our board of directors has adopted an annual cash dividend policy which reflects an intention to distribute to our shareholders via regular quarterly dividends a portion of the cash generated by our business that exceeds our operating needs and capital expenditures. In addition, our board of directors authorized the us to repurchase up to $350.0 million of its common stock from time to time in the open market. As of December 31, 2010, $260.7 million remained available for share repurchases under the stock repurchase program, and in February 2011 we used $200.0 million in an accelerated share repurchase program with Barclays Capital. In developing the dividend policy and the stock repurchase plan, we have made assumptions for and judgments about our expected results of operations, anticipated levels of capital expenditures, income taxes and working capital. Payment of dividends or stock repurchases, if any, could limit our ability to finance any material expansion of our business, including through acquisitions, investments or increased capital spending, or to fund our operations.

Because our stock price is volatile, our stock price could experience substantial declines.

The market price of our common stock has historically experienced and might continue to experience volatility. Our quarterly operating results or anticipated future results, changes in general conditions in the economy or the financial markets, both of which experienced uncertainty in 2009 due to the global financial crisis, and other developments affecting us or our competitors have caused and could continue to cause the market price of our common stock to fluctuate substantially. These factors include ones beyond our control, such as changes in revenue and earnings estimates by analysts, market conditions within our industry, disclosures by product development partners and actions by regulatory authorities with respect to potential drug candidates, changes in pharmaceutical and biotechnology industries and the government sponsored clinical research sector. In addition, in recent years, the stock market has experienced significant price and volume fluctuations. The stock market, and in particular the market for pharmaceutical and biotechnology company stocks, has also experienced significant decreases in value in the past. This volatility and valuation decline have affected the market prices of securities issued by many companies, often for reasons unrelated to their operating performance, and might adversely affect the price of our common stock.

 

Item 1B. Unresolved Staff Comments

None.

 

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Item 2. Properties

As of February 15, 2011, we had 86 offices located in 43 countries on six continents. We own and operate six facilities and lease all of our other facilities. We believe that our facilities are adequate for our operations and that suitable additional space will be available when needed. Our material operating facilities which are operating leases comprising more than 40,000 square feet and our owned facilities as of February 15, 2011 were as follows:

Owned:

 

Location

   Approximate
Square
Footage
  

Business

Segment

Wilmington, North Carolina

   395,000    Corporate Headquarters/Clinical Development Services

Wayne, Pennsylvania

   146,000    Laboratory Services

Brussels, Belgium

   43,000    Laboratory Services

Bellshill, United Kingdom

   68,000    Clinical Development Services

Durham, North Carolina

   25,000    Clinical Development Services

Leased:

 

Location

   Approximate
Square
Footage
   Lease Expiration Dates   

Business

Segment

Morrisville, North Carolina

   355,000    10/31/16 - 11/30/23    Clinical Development Services

Austin, Texas

   282,000    6/30/15 - 2/28/17    Clinical Development Services/Laboratory Services

Middleton, Wisconsin

   206,000    7/31/15 - 5/31/18    Laboratory Services

Beijing, China

   199,000    5/31/13 - 7/14/13    Clinical Development Services/Laboratory Services

Richmond, Virginia

   126,000    4/30/21    Laboratory Services

Cambridge, United Kingdom

   90,000    6/23/19    Clinical Development Services

Highland Heights, Kentucky

   72,000    12/31/14    Laboratory Services

Buenos Aires, Argentina

   48,000    8/31/15    Clinical Development Services

Sao Paulo, Brazil

   43,000    6/30/12 - 7/31/15    Clinical Development Services

 

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Item 3. Legal Proceedings

None.

 

Item 4. [Removed and Reserved]

 

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Executive Officers

The following table contains information concerning our executive officers as of February 25, 2011:

 

Name

   Age   

Position(s)

Fredric N. Eshelman, Pharm.D.

   62    Executive Chairman, Board of Directors

David L. Grange(1)

   63    Chief Executive Officer

Lee E. Babiss

   55    Executive Vice President, Global Lab Services

Paul D. Colvin

   41    Executive Vice President, Global Clinical Development

Daniel G. Darazsdi

   50    Chief Financial Officer, Treasurer and Assistant Secretary

Christine A. Dingivan, M.D.

   43    Executive Vice President, Chief Medical Officer

William W. Richardson

   58    Senior Vice President, Global Business Development

William J. Sharbaugh

   48    Chief Operating Officer

Michael O. Wilkinson, Ph.D.

   56    Executive Vice President, Chief Information Officer

 

(1)

As previously disclosed on Form 8-K filed on February 9, 2011, General Grange will be retiring from his position as Chief Executive Officer effective May 18, 2011.

Fredric N. Eshelman, Pharm.D. was promoted to Executive Chairman of the Board of Directors in July 2009 and is responsible for providing strategic direction to the company and overseeing the implementation of the company’s strategic and business plans. Prior to this promotion, Dr. Eshelman served as Chief Executive Officer and as a director from July 1990 to June 2009, and as Vice Chairman of the Board of Directors from 1993 to 2009. Dr. Eshelman founded our company’s predecessor in 1985 and served as its Chief Executive Officer until 1989. Prior to rejoining us in 1990, Dr. Eshelman served as Senior Vice President, Development and as a director of Glaxo Inc., a subsidiary of Glaxo Holdings plc.

David L. Grange is our Chief Executive Officer. Assuming the role of Chief Executive Officer in July 2009, General Grange has been a member of the Board of Directors since 2003. Prior to joining us, General Grange spent 10 years with the McCormick Foundation, where he most recently served as President and Chief Executive Officer. The foundation is a nonprofit organization that conducts grant-making programs and other operations, and is one of the nation’s largest charities. Prior to joining the foundation, General Grange had a 30-year career in the U.S. Army, with his final position as commanding general of the First Infantry Division.

Lee E. Babiss, Ph.D. is our Executive Vice President, Global Laboratory Services. Prior to joining PPD in February 2010, he served as president and director of pharmaceutical research for F. Hoffmann-La Roche, Ltd., in Basel, Switzerland. He spent seven years at Glaxo, Inc. where he served as vice president of biological sciences and genetics, where he had global accountability for developing and implementing the company’s corporate genetics strategy and oncology research efforts focused on the cell cycle. Dr. Babiss earned a doctorate in microbiology from Columbia University and completed his postdoctoral fellowship at The Rockefeller University, where he served as an assistant and associate professor. He has received numerous fellowship awards and grants and serves on several scientific advisory committees and boards.

Paul D. Colvin is our Executive Vice President, Global Clinical Development. Mr. Colvin served nearly three years as PPD’s Senior Vice President of Clinical Development for North America. He joined PPD after 14 years with Eli Lilly and Company in a series of leadership roles that included overseeing clinical operations and global patient recruitment and providing direction for the cardiovascular brand team and oncology, critical care, primary care and neuroscience groups.

Daniel G. Darazsdi is our Chief Financial Officer, Treasurer and Assistant Secretary. Mr. Darazsdi joined us in October 2007. Prior to his employment by us, Mr. Darazsdi spent 25 years with Honeywell International where he most recently served as vice president and Chief Financial Officer of finance transformation and operations. Over the years at Honeywell, he was Chief Financial Officer of the company’s global specialty materials business segment, VP of finance for Asia Pacific and held a variety of leadership roles in finance, including business analysis and planning and technology and business development leadership. Mr. Darazsdi is a Certified Management Accountant.

 

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Christine A. Dingivan, M.D. is our Executive Vice President and Chief Medical Officer. Dr. Dingivan joined us in July 2008. Prior to joining us, Dr. Dingivan spent 12 years with MedImmune, which was acquired by AstraZeneca PLC in 2007, serving most recently as senior vice president of clinical development and operations. She oversaw strategic development and implementation of global clinical research programs across all therapeutic areas, provided senior clinical leadership for U.S. and European regulatory applications and chaired the clinical safety monitoring committee.

William W. Richardson is our Senior Vice President, Global Business Development. Prior to joining us in November 2005, Mr. Richardson served as Executive Vice President of Sales for Mylan Bertek Pharmaceuticals Inc. from 2000 to 2005. He was President and Chief Executive Officer of Bertek Pharmaceuticals Inc. from 1996 to 2000. He began his career as Sales Manager for Dow Hickam Pharmaceuticals and rose through its ranks to serve as President and CEO from 1992 to 1996.

William J. Sharbaugh is our Chief Operating Officer. Before Mr. Sharbaugh joined PPD in May 2007, he spent six years at Bristol-Myers Squibb where he most recently served as Vice President, Global Development Operations from 2005 to 2007, responsible for strategic direction for clinical operations located in 55 countries. From 2001 to 2005, Mr. Sharbaugh served as Executive Director of Global Clinical Supply Operations where he was responsible for planning, manufacturing, packaging and distributing investigational products worldwide. Prior to his tenure with Bristol-Myers Squibb, he spent 10 years at Merck and Co. in a variety of assignments in clinical supply operations, sales and manufacturing.

Michael O. Wilkinson, Ph.D. is our Executive Vice President, Global Clinical Development and Chief Information Officer. Prior to being promoted to this position, Dr. Wilkinson served as PPD’s Executive Vice President, Global Clinical Development. Dr. Wilkinson joined PPD in March 2008. Prior to that time, he served at Quintiles as Global Head of Internal Medicine from 2005 to 2007, Vice President of Project Management across all regions and therapeutic areas from 2003 to 2005, and in key account and program management roles in 2002 and 2003. From 2000 to 2002, Dr. Wilkinson led the clinical research project management practice at Campbell Alliance, a consulting firm, and from 1998 to 2000, he held program management roles in cardiovascular therapeutics at Quintiles. Before joining the drug development industry in 1998, Dr. Wilkinson served as a physiologist and medical service corps officer in the U.S. Navy from 1982 to 1998 and while in numerous leadership positions was responsible for human factors research and medical training.

 

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PART II

 

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is traded under the symbol “PPDI” and is quoted on the Nasdaq Global Select Market. The following table sets forth the high and low sales prices for shares of our common stock, as reported by Nasdaq for the periods indicated.

 

     2009      2010  
     High      Low      High      Low  

First Quarter

   $ 29.53       $ 20.00       $ 22.87       $ 19.69   

Second Quarter

   $ 24.24       $ 17.97       $ 28.03       $ 22.13   

Third Quarter

   $ 23.46       $ 18.77       $ 27.99       $ 22.71   

Fourth Quarter

   $ 23.80       $ 20.27       $ 28.00       $ 24.00   

Holders

As of February 15, 2011, there were approximately 58,100 holders of our common stock.

Dividends

In October 2005, our board of directors adopted an annual cash dividend policy. In May 2009, our board of directors increased the annual dividend from $0.50 to $0.60 per year, payable quarterly at a rate of $0.15 per share. 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.

Stock Repurchase Plan

In February 2008, we announced our board of directors approved a stock repurchase program authorizing us to repurchase up to $350.0 million of our common stock from time to time in the open market. The timing and amount of any share repurchases, if any, will be determined by our management based on its evaluation of the market conditions and other factors. During 2009 and 2010, there were no share repurchases made and the maximum dollar value of shares that may yet be purchased under the share repurchase program remains at $260.7 million. On February 14, 2011, we entered into an accelerated share repurchase arrangement with Barclays Capital Inc. under which we used $200.0 million of the remaining amount to repurchase additional shares of our common stock. For more details, see our Current Report on Form 8-K dated February 14, 2011.

Equity Compensation Plans

The information required by Item 5 of Form 10-K regarding equity compensation plans is incorporated herein by reference to “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.

 

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Item 6. Selected Financial Data

The following table represents selected historical consolidated financial data. The statements of income data for the years ended December 31, 2008, 2009 and 2010 and balance sheet data at December 31, 2009 and 2010 are derived from our audited consolidated financial statements included elsewhere in this report. The statements of income data for the years ended December 31, 2006 and 2007, and the balance sheet data at December 31, 2006, 2007 and 2008 are derived from audited consolidated financial statements not included in this report. The historical results are not necessarily indicative of the operating results to be expected in the future. The selected financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes to the financial statements included elsewhere in this report. Consolidated statements of income data have been reclassified in prior periods to reflect discontinued operations.

Consolidated Statements of Income Data (in thousands, except per share data):

 

     Year Ended December 31,  
     2006     2007     2008(1)     2009(1)     2010(2)(3)  

Net revenue

   $ 1,230,346      $ 1,394,928      $ 1,551,384      $ 1,416,770      $ 1,470,570   
                                        

Operating expenses

     1,006,928        1,165,166        1,267,380        1,198,573        1,283,118   

Restructuring costs (4)

     —          —          —          3,892        —     

Impairment of intangible asset (5)

     —          —          1,607        —          —     
                                        

Total operating expenses

     1,006,928        1,165,166        1,268,987        1,202,465        1,283,118   
                                        

Operating income

     223,418        229,762        282,397        214,305        187,452   

Impairment of investments, net (6)

     —          (690     (17,741     (2,076     (4,999

Loss from equity method investment (7)

     —          —          —          (1,278     (701

Other income, net

     15,730        18,674        14,761        3,547        6,417   
                                        

Income from continuing operations before provision for income taxes

     239,148        247,746        279,417        214,498        188,169   

Provision for income taxes

     80,014        84,431        91,469        62,892        60,840   
                                        

Income from continuing operations

     159,134        163,315        187,948        151,606        127,329   

Income (loss) from discontinued operations, net of income tax (8)

     (2,482     86        (429     7,689        (3,662
                                        

Net income

     156,652        163,401        187,519        159,295        123,667   
                                        

Net loss attributable to noncontrolling interests

     —          —          —          —          374   
                                        

Net income attributable to shareholders

   $ 156,652      $ 163,401      $ 187,519      $ 159,295      $ 124,041   
                                        

Income per common share from continuing operations:

          

Basic

   $ 1.36      $ 1.38      $ 1.58      $ 1.28      $ 1.07   
                                        

Diluted

   $ 1.34      $ 1.36      $ 1.56      $ 1.28      $ 1.06   
                                        

Income (loss) per common share from discontinued operations:

          

Basic

   $ (0.02   $ —        $ —        $ 0.07      $ (0.03
                                        

Diluted

   $ (0.02   $ —        $ —        $ 0.06      $ (0.03
                                        

Net income per common share:

          

Basic

   $ 1.34      $ 1.38      $ 1.58      $ 1.35      $ 1.05   
                                        

Diluted

   $ 1.32      $ 1.36      $ 1.56      $ 1.34      $ 1.04   
                                        

Cash dividends declared per common share

   $ 0.105      $ 0.19      $ 0.43      $ 0.58      $ 0.60   
                                        

Weighted-average number of common shares outstanding:

          

Basic

     116,780        118,459        118,792        118,007        118,692   

Dilutive effect of stock options

     1,755        1,494        1,305        762        984   
                                        

Diluted

     118,535        119,953        120,097        118,769        119,676   
                                        

 

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Consolidated Balance Sheet Data (in thousands):

 

     As of December 31,  
     2006      2007      2008      2009      2010  

Cash, cash equivalents, short-term and long-term investments

   $ 435,671       $ 502,384       $ 608,437       $ 642,106       $ 638,297   

Working capital (9)

     412,711         599,980         512,855         541,101         519,999   

Total assets

     1,481,565         1,684,375         1,754,428         2,030,203         1,992,046   

Long-term debt and capital lease obligations, including current portion (10)

     75,159         —           —           —           —     

Shareholders’ equity

     952,900         1,150,096         1,180,996         1,346,127         1,289,010   

 

(1) We acquired companies in 2008 and 2009. Results of operations for these acquisitions are included in our consolidated results of operations as of and since the effective date of the acquisitions. For further details, see Note 2 in the notes to the consolidated financial statements.
(2) We acquired controlling interests in two companies in 2010. Results of operations for these acquisitions are included in our consolidated results of operations as of and since the effective date of the acquisitions. For further details, see Note 2 in the notes to the consolidated financial statements.
(3) In June 2010, we spun off our compound partnering business into a new independent, publicly traded company, Furiex Pharmaceuticals, Inc. For further details, see Note 18 in the notes to the consolidated financial statements.
(4) For 2009, restructuring costs related to our reduction of the North America workforce in our Clinical Development Services segment.
(5) For 2008, impairment of intangible asset related to the remaining unamortized value of our royalty interest in SinuNase.
(6) For 2007, 2008, 2009 and 2010, impairment of investments, net, includes charges to earnings for other-than-temporary declines in the fair market value of our other investments. For further details, see Note 3 in notes to consolidated financial statements.
(7) For 2009 and 2010, we recorded a loss of $1.3 million and $0.7 million, respectively, from equity method investment relating to Celtic Therapeutics Holdings, L.P. For further details, see Note 3 in the notes to the consolidated financial statements.
(8) In 2009, we completed dispositions of Piedmont Research Center, LLC and PPD Biomarker Discovery Sciences, LLC. In 2010, we discontinued the operations of our wholly owned subsidiary PPD Dermatology, Inc. Results of operations for these dispositions are included in discontinued operations, net of provision for income tax. For further details, see Note 2 in the notes to consolidated financial statements.
(9) Working capital equals current assets minus current liabilities.
(10) For 2006, long-term debt includes $74.8 million that we borrowed to finance the construction of our new headquarters building and related parking facility in Wilmington, North Carolina.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is provided to increase understanding of, and should be read in conjunction with, our consolidated 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-K 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 below in “Potential Volatility of Quarterly and Annual Operating Results and Stock Price” and above in “Part I, Item 1A. Risk Factors.” 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.

 

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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 – Trends Affecting the Drug Discovery and Development Industry”. In 2010, we experienced higher demand for our services than we did in 2009, which was a difficult year due primarily to lower-than-expected new business authorizations and record cancellations. We continue to believe in the fundamentals of the 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. We made steady progress in 2010 in recovering from the challenges of 2009. For 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. Finally, we will continue the initiatives started in 2010 to improve productivity and control costs to achieve our 2011 financial objectives.

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 2010, we had net authorizations, defined as new authorizations less cancellations and adjustments, of $1.8 billion, an increase of 71.3% over 2009. The cancellation rate for 2010 was 5.5% of average beginning backlog compared to 6.8% for 2009. As of December 31, 2010, backlog was $3.4 billion, up 14.3% from December 31, 2009. The average length of our contracts in backlog decreased to 34 months as of December 31, 2010 from 35 months as of December 31, 2009. Revenue conversion, defined as revenue divided by prior periods’ ending backlog, in 2010 averaged 10.7% compared to 10.2% in 2009.

Backlog by client type as of December 31, 2010 was 75.9% pharmaceutical, 17.1% biotech and 7.0% government/other, as compared to 68.8% pharmaceutical, 25.8% biotech and 5.4% government/other as of December 31, 2009. Net revenue by client type for the year ended December 31, 2010 was 76.9% pharmaceutical, 16.8% biotech and 6.3% government/other, compared to 66.3% pharmaceutical, 25.8% biotech and 7.9% government/other in 2009. The change in the composition of our backlog and net revenue from 2009 to 2010 was primarily a result of an increase in percentage of authorizations from pharmaceutical companies in 2010 and mergers of biotechnology clients into pharmaceutical companies.

For 2010, net revenue contribution by business segment was 76.4% from Clinical Development Services, 23.0% from Laboratory Services and 0.6% for Discovery Sciences, compared to net revenue contribution for the year ended December 31, 2009 of 78.7% from Clinical Development Services, 20.9% from Laboratory Services and 0.4% for Discovery Sciences. The change in the mix of net revenue was due primarily to the acquisition of BioDuro in late 2009. Our top therapeutic areas by net revenue for the year ended December 31, 2010 were oncology, circulatory/cardiovascular, endocrine/metabolic, infectious disease and central nervous system. For a detailed discussion of our revenue, margins, earnings and other financial results for the year ended December 31, 2010, see “Results of Operations – Year Ended December 31, 2009 versus Year Ended December 31, 2010” below.

Our operating margin for 2010 was 12.7% and reflects investments we have made in our Phase II-IV business, overhead and integration expenses from our acquisitions of Excel and BioDuro in China, start-up expenses associated with our cGMP lab in Ireland and call center in Eastern Europe, and investment in information technology and business development. We anticipate an improvement in operating margin in 2011 based on projected revenue growth and leveraging our existing infrastructure. 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.

Capital expenditures for the year ended December 31, 2010 totaled $62.5 million. These capital expenditures were primarily for computer software and scientific equipment for our laboratory units and leasehold improvements for our new Bulgaria and China facilities. We made these investments to support our businesses and to improve the efficiencies of our operations. For 2011, we expect to spend between $85 million and $95 million for capital expenditures, primarily for investments in information technology and new laboratory equipment as well as facility expansions and improvements.

As of December 31, 2010, we had $638.3 million of cash, cash equivalents and short- and long-term investments. In 2010, we generated $247.7 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 22 and 31 days as of December 31, 2010 and 2009, respectively. DSO decreased in 2010 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

 

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DSO will continue to fluctuate in the future depending on contract terms, the mix of contracts performed and our success in collecting receivables.

In May 2010, as previously disclosed, we discontinued the operations of our wholly owned subsidiary PPD Dermatology, Inc. due to unfavorable efficacy data associated with the MAG 131 program. In June 2010, we spun off our compound partnering business into a new independent, publicly traded company, Furiex Pharmaceuticals, Inc.

New Business Authorizations and Backlog

We add new business authorizations, which are sales of our services, to backlog when we enter into a contract or letter of intent or receive a verbal commitment. Authorizations 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 years ended December 31, 2008, 2009 and 2010 were $2.7 billion, $1.9 billion and $2.5 billion, 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 December 31, 2010, the remaining duration of the contracts in our backlog ranged from one to 96 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 December 31, 2008, 2009 and 2010 was $3.2 billion, $3.0 billion and $3.4 billion, respectively. For various reasons discussed in “Item 1. Business – Backlog”, our backlog might never be fully recognized as net revenue and is not necessarily a meaningful predictor of future performance.

Results of Operations

Revenue Recognition

We generally enter into contracts with customers 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 which have been completed or delivered compared to the total contractual outputs or performance obligations. Under a small number of customer 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. If we determine that a loss will result from the performance of a contract, we charge the entire amount of the estimated loss against income in the period in which such determination is made.

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 recognized renegotiated amounts as revenue by revision to the total contract value resulting from the renegotiated contract.

 

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We often offer volume rebates to our large customers based on annual volume thresholds. We record an estimate of the annual volume rebate as a reduction of revenue throughout the period based on the estimated total rebate to be earned for the period.

In connection with the management of clinical trials, we pay, on behalf of our clients, fees to investigators and test subjects as well as other out-of-pocket costs for items such as travel, printing, meetings and couriers. Our clients reimburse us for these costs. Amounts paid by us as a principal for out-of-pocket costs are included in direct costs and the reimbursements we receive as a principal are reported as reimbursed revenue. In our statements of income, we combine amounts paid by us as an agent for out-of-pocket costs with the corresponding reimbursements, or revenue, we receive as an agent. During the years ended December 31, 2008, 2009 and 2010, fees paid to investigators and other fees we paid as an agent and the associated reimbursements were approximately $319.0 million, $330.4 million and $380.7 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 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 June 2010, the Discovery Sciences segment generated 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.

 

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Recording of Expenses

We generally record our operating expenses among the following categories:

 

   

direct costs;

 

   

research and development, or R&D;

 

   

selling, general and administrative or SG&A; 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, 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.

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 customers. R&D costs for the Discovery Sciences segment consist 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 in our financial statements at cost less accumulated depreciation. We record depreciation expense using the straight-line method, based on the following estimated useful lives:

 

Buildings

     20-40 years   

Furniture and equipment

     5-10 years   

Computer equipment and software

     2-5 years   

Aircraft

     30 years   

We depreciate leasehold improvements over the shorter of the respective lives of the leases or the useful lives of the improvements.

 

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Year Ended December 31, 2009 versus Year Ended December 31, 2010

The following table sets forth amounts from our consolidated financial statements along with the dollar and percentage change for the full year of 2009 compared to the full year of 2010.

 

(in thousands, except per share data)    Year Ended
December 31,
             
     2009     2010     $ Inc (Dec)     % Inc (Dec)  

Net revenue:

        

Service revenue

   $ 1,315,767      $ 1,363,056      $ 47,289        3.6   

Reimbursed revenue

     101,003        107,514        6,511        6.4   
                          

Total net revenue

     1,416,770        1,470,570        53,800        3.8   

Direct costs

     731,755        763,292        31,537        4.3   

Research and development expenses

     13,339        16,733        3,394        25.4   

Selling, general and administrative expenses

     389,624        437,955        48,331        12.4   

Depreciation and amortization

     63,855        65,138        1,283        2.0   

Restructuring costs

     3,892        —          (3,892     (100.0
                          

Operating income

     214,305        187,452        (26,853     (12.5

Impairment of investments

     (2,076     (4,999     (2,923     (140.8

Loss from equity method investment

     (1,278     (701     577        (45.1

Interest and other income, net

     3,547        6,417        2,870        80.9   
                          

Income from continuing operations before provision for income taxes

     214,498        188,169        (26,329     (12.3

Provision for income taxes

     62,892        60,840        (2,052     (3.3
                          

Income from continuing operations

     151,606        127,329        (24,277     (16.0

Income (loss) from discontinued operations, net of income taxes

     7,689        (3,662     (11,351     (147.6
                          

Net income

     159,295        123,667        (35,628     (22.4

Net loss attributable to noncontrolling interests

     —          374        374        NC   
                          

Net income attributable to shareholders

   $ 159,295      $ 124,041      $ (35,254     (22.1
                          

Income per diluted share from continuing operations

   $ 1.28      $ 1.06      $ (0.22     (17.2
                          

Income per diluted share from discontinued operations

   $ 0.06      $ (0.03   $ (0.09     (150.0
                          

Net income per diluted share

   $ 1.34      $ 1.04      $ (0.30     (22.4
                          

Total net revenue increased $53.8 million to $1.5 billion in 2010. Service revenue was $1.4 billion, which accounted for 92.7% of total net revenue for 2010. The $47.3 million increase in service revenue was attributable to a $38.5 million increase in net revenue from our Laboratory Services segment and a $7.1 million increase in net revenue from our Clinical Development Services segment. The increase in net revenue from our Laboratory Services segment was primarily related to the BioDuro acquisition in late 2009. The increase in net revenue from our Clinical Development Services segment was related to a 71.3% increase in net authorizations from 2009 and a $14.6 million increase in net revenue in our Asia Pacific services related to growth in the region and our acquisition of Excel in late 2009. In 2009 and 2010, we recognized revenue of $6.3 million and $8.0 million, respectively, from the compound partnering business in our Discovery Sciences segment, which we spun off in June 2010. In 2010, the U.S. dollar strengthened relative to the euro and pound sterling. Converting our 2010 euro and pound sterling net revenue at average 2009 exchange rates, our Clinical Development Services segment net revenue for 2010 would have been $7.1 million higher.

Total direct costs increased $31.5 million to $763.3 million in 2010. The increase was mainly attributable to a $21.8 million increase in personnel costs, a $9.4 million increase in supply costs related to our laboratories, a $6.5 million increase in reimbursable out-of-pocket expenses, a $3.5 million reduction in research credits and a $2.1 million increase in

 

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contract labor and consulting. These costs were partially offset by a foreign currency hedging gain of $7.1 million in 2010 compared to a foreign currency hedging loss of $4.4 million in 2009. The increase in personnel costs was due to a $6.3 million increase in incentive compensation expense and a $15.5 million increase in personnel costs due to headcount growth to support revenue growth.

R&D expenses increased $3.4 million to $16.7 million in 2010. The increase in R&D expense was primarily due to development costs associated with the two therapeutic compounds acquired from Janssen Pharmaceutica in November 2009 that were part of the compound partnering business in the Discovery Sciences segment. The majority of our R&D expenses were associated with our Discovery Sciences segment, which we spun off in June 2010.

SG&A expenses increased $48.3 million to $438.0 million in 2010. The increase in SG&A expenses was primarily related to a $30.5 million increase in personnel costs, a $5.2 million increase in facility costs primarily related to building impairment and lease termination costs, a $3.5 million reduction in research credits, a $2.6 million increase in non-billable travel and training costs, a $2.0 million increase in contract labor and subcontractor costs and a $1.8 million increase in recruitment and relocation, partially offset by a $2.7 million decrease in bad debt expense. More personnel related to acquired entities resulted in a $10.5 million increase in personnel costs, and the remainder of the increase was due to a decrease in utilization along with growth and expansion of our business.

Depreciation and amortization expense increased $1.3 million to $65.1 million in 2010, primarily because of property and equipment we acquired to accommodate growth.

Restructuring costs were $3.9 million in 2009 because of our July 2009 workforce reduction in North America by approximately 270 employees. We did not incur restructuring costs in 2010.

Impairment of investments in 2009 consisted of impairments of various investments in our short-term investment portfolio of $2.1 million. For 2010, we recorded $5.0 million of impairments due to an other-than-temporary decline in the value of several of our other investments. These impairments were based on the overall market conditions and the financial performance and estimated fair values of the individual investments held by each fund.

Loss from equity investment decreased by $0.6 million to $0.7 million in 2010. The decrease is attributable to the change in the net asset value of our investment in Celtic Therapeutics Holdings, L.P.

Interest and other income, net increased $2.9 million to $6.4 million in 2010. Changes in exchange rates from the time we recognize revenue until the client pays resulted in a net loss of $0.9 million in 2010, down from a net loss of $3.0 million in 2009.

Our provision for income taxes from continuing operations decreased $2.1 million to $60.8 million in 2010. Our effective income tax rate for 2010 was 32.3% compared to 29.3% for 2009. The increase in our effective tax rate was primarily attributable to $3.8 million of tax expense in 2010 related to a valuation allowance for deferred tax assets associated with the compound partnering spin-off.

In 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. In 2009, we recognized $7.7 million in income from discontinued operations, net of income taxes in relation to the disposition of Piedmont Research Center, LLC, and PPD Biomarker Discovery Sciences, LLC. We recognized a net gain from the sale of businesses of $21.5 million, net of provision for income taxes in 2009 related to these dispositions. As a result, these business units have been shown as discontinued operations for 2009 and 2010.

Net income of $124.0 million in 2010 represents a decrease of 22.1% from $159.3 million in 2009. Net income per diluted share of $1.04 in 2010 represents a 22.4% decrease from $1.34 net income per diluted share in 2009. Net income changed for various reasons as explained above.

 

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Year Ended December 31, 2008 versus Year Ended December 31, 2009

The following table sets forth amounts from our consolidated financial statements along with the dollar and percentage change for the full year of 2008 compared to the full year of 2009. The information below has been reclassified to reflect discontinued operations.

 

(in thousands, except per share data)    Year Ended
December 31,
             
     2008     2009     $ Inc (Dec)     % Inc (Dec)  

Net revenue:

        

Service revenue

   $ 1,434,252      $ 1,315,767      $ (118,485     (8.3 )% 

Reimbursed revenue

     117,132        101,003        (16,129     (13.8
                          

Total net revenue

     1,551,384        1,416,770        (134,614     (8.7

Direct costs

     807,170        731,755        (75,415     (9.3

Research and development expenses

     7,621        13,339        5,718        75.0   

Selling, general and administrative expenses

     393,439        389,624        (3,815     (1.0

Depreciation and amortization

     59,150        63,855        4,705        8.0   

Restructuring costs

     —          3,892        3,892        NC   

Impairment of intangible asset

     1,607        —          (1,607     (100.0
                          

Operating income

     282,397        214,305        (68,092     (24.1

Impairment of investments, net

     (17,741     (2,076     15,665        88.3   

Loss from equity method investment

     —          (1,278     (1,278     NC   

Interest and other income, net

     14,761        3,547        (11,214     (76.0
                          

Income from continuing operations before provision for income taxes

     279,417        214,498        (64,919     (23.2

Provision for income taxes

     91,469        62,892        (28,577     (31.2
                          

Income from continuing operations

     187,948        151,606        (36,342     (19.3

Income (loss) from discontinued operations, net of income taxes

     (429     7,689        8,118        1892.3   
                          

Net income

   $ 187,519      $ 159,295      $ (28,224     (15.1
                          

Income per diluted share from continuing operations

   $ 1.56      $ 1.28      $ (0.28     (17.9
                          

Income per diluted share from discontinued operations

   $ —        $ 0.06      $ 0.06        NC   
                          

Net income per diluted share

   $ 1.56      $ 1.34      $ (0.22     (14.1
                          

Total net revenue decreased $134.6 million to $1.4 billion in 2009. Service revenue was $1.3 billion, which accounted for 92.9% of total net revenue for 2009. The $118.5 million decrease in service revenue was attributable to a $117.1 million decrease in net revenue from our Clinical Development Services segment, offset by a $10.7 million increase in net revenue from our Laboratory Services segment. The increase in net revenue from our Laboratory Services segment was primarily related to the Vaccine Laboratory acquisition in late 2008 and BioDuro acquisition in late 2009. The decrease in Clinical Development Services segment net revenue was related to our high cancelation rate and a 43% decrease in net authorizations in 2009. In 2009 and 2008, we recognized revenue of $6.3 million and $18.4 million, respectively, in our Discovery Sciences segment, which we spun off in June 2010. Converting our 2009 euro and pound sterling net revenue at average 2008 exchange rates, our Clinical Development Services segment net revenue for 2009 would have been $15.0 million higher.

Total direct costs decreased $75.4 million to $731.8 million in 2009. The decrease was mainly attributable to a $39.9 million decrease in personnel costs, a $17.4 million decrease in contract labor and subcontractor costs, a $16.1 million decrease in reimbursable out-of-pocket expenses and a $9.1 million increase in research credits recognized in 2009. Of the $9.1 million increase in research credits, $4.9 million was related to expenses incurred in 2008. The direct costs

 

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decrease was also attributable to a foreign currency hedging loss of $4.4 million in 2009 compared to a foreign currency hedging loss of $7.3 million in 2008.

R&D expenses increased $5.7 million to $13.3 million in 2009. The increase in R&D expense was primarily due to development costs associated with the two therapeutic compounds acquired from Janssen Pharmaceutica in November 2009 that were part of the Discovery Sciences segment. The majority of our R&D expenses were associated with our Discovery Sciences segment which was spun off in June 2010.

SG&A expenses decreased $3.8 million to $389.6 million in 2009. The decrease in SG&A expenses was primarily related to a $5.6 million decrease in recruitment and relocation costs, a $2.9 million decrease in non-billable travel costs and a $1.4 million decrease in bad debt expense, partially offset by a $6.0 million increase in investment banking, legal and accounting expenses, primarily related to our acquisitions and spin-off.

Depreciation and amortization expense increased $4.7 million to $63.9 million in 2009 related to property and equipment we acquired to accommodate growth.

Restructuring costs were $3.9 million in 2009. In July 2009, we reduced our Development segment workforce in North America by approximately 270 employees.

In 2008, Accentia announced its Phase III clinical trial in SinuNase failed to meet its goal in treating chronic sinusitis participants, discontinued the sales of antifungal products on which we received royalties and declared bankruptcy. As a result, we wrote off the $1.6 million of remaining unamortized value of our royalty interest in the antifungal products of Accentia.

Impairment of investments, net decreased $15.7 million to $2.1 million in 2009. Impairment of investments, net in 2009 consisted of impairments of various investments in our short-term investment portfolio of $2.1 million. Impairment of investments, net in 2008 consisted of a net impairment of an investment in our short-term investment portfolio of $3.7 million and a $14.0 million write-down for an other-than-temporary decline in the fair market value of our marketable investment in Accentia. The write-down on Accentia was based on a decrease in the publicly quoted market price of Accentia’s common stock and Accentia’s bankruptcy filing in November 2008.

In October 2009, we committed to invest up to $102.7 million in Celtic Therapeutics Holdings, L.P. As of December 31, 2009, we had invested a total of $32.7 million of the aggregate commitment. We account for this investment under the equity method of accounting. For 2009, we recognized a loss from equity investment of $1.3 million. As of December 31, 2009, our investment balance in Celtic was $31.4 million.

Interest and other income, net decreased $11.2 million to $3.5 million in 2009. This decrease was due primarily to an $11.5 million decrease in interest income as a result of lower interest rates earned on cash balances. Changes in exchange rates from the time we recognize revenue until the client pays also resulted in a net loss on foreign currency transactions of $3.0 million for 2009, down from a net loss of $3.8 million in 2008.

Our provision for income taxes from continuing operations decreased $28.6 million to $62.9 million in 2009. Our effective income tax rate for 2008 was 32.7% compared to 29.3% for 2009. The effective tax rate for 2009 was positively impacted by a shift in the geographical mix of our pre-tax earnings to the European and Asian tax jurisdictions, the receipt of nontaxable foreign research credits and the reduction in liabilities for uncertain tax positions in 2009.

The income from discontinued operations, net of income taxes was $7.7 million in 2009. In May 2009, we completed the disposition of substantially all of the assets of Piedmont Research Center, LLC. Piedmont Research Center provided preclinical research services. In December 2009, we completed the disposition of our wholly owned subsidiary PPD Biomarker Discovery Sciences, LLC. PPD Biomarker Discovery Sciences provided biomarker discovery services and participant sample analysis. We recognized a net gain from the sale of business of $21.5 million, net of provision for income taxes in 2009 related to these dispositions. In May 2010, we discontinued the operations of our wholly owned subsidiary PPD Dermatology, Inc. due to unfavorable efficacy data associated with the MAG-131 program. As a result, these business units have been shown as discontinued operations for 2009.

Net income of $159.3 million in 2009 represents a decrease of 15.1% from $187.5 million in 2008. Net income per diluted share of $1.34 in 2009 represents a 14.1% decrease from $1.56 net income per diluted share in 2008. Net income changed for various reasons as explained above.

 

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Liquidity and Capital Resources

As of December 31, 2010, we had $479.6 million of cash and cash equivalents and $80.0 million of short-term investments. We invest our cash and cash equivalents and short-term investments in bank deposits, financial instruments that are issued or guaranteed by the U.S. government and municipal debt obligations. Our expected primary cash needs are for capital expenditures, expansion of services, possible acquisitions, investments, geographic expansion, dividends, working capital and other general corporate purposes. We have historically funded our operations, dividends and growth, including acquisitions, primarily with cash flow from operations.

We held approximately $88.6 million and $78.7 million, net of unrealized losses, in auction rate securities at December 31, 2009 and 2010, respectively. Our portfolio of investments in auction rate securities consists principally of interests in government-guaranteed student loans, insured municipal debt obligations and municipal preferred auction rate securities. We classified our entire balance of auction rate securities as long-term investments as of December 31, 2010 due to continuing uncertainties about the liquidity in the auction rate securities market. We also recorded unrealized losses on these investments of $21.3 million and $14.2 million as of December 31, 2009 and 2010, respectively. We concluded that this impairment was temporary because of our ability and intent to hold the auction rate securities until the fair value recovers. We will continue to seek to liquidate these investments at par value and will review the classification and valuation of these securities on a quarterly basis.

In 2010, our operating activities provided $247.7 million in cash as compared to $253.0 million for the same period last year. The change in operating cash flow was due primarily to lower net income in 2010 compared to 2009 partially offset by the gain on sale of business of $21.5 million in 2009, a decrease in impairment of intangible of $10.4 million and changes in operating cash receipts and payments totaling $11.4 million. The change in adjustments for accruals of expected future operating cash receipts and payments includes current income taxes of $31.0 million, prepaid expenses and investigator advances of $11.1 million, other accrued expenses and deferred rent of $5.9 million and other assets of $1.7 million. The change in adjustments to deferrals of past operating cash receipts and payments includes unearned income of ($23.8) million, payables to investigators of ($9.6) million and accounts receivable and unbilled of ($4.9) million. Fluctuations in receivables and unearned income occur on a regular basis as we perform services, achieve milestones or other billing criteria, send invoices to clients and collect outstanding accounts receivable. This activity varies by individual client and contract. We attempt to negotiate payment terms that provide for payment of services prior to or soon after the provision of services, but the levels of unbilled services and unearned revenue can vary significantly from period to period.

In 2010, our investing activities used $16.7 million in cash. We used cash of $63.3 million to purchase investments, $62.5 million for capital expenditures, $23.1 million for acquisitions and $19.2 million for loan advances. These amounts were offset by maturity and sale of investments of $133.6 million, changes in restricted cash of $7.5 million, proceeds from the sale of investment of $4.7 million, additional proceeds from the sale of business of $3.5 million and loan repayments of $2.0 million. Our capital expenditures in 2010 primarily consisted of $31.3 million for computer software and hardware, $17.1 million for various facility improvements and furnishings and $14.1 million for additional scientific equipment for our laboratory units. We expect our capital expenditures in 2011 will be approximately $85 million to $95 million, primarily for investments in information technology , new laboratory equipment as well as facility expansions and improvements.

In 2010, our financing activities used $155.9 million of cash. The biggest difference from 2009 was our contribution of $100.0 million of cash and cash equivalents to Furiex in the compound partnering spin-off. In 2010, we paid $71.3 million of dividends to shareholders, which were partially offset by proceeds of $15.1 million from stock option exercises and purchases under our employee stock purchase plan.

 

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

 

     December 31,         
(in thousands)    2009      2010      $ Inc (Dec)  

Current assets:

        

Cash and cash equivalents

   $ 408,903       $ 479,574       $ 70,671   

Short-term investments

     144,645         79,976         (64,669

Accounts receivable and unbilled services, net

     429,670         435,876         6,206   

Income tax receivable

     16,887         12,327         (4,560

Investigator advances

     13,980         16,032         2,052   

Prepaid expenses

     24,458         24,535         77   

Deferred tax assets

     26,068         30,910         4,842   

Cash held in escrow

     12,415         10,304         (2,111

Other current assets

     55,115         44,172         (10,943
                          

Total current assets

   $ 1,132,141       $ 1,133,706       $ 1,565   
                          

Current liabilities:

        

Accounts payable

   $ 34,005       $ 29,858       $ (4,147

Payables to investigators

     54,428         56,612         2,184   

Accrued income taxes

     4,043         1,918         (2,125

Other accrued expenses

     200,720         208,128         7,408   

Unearned income

     297,844         317,191         19,347   
                          

Total current liabilities

   $ 591,040       $ 613,707       $ 22,667   
                          

Working capital

   $ 541,101       $ 519,999       $ (21,102

Working capital as of December 31, 2010 was $520.0 million, compared to $541.1 million at December 31, 2009. The decrease in working capital was due primarily to an increase in unearned income of $19.3 million and a decrease in other current assets of $10.9 million offset by a net increase in cash and short term investments of $6.0 million. During 2010, we contributed $100.0 million of cash and cash equivalents to Furiex in the compound partnering spin-off which was offset by cash generated in the normal course of business.

For the year ended December 31, 2010, DSO was 22 days, compared to 31 days for the year ended December 31, 2009. We calculate DSO by dividing accounts receivable and unbilled services less unearned income by average daily gross revenue for the applicable period. 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.

We maintain a defined benefit pension plan for certain employees and former employees in the United Kingdom, or U.K. This pension plan was closed to new participants as of December 31, 2002. In December 2009, we amended the plan effective January 1, 2010. As amended, participants are entitled to receive benefits previously accrued, which are based on expected pay at retirement and number of years of service through January 1, 2010, but will received no additional credit for future years. The projected benefit obligation for the benefit plan at December 31, 2009 and December 31, 2010, was $58.3 million and $59.3 million, respectively, and the value of the plan assets was $42.8 million and $48.3 million, respectively. As a result, the plan was under-funded by $15.4 million in 2009 and by $11.0 million in 2010. The amount of contributions to the plan for the years ended December 31, 2009 and 2010 were $3.4 million and $2.8 million, respectively. We expect the pension cost to be recognized in our financial statements to decrease from the $1.8 million in 2010 to approximately $1.1 million in 2011. The expense to be recognized in future periods could increase or decrease depending upon the change in the fair market value of the plan assets. A decrease in the market value of plan assets and/or declines in interest rates are likely to cause the amount of the under-funded status to increase. After completion of the actuarial valuations in 2011, we could be required to record an additional reduction to shareholders’ equity. In connection with the plan, we recorded a decrease to shareholders’ equity in 2009 of $1.7 million and an increase of $2.1 million in 2010. Given the impact that the discount rate and stock market performance have on the projected benefit obligation and market value of plan assets, future changes in either one of these factors could significantly reduce or increase the amount of our pension plan under-funding.

 

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

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

In 2008, our board of directors approved a stock repurchase program authorizing us to repurchase up to $350.0 million of our common stock from time to time in the open market. We adopted a share repurchase program in view of the price at which our stock was trading at the time of the adoption of the program, the strength of our balance sheet and our ability to generate cash, and in order to minimize earnings dilution from future equity compensation awards. During the year ended December 31, 2008, we repurchased approximately 2,435,000 shares of our common stock for an aggregate purchase price, including broker commissions, of $89.3 million at an average price per share of $36.68. During 2009 and 2010, we did not repurchase any shares of our common stock. As of December 31, 2010, $260.7 million remained available for share repurchases under the stock repurchase program. On February 14, 2011, we entered into an accelerated share repurchase arrangement with Barclays Capital Inc. under which we expect to use approximately $200.0 million of the remaining amount to repurchase additional shares of our common stock.

In late 2009, we committed to invest up to $102.7 million in Celtic Therapeutics Holdings L.P. Celtic is an investment partnership organized for the purpose of identifying, acquiring and investing in a diversified portfolio of novel therapeutic product candidates, with a focus on mid-stage compounds that have progressed through human proof of concept studies that are targeted to address unmet medical needs. As of December 31, 2010, we had invested a total of $32.7 million of the aggregate commitment and had an investment balance of $30.7 million, which includes cumulative equity method investment losses to date. We expect to invest the remainder of our commitment over a period of three years.

In 2010, we entered into a non-revolving line of credit agreement to loan Celtic Pharma Development Services Bermuda Ltd., a subsidiary of Celtic Pharmaceutical Holdings L.P., up to $18.0 million to finance trade payables in connection with a specified drug candidate. Celtic Pharma Development Services Bermuda Ltd. has appointed us to conduct certain clinical studies on the specified drug candidate. Principal and interest are due and payable no later than June 30, 2013 and are secured by a guarantee of an affiliate of the borrower. As of December 31, 2010, we had advanced $9.2 million to the borrower.

As of December 31, 2010, we had commitments to invest up to an aggregate additional $10.8 million in four venture capital funds and $1.7 million in other investments. For further details, see Note 3 in the notes to consolidated financial statements.

As of December 31, 2010, the total gross unrecognized tax benefits were $30.0 million and of this total, $14.5 million is the amount that, 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 by up to $1.7 million within the next twelve months due to the settlement of audits and the expiration of the 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 December 31, 2010, we accrued $4.1 million of interest and $0.9 million of penalties with respect to uncertain tax positions. To the extent these interest and penalties are not assessed, we will reduce amounts accrued and reflect them as a reduction of the overall income tax provision.

We analyzed filing positions in all of the significant federal, state and foreign jurisdictions where we are required to file income tax returns, as well as open tax years in these jurisdictions. The only periods subject to examination by the major tax jurisdictions where we do business are the 2007 through 2010 tax years. Various 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 statements.

We expect to continue expanding our operations through internal growth, strategic acquisitions and investments. We expect to fund these activities, the payment of future cash dividends and repurchases of stock from existing cash, cash

 

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flows from operations and, if necessary or appropriate, borrowings under our future credit facilities. We believe that these sources of liquidity will be sufficient to fund our operations, dividends and stock repurchases, if any, for the foreseeable future. From time to time, we evaluate potential acquisitions, investments and other growth and strategic opportunities that might require additional external financing, and we might seek funds from public or private issuances of equity or debt securities. While we believe we have sufficient liquidity to fund our operations for the foreseeable future, our sources of liquidity and ability to pay dividends or repurchase our stock could be affected by current and anticipated difficult economic conditions; our dependence on a small number of industries and clients; compliance with regulations; reliance on key personnel; breach of contract, personal injury or other tort claims; international risks; environmental or intellectual property claims; or other factors described under “Item 1A. Risk Factors”, in this Item 7 under the subheadings “Contractual Obligations”, “Critical Accounting Policies and Estimates”, “Potential Liability and Insurance”, “Potential Volatility of Quarterly Operating Results and Stock Price” and under “Item 7A. Quantitative and Qualitative Disclosures about Market Risk”.

Contractual Obligations

As of December 31, 2010, future minimum payments on all our contractual obligations for years subsequent to December 31, 2010 were as follows:

 

     Payments Due by Period (in thousands)  
     2011     2012 -
2013
    2014 -
2015
     2016 and
thereafter
     Total  

Operating leases

   $ 52,298      $ 77,922      $ 50,201       $ 95,234       $ 275,655   

Less: sublease income

     (398     (282     —           —           (680
                                          

Total leases, net

     51,900        77,640        50,201         95,234         274,975   

Acquisition liabilities

     10,304        4,164        —           —           14,468   

Software license payments

     4,212        4,212        —           —           8,424   
                                          

Total

   $ 66,416      $ 86,016      $ 50,201       $ 95,234       $ 297,867   
                                          

Contractual obligations as of December 31, 2010 without a specified maturity date were as follows:

 

Venture capital funds capital commitment

   $ 10,760   

Celtic Therapeutics capital commitment

     70,000   

Other investments capital commitment

     1,722   

Celtic Pharmaceutical credit agreement

     8,800   

U.K. pension

     10,989   

Gross unrecognized tax liability

     29,967   
        

Total

   $ 132,238   
        

We have a contractual obligation to repurchase the minority interests of our BioDuro Biologics subsidiary at fair value that is exercisable by the minority interest holders in 2016.

In February 2011, we entered into an accelerated share repurchase program and were required to pay $200.0 million for the repurchase of shares and $1.3 million in prepaid dividends upon signing of the agreement.

Off-balance Sheet Arrangements

From time to time, we cause letters of credit to be issued to provide credit support for guarantees, contractual commitments and insurance policies. The fair values of the letters of credit reflect the amount of the underlying obligation and are subject to fees competitively determined in the marketplace. As of December 31, 2010, we had four letters of credit outstanding for a total of $1.8 million. We have no other off-balance sheet arrangements except for operating leases entered into in the normal course of business.

Critical Accounting Policies and Estimates

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

 

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believe that the following are the primary areas in which management must make significant judgments in applying our accounting policies to determine our financial condition and results of operations. We have discussed the application of these critical accounting policies with the Finance and Audit Committee of our board of directors.

Revenue Recognition

We record the majority of our revenues on a proportional performance basis. To measure performance on a given date, we compare direct costs through that date to estimated total direct costs to complete the contract. Direct costs relate primarily to the amount of labor and related overhead costs for the delivery of services. We believe this is the best indicator of the performance of the contractual obligations.

Our contracts are generally based on a fixed fee or variable pricing models and have a duration of a few months to ten years. The contract value for a fixed fee contract equals the agreed-upon aggregate amount of the fixed fees. We measure the contract value for variable pricing models using the estimated units (number of patients to be dosed or study sites to be initiated, for example) to be completed and the agreed-upon unit prices. As part of the client proposal and contract negotiation process, we develop a detailed project budget for the direct costs based on the scope of the work, the complexity of the study, the geographic locations involved and our historical experience. We then establish the individual contract pricing based on our internal pricing guidelines, discount agreements, if any, and negotiations with the client.

Contracts with the same customer generally are not linked, although contracts for some large customers involve annual or multi-year pricing agreements, which generally provide for specified discounts with periodic rate increases or other price adjustment mechanisms. We negotiate pricing for each project individually, based on the scope of the work, and any discounts and rate increases are reflected within the contract for the project. Other large customers negotiate rebates based on the volume of services purchased. These agreements are generally negotiated at the beginning of each year and require a one-time rebate in the following year based upon the volume of services purchased or recognized during the relevant year. We record an estimate of the annual volume rebate as a reduction of revenues throughout the period based on the estimated total rebate to be earned for the period.

Generally, we base payment terms on the passage of time, the monthly completion of units or non-contingent project milestones that represent progression of the project plan, such as contract signing, site initiation and database lock. The timing of payments can vary significantly. We attempt to negotiate payment terms which provide for payment of services prior to or within close proximity to the provision of services, but the levels of unbilled services and unearned revenue varies significantly.

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 through the date of termination, 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.

Each month we accumulate direct costs on each project and compare them to the total current estimated direct costs to complete the project in order to determine the percentage-of-completion. We then multiply this percentage by the contract value to determine the amount of revenue that can be recognized. This process includes, among other things:

 

   

a comparison of direct costs incurred in the current month against the budgeted direct costs for the month;

 

   

detailed discussions with the operational project teams relating to the status of the project, including the rate of enrollment, the ability to complete individual tasks in the time-frame allotted, the anticipated total units to be achieved and potential changes to the project scope;

 

   

a comparison of the fees invoiced and collected compared to revenue recognized;

 

   

a review of experience on projects recently completed or currently running; and

 

   

a review of specific client and industry changes.

As a result, we might determine that our previous estimates of contract value or direct costs need to be revised based upon the new information. In addition, a change in the scope of work generally results in the negotiation of contract modifications to increase or decrease the contract value along with an associated increase or decrease in the estimated total direct costs to complete. If a client does not agree to a contract modification, we could bear the risk of cost overruns. We include contract values and modifications to contract values in the calculation of revenue when we believe that realization is reasonably assured and we have appropriate evidence of arrangement.

 

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If we determine that a loss will result from the performance of a contract, we change the entire amount of the estimated loss against income in the period in which such determination is made. The payment terms for our contracts do not necessarily coincide with the recognition of revenue. We record unbilled services for revenue recognized to date that are not then billable under the relevant customer agreement. Conversely, we record unearned income for cash received from customers for which revenue has not been recognized at the balance sheet date.

In 2010 and some prior years, we had to commit unanticipated resources to complete projects, resulting in lower gross margins on those projects. We might experience similar situations in the future. Increases in the estimated total direct costs to complete a contract without a corresponding proportional increase to the contract value result in a cumulative adjustment to the amount of revenue recognized in the period the change in estimate is determined. Should our estimated direct costs to complete a fixed price contract prove to be low, gross margins could be materially adversely affected, absent our ability to negotiate a contract modification. Historically, the majority of our estimates and assumptions have been materially correct, but these estimates might not continue to be accurate in the future. A hypothetical increase of 1% in the total estimated remaining project direct costs to complete, without a corresponding proportional increase in the contract value, for open projects accounted for under the proportional performance method as of December 31, 2008, 2009 and 2010 would have resulted in a cumulative reduction in revenue and gross margin of approximately $4.2 million, $6.6 million and $9.1 million, respectively.

Prior to June 2010, the Discovery Sciences segment generated 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. Sales-based milestone payments were typically one-time payments to us triggered when the aggregate net sales of product by a collaborator for a specified period (for example, an annual period) reached an agreed upon threshold amount. We recognized these various forms of payment from our collaborators when the event which triggered the obligation of payment had occurred, there were no further obligations on our part in connection with the payment and collection was reasonably assured.

Allowance for Doubtful Accounts

We include an allowance for doubtful accounts in “Accounts receivable and unbilled services, net” on our consolidated balance sheets. Generally, before we do business with a new client, we perform a credit check. We also review our accounts receivable aging on a monthly basis to determine if any receivables will potentially be uncollectible. The allowance for doubtful accounts includes specific accounts and an estimate of other losses based on historical loss experience. If all attempts to collect the receivable fail, we then write the receivable off against the allowance. Based on the information available to us, we believe our allowance for doubtful accounts as of December 31, 2010 is adequate to cover uncollectible balances. However, actual invoice write-offs might exceed the recorded reserve.

Investments

Our investments consist of marketable and debt investments in publicly traded and privately held entities. We classify our investments in publicly traded securities as available-for-sale securities and measure them at market value. The majority of our investments in privately held entities do not have readily determinable fair values and, therefore, we record them using the cost method of accounting. Our equity method investment is measured at fair value, and we record our share of the change in the net asset values reported by the fund manager. Most of our investments are in relatively early-stage life sciences and biotechnology companies or investment funds that invest in similar companies. These early-stage life sciences and biotechnology companies generally do not have established products or proven technologies or material revenue, if any. The fair value of these investments might from time to time be less than their recorded value. We assess our investment portfolio on a quarterly basis for other-than-temporary impairments. For our investments in privately held entities, we look for events or circumstances that would likely have a significant adverse effect on the fair value of the investment. In addition, we evaluate any decline in the fair value of publicly traded or privately held investments to determine the potential extent and timing of recovery, if any. If we deem the impairment to be other-than-temporary, we record the impairment of the investment in our statement of income. This quarterly review includes an evaluation of the entity, including, among other things, the market condition of the overall industry, historical and projected financial performance, expected cash needs and recent funding events, as well as our expected holding period and the length of time and the extent to which the estimated fair value of the investment has been less than cost. This analysis of the estimated fair values and the extent and timing of recoveries of decreases in fair value requires significant judgment.

 

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Tax Valuation Allowances and Tax Liabilities

Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of our effective tax rate and, consequently, our operating results. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and may not accurately anticipate actual outcomes.

We have to use estimates and judgments in calculating certain tax liabilities and determining the recoverability of certain deferred tax assets, which arise from net operating losses, tax credit carryforwards and temporary differences between the tax and financial statement recognition of revenue and expense. We are also required to reduce our deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods.

In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent fiscal years and our forecast of future taxable income on a jurisdiction-by-jurisdiction basis. In determining future taxable income, assumptions include the amount of state, federal and international pretax operating income, international transfer pricing policies, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses. Based on our analysis of the above factors, we determined that a valuation allowance of $3.7 million was required as of December 31, 2010 for carryforwards of foreign and state tax losses and credits. Changes in our assumptions could result in an adjustment to the valuation allowance, up or down, in the future.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions. We determine our liability for uncertain tax positions globally under the provisions in this standard. As of December 31, 2010, we had recorded a gross liability for uncertain tax position of $30.0 million. If events occur such that payment of these amounts ultimately proves to be unnecessary, the reversal of liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our calculation of liability related to uncertain tax positions proves to be more or less than the ultimate assessment, a tax expense or benefit to expense, respectively, would result. The total liability reversal that could affect the tax rate is $14.5 million.

Goodwill

The fair value of goodwill could be impacted by future adverse changes such as future declines in our operating results, a decline in the valuation of pharmaceutical and biotechnology company stocks, including the valuation of our common stock, a further significant slowdown in the worldwide economy or the pharmaceutical and biotechnology industry, failure to meet the performance projections included in our forecasts of future operating results or the delay or abandonment of any of our in-process research and development programs.

We review goodwill for impairment annually on October 1 and whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. This analysis utilizes a discounted cash flow analysis utilizing the expected future in-flow and out-flows of our business and an appropriate discount rate. On October 1, 2010, we reviewed goodwill for impairment and our analysis indicated a significant fair value in excess of book value.

Intangible Assets

The value of our intangible assets could be impacted by future adverse changes such as changes in regulatory conditions, changes in medical reimbursement rates, decisions by customers to discontinue research programs, the success of our customer relationships, introduction of competing services, significant slowdowns in the worldwide economy or the pharmaceutical and biotechnology industry, or the delay or abandonment of any of our in-process research and development programs.

We evaluate intangible assets, which consist primarily of customer related intangibles and acquired in-process research and development, at any time we believe indicators of impairment exist. We initially record these intangible assets at fair value and use fair value measurements to evaluate impairment. The fair value of our intangible assets is determined by estimating the costs to develop the acquired technology into commercially viable services or continuing to provide contracted services, estimating the resulting net cash flows from future services to be provided, and discounting the net cash flows to present value. Additionally, our estimates take into account the relevant market size and growth factors, expected trends in technology, and the nature and expected timing of new service introductions by us and our competitors. The resulting net cash flows are based on management’s estimates of direct costs, operating expenses, and income taxes

 

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from the provision of services. The rates utilized to discount the net cash flows to their present value were commensurate with the uncertainties of the future revenues and development costs of the estimates used in the projections described above.

Share-Based Compensation

We measure share-based compensation cost at grant date, based on the fair value of the award, and recognize it as expense over the employee’s requisite service period. We estimate the fair value of each option award on the grant date using the Black-Scholes option-pricing model. The model requires the use of the following assumptions: an expected dividend yield; expected volatility; risk-free interest rate; and expected term. Based on our assumptions for these factors, the weighted-average fair value of options granted during the year ended December 31, 2010 was $5.16 per option. A change in these assumptions could have a significant impact on the weighted-average fair value of options. For example, if the fair value of all unvested shares increased by 10%, the weighted-average fair value of options granted during 2010 would have increased by $0.51 or 10% from $5.16 to $5.67, and the resulting share-based employee compensation expense determined under the fair-value based method for stock option awards, net of related tax effect, would have increased by $1.1 million. Diluted earnings per share would have decreased by $0.01. See Note 10 in the notes to our consolidated financial statements for details regarding the assumptions used in estimating fair value for the years ended December 31, 2008, 2009 and 2010 regarding our equity compensation plan and our employee stock purchase plan.

Recent Accounting Pronouncements

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

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

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

Income Taxes

Because we conduct operations on a global basis, our effective tax rate has and will continue to depend upon the geographic distribution of our pretax earnings among locations with varying tax rates. Our profits are also impacted by changes in the tax rates and tax laws of the various tax jurisdictions as applied to certain items of income and loss recognized for GAAP purposes. In particular, as the geographic mix of our pretax earnings among various tax jurisdictions changes, our effective tax rate might vary from period to period. The effective rate will also change due to the discrete recognition of tax benefits when tax positions are effectively settled or as a result of specific transactions, such as the receipt of nontaxable research benefits in 2009 and 2010.

Inflation

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

 

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Potential Liability and Insurance

Drug development services involve the testing of potential drug candidates on human volunteers pursuant to a study protocol. This testing exposes us to the risk of liability for personal injury or death to 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.

Potential Volatility of Quarterly and Annual Operating Results and Stock Price

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

 

   

the timing and level of new business authorizations;

 

   

project cancellations;

 

   

the timing of the initiation and progress of significant projects;

 

   

our dependence on a small number of industries and clients;

 

   

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

 

   

the timing and amount of costs associated with integrating acquisitions;

 

   

our ability to recruit and retain experienced personnel;

 

   

the timing and extent of new government regulations;

 

   

impairment of investments or intangible assets;

 

   

variability of equity method investments;

 

   

litigation costs;

 

   

the timing of the opening of new offices;

 

   

the timing of other internal expansion costs;

 

   

exchange rate fluctuations between periods;

 

   

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

 

   

pricing pressure in the market for our services;

 

   

rapid technological change;

 

   

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

 

   

intellectual property risks.

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

Fluctuations in quarterly results, actual or anticipated changes in our dividend policy or stock repurchase plan or other factors, including 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 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 “Item 1A. Risk Factors.”

 

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to foreign currency risk by virtue of our international operations. We derived 39.1%, 40.4% and 44.2% of our net revenue for the years ended December 31, 2008, 2009 and 2010, respectively, from operations outside the United States. We generally reinvest funds generated by each subsidiary in the country where they are earned. Accordingly, we are exposed to adverse movements in foreign currencies, predominately in the pound sterling, euro and Brazilian real.

The vast majority of our contracts are entered into by our U.S., U.K. or Singapore subsidiaries. The contracts entered into by the U.S. subsidiaries are almost always denominated in U.S. dollars. Contracts entered into by our U.K. and Singapore subsidiaries are generally denominated in U.S. dollars, pounds sterling or euros, with the majority in U.S. dollars. Although an increase in exchange rates for the pound sterling or euro relative to the U.S. dollar increases net revenue from contracts denominated in these currencies, 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 $5.2 million in the year ended December 31, 2010.

Our strategy for managing foreign currency risk relies primarily on receiving payment in the same currency used to pay expenses and other non-derivative hedging strategies. From time to time, we also enter into foreign currency hedging activities in an effort to manage our potential foreign exchange exposure. If the U.S. dollar had weakened an additional 10% relative to the pound sterling, euro and Brazilian real in 2010, income from continuing operations, including the impact of hedging, would have been approximately $0.7 million lower for the year based on revenues and the costs related to our foreign operations. From time to time, we also enter into foreign currency hedging activities in an effort to manage our potential foreign exchange exposure. We have hedged a significant portion of our foreign currency exposure for 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 financial results. The process by which we translate each foreign subsidiary’s financial results to U.S. dollars is as follows:

 

   

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

 

   

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

 

   

we translate equity accounts at historical exchange rates.

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

Currently, there are no material exchange controls on the payment of dividends or otherwise prohibiting the transfer of funds out of any country in which we conduct operations. Although we perform services for clients located in a number of jurisdictions, we have not experienced any material difficulties in receiving funds remitted from foreign countries. However, new or modified exchange control restrictions could have an adverse effect on our financial condition. If we were to repatriate dividends from the cumulative amount of undistributed earnings in foreign entities, we would incur a tax liability not currently provided for in our 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 year ended December 31, 2010.

 

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We are also exposed to market risk related to our investments in auction rate securities. For further details, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”.

 

Item 8. Financial Statements and Supplementary Data

The information called for by this Item is set forth herein commencing on page F-1.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

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Item 9A. Controls and Procedures

Disclosure Controls and Procedures

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

Internal Control Over Financial Reporting

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

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our Board of Directors and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

A control system, no matter how well designed and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met and must reflect the fact that there are resource constraints that require management to consider the benefits of internal controls relative to their costs. Because of these inherent limitations, management does not expect that our internal controls over financial reporting will prevent all errors and all fraud. Also, internal controls might become inadequate because of changes in business conditions or a decline in the degree of compliance with our policies or procedures.

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment, we believe that, as of December 31, 2010, our internal control over financial reporting was effective based on those criteria.

Deloitte & Touche, LLP, the registered public accounting firm that audited the financial statements included in this annual report, has issued an attestation report on our internal control over financial reporting.

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Pharmaceutical Product Development, Inc. and Subsidiaries

Wilmington, North Carolina

We have audited the internal control over financial reporting of Pharmaceutical Product Development, Inc. and Subsidiaries (the “Company”) as of December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s Board of Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2010 of the Company and our report dated February 25, 2011 expressed an unqualified opinion on those financial statements.

/s/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
February 25, 2011

 

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Item 9B. Other information

None.

 

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PART III

Certain information required by Part III is omitted from this report because the Registrant intends to file a definitive proxy statement for its 2011 Annual Meeting of Shareholders to be held on May 18, 2011 (the “Proxy Statement”) within 120 days after the end of its fiscal year pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, and the information included therein is incorporated herein by reference to the extent provided below.

 

Item 10. Directors, Executive Officers and Corporate Governance

The information required by Item 10 of Form 10-K concerning the Registrant’s executive officers is set forth under the heading “Executive Officers” located at the end of Part I of this Form 10-K.

The board of directors has determined that Frederick Frank, Stuart Bondurant, Catherine M. Klema, Terry Magnuson and John A. McNeill, Jr., the members of the Finance and Audit Committee, are independent as defined in Rule 4200(a) (15) of the Nasdaq listing standards and Rule 10A-3 under the Securities Exchange Act of 1934. The board of directors has also determined that at least one committee member, namely Mr. Frank, is an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K.

Our board of directors has adopted a code of conduct that applies to all of our directors and employees. Our board has also adopted a separate code of ethics for our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and Controller, or persons performing similar functions. We will provide copies of our code of conduct and code of ethics without charge upon request. To obtain a copy of the code of ethics or code of conduct, please send your written request to Pharmaceutical Product Development, Inc., 929 North Front Street, Wilmington, NC 28401, Attn: General Counsel.

The other information required by Item 10 of Form 10-K is incorporated by reference to the information under the headings “Proposal No. 1 - Election of Directors” and “Other Information-Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.

 

Item 11. Executive Compensation

The information required by Item 11 of Form 10-K is incorporated by reference to the information under the heading “Other Information —Compensation of Non-Employee Directors”, “—Director Compensation in Fiscal 2010,” “—Executive Compensation”, “—Compensation Committee Report,” and “—Compensation Committee Interlocks and Insider Participation” in the Proxy Statement.

 

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Equity Compensation Plans

The following table sets forth the indicated information with respect to our equity compensation plans as of December 31, 2010:

 

Plan Category

   (a)
Number of Securities
to be Issued Upon
Exercise of Outstanding
Options, Warrants and Rights
     (b)
Weighted-Average
Exercise Price Of
Outstanding Options,
Warrants and Rights
     (c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities

Reflected in Column (a))
 

Equity compensation plans approved by security holders

     11,451,071       $ 27.26         7,672,888 (1) 

Equity compensation plans not approved by security holders

     0         N/A      

Total

     11,451,071       $ 27.26         7,672,888 (1) 

 

(1) This includes 6,836,131 shares of stock available for issuance under our amended and restated Equity Compensation Plan and 836,757 shares available for issuance under our Employee Stock Purchase Plan.

The other information required by Item 12 of Form 10-K is incorporated by reference to the information under the heading “Other Information – Principal Shareholders” in the Proxy Statement.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by Item 13 of Form 10-K is incorporated by reference to the information under the headings “Proposal No. 1 - Election of Directors - Nominees” and “Information About the Board of Directors and its Committees”, and “Other Information - Related Party Transactions” in the Proxy Statement.

 

Item 14. Principal Accounting Fees and Services

The information required by Item 14 of Form 10-K is incorporated by reference to the information under the heading “Other Information – Report of the Finance and Audit Committee” and “—Fees Paid to the Independent Registered Public Accounting Firm” in the Proxy Statement.

 

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PART IV

 

Item 15. Exhibits, Financial Statement Schedules

 

  (a) Financial Statements

Our consolidated financial statements filed as part of this report are listed in the attached Index to Consolidated Financial Statements. There are no schedules to our consolidated financial statements.

 

  (b) Exhibits

 

Exhibit
Number

  

Description

   Registrant’s
Form
   Dated    Exhibit
Number
   Filed
Herewith
 
  3.1       

—Restated Articles of Incorporation.

   8-K    2/9/06    3.1   
  3.2       

—Amended and Restated Bylaws.

   S-4    7/16/96    3.2   
10.86     

—Pharmaceutical Product Development, Inc. Employee Stock Purchase Plan.

   8-K    5/18/05    10.86   
10.88     

—Amendment to Stock Option Plan for Non-Employee Directors, dated May 15, 1997.

   10-Q    8/14/97    10.88   
10.93     

—Lease Agreement dated July 9, 1997, between Weeks Realty, Inc. and PPD Pharmaco, Inc.

   10-Q    11/13/97    10.93   
10.114   

—Lease Agreement dated June 26, 1998 between Weeks Realty Limited Partnership and PPD Pharmaco, Inc.

   10-Q    8/13/98    10.114   
10.116   

—First Amendment to Lease Agreement dated September 28, 1998, between PPD Pharmaco, Inc. and Weeks Realty, Inc.

   10-Q    11/13/98    10.116   
10.133   

—Fourth Amendment, dated July 6, 1999, to Lease Agreement dated July 9, 1997 between PPD Development, Inc. (formerly known as PPD Pharmaco, Inc.) and Weeks Realty, L.P.

   10-Q    11/15/99    10.133   
10.145   

—Third Amendment to Employee Stock Purchase Plan, dated June 21, 1997.

   10-Q    8/11/00    10.145   
10.162   

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

         10.162      X   
10.164   

—First Amendment, dated January 28, 1998, to Lease Agreement dated July 9, 1997 between PPD Development, Inc. (formerly known as PPD Pharmaco, Inc.) and Weeks Realty, L.P.

   10-K    3/13/01    10.164   
10.165   

—Second Amendment, dated June 26, 1998, to Lease Agreement dated July 9, 1997 between PPD Development, Inc. (formerly known as PPD Pharmaco, Inc.) and Weeks Realty, L.P.

   10-K    3/13/01    10.165   
10.166   

—Third Amendment, dated February 18, 1999, to Lease Agreement dated July 9, 1997 between PPD Development, Inc. (formerly known as PPD Pharmaco, Inc.) and Weeks Realty, L.P.

   10-K    3/13/01    10.166   
10.170   

—Employment Agreement dated July 9, 2001 between Pharmaceutical Product Development, Inc. and Brainard Judd Hartman.

   10-Q    8/1/01    10.170   
10.189   

—Lease Agreement dated July 1, 2001 between Brandywine Grande C,L.P. and PPD Development, LLC.

   10-Q    8/13/02    10.189   
10.191   

—Second Amendment, dated October 1, 2002, to Lease Agreement dated June 26, 1998 between PPD Development, Inc. (formerly PPD Pharmaco, Inc.) and Duke Realty Limited Partnership (formerly Weeks Realty, L.P.).

   10-Q    11/13/02    10.191   

 

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Table of Contents

Exhibit
Number

  

Description

   Registrant’s
Form
   Dated    Exhibit
Number
   Filed
Herewith
 
10.192   

—Fifth Amendment, dated October 1, 2002, to Lease Agreement dated July 9, 1997 between PPD Development, Inc. and Duke Realty Limited Partnership (formerly Weeks Realty, L.P.).

   10-Q    11/13/02    10.192   
10.200   

—Pharmaceutical Product Development, Inc. Equity Compensation Plan as amended and restated effective May 14, 2003.

   Proxy    3/28/03    10.200   
10.209   

—Deferred Compensation Plan for Non-Employee Directors, as amended and restated on November 22, 2005.

   8-K    11/22/05    10.209   
10.212   

—Lease agreement dated June 18, 2004, between Met Center Partners-6, Ltd. And PPD Development, LP.

   10-K    3/4/05    10.212   
10.213   

—First Amendment dated March 16, 2005 to Lease Agreement between Met Center Partners-6, Ltd. And PPD Development, LP.

   10-Q    5/5/05    10.213   
10.214   

— Second Amendment dated March 16, 2005 to Lease Agreement between Met Center Partners-6, Ltd. And PPD Development, LP.

   10-Q    5/5/05    10.214   
10.215   

—Agreement dated July 13, 2005 among Pharmaceutical Product Development, Inc., Development Partners, LLC, Takeda Pharmaceutical Company Limited and Takeda San Diego, Inc.

   8-K    7/13/05    10.215   
10.218   

—Amendment No. 1, effective as of October 10, 2005, to the Agreement dated July 13, 2005, among Pharmaceutical Product Development, Inc., Development Partners, LLC, Takeda Pharmaceutical Company Limited and Takeda San Diego, Inc.

   8-K    10/10/05    10.218   
10.219   

—Employment Agreement dated October 12, 2005, between PPD Development, LP and William W. Richardson.

   8-K    10/12/05    10.219   
10.221   

—Lease Agreement dated April 30, 2001 by and between Greenway Properties, Inc. and PPD Development, LP.

   10-Q    11/8/05    10.221   
10.222   

—First Amendment dated August 15, 2001, to Lease Agreement, dated April 30, 2001, by and between Greenway Properties, Inc. and PPD Development, LP.

   10-Q    11/8/05    10.222   
10.223   

—Second Amendment dated August 25, 2003, to Lease Agreement, dated April 30, 2001, by and between Greenway Properties, Inc. and PPD Development, LP.

   10-Q    11/8/05    10.223   
10.224   

—Third Amendment dated March 22, 2004, to Lease Agreement, dated April 30, 2001, by and between Greenway Properties, Inc. and PPD Development, LP.

   10-Q    11/8/05    10.224   
10.225   

—Fourth Amendment dated May 17, 2004, to Lease Agreement, dated April 30, 2001, by and between Greenway Properties, Inc. and PPD Development, LP.

   10-Q    11/8/05    10.225   
10.226   

—Fifth Amendment dated December 14, 2004, to Lease Agreement, dated April 30, 2001, by and between Greenway Properties, Inc. and PPD Development, LP.

   10-Q    11/8/05    10.226   
10.227   

—Sixth Amendment dated June 3, 2005, to Lease Agreement, dated April 30, 2001, by and between Greenway Properties, Inc. and PPD Development, LP.

   10-Q    11/8/05    10.227   
10.228   

—Seventh Amendment dated July 29, 2005, to Lease Agreement, dated April 30, 2001, by and between Greenway Properties, Inc. and PPD Development, LP.

   10-Q    11/8/05    10.228   
10.235   

—Form of Restricted Stock Award Agreement under the Equity Compensation Plan for Directors.

   10-K    3/2/06    10.235   

 

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Table of Contents

Exhibit
Number

  

Description

   Registrant’s
Form
   Dated    Exhibit
Number
   Filed
Herewith
 
10.236   

—Form of Restricted Stock Award Agreement under the Equity Compensation Plan for Executive Officers.

   10-K    3/2/06    10.236   
10.237   

—Form of Nonqualified Stock Option Award Agreement under the Equity Compensation Plan for Directors.

   10-K    3/2/06    10.237   
10.238   

—Form of Nonqualified Stock Option Award Agreement under the Equity Compensation Plan for all non-Director participants.

   10-K    3/2/06    10.238   
10.244   

—Employment Agreement dated May 5, 2007, effective May 31, 2007, between Pharmaceutical Product Development, Inc. and William J. Sharbaugh.

   8-K    5/17/07    10.244   
10.246   

—Employment Agreement dated September 12, 2007, effective October 1, 2007, between Pharmaceutical Product Development, Inc. and Daniel G. Darazsdi.

   8-K    9/12/07    10.246   
10.247   

—Third Amendment dated September 22, 2003, to Lease Agreement, dated June 26, 1998, by and between Duke Realty Limited Partnership and PPD Development, LP.

   10-K    2/26/08    10.247   
10.248   

—Fourth Amendment dated March 31, 2005, to Lease Agreement, dated June 26, 1998, by and between Duke Realty Limited Partnership and PPD Development, LP.

   10-K    2/26/08    10.248   
10.249   

—Fifth Amendment dated July 7, 2005, to Lease Agreement, dated June 26, 1998, by and between Duke Realty Limited Partnership and PPD Development, LP.

   10-K    2/26/08    10.249   
10.250   

—Sixth Amendment dated December 30, 2005, to Lease Agreement, dated June 26, 1998, by and between Duke Realty Limited Partnership and PPD Development, LP.

   10-K    2/26/08    10.250   
10.251   

—Seventh Amendment dated February 6, 2006, to Lease Agreement, dated June 26, 1998, by and between Duke Realty Limited Partnership and PPD Development, LP.

   10-K    2/26/08    10.251   
10.252   

—Eighth Amendment dated September 24, 2007, to Lease Agreement, dated June 26, 1998, by and between Duke Realty Limited Partnership and PPD Development, LP.

   10-K    2/26/08    10.252   
10.253   

—First Amendment dated March 9, 2007, to Lease Agreement, dated July 1, 2001, by and between Brandywine Grande C, LP and PPD Development, LP.

   10-K    2/26/08    10.253   
10.254   

—Eighth Amendment dated March 1, 2006, to Lease Agreement, dated April 30, 2001, by and between Greenway Office Center, LLC and PPD Development, LLP.

   10-K    2/26/08    10.254   
10.255   

—Ninth Amendment dated August 31, 2007, to Lease Agreement, dated April 30, 2001, by and between Greenway Office Center, LLC and PPD Development, LLP.

   10-K    2/26/08    10.255   
10.256   

—Tenth Amendment dated September 25, 2007, to Lease Agreement, dated April 30, 2001, by and between Greenway Office Center, LLC and PPD Development, LLP.

   10-K    2/26/08    10.256   
10.257^   

—Employment Agreement, effective April 1, 2008, between PPD Development, LP and Michael O. Wilkinson.

   8-K    3/31/08    10.257   
10.258   

—Third Amendment dated December 13, 2007, to Lease Agreement, dated June 18, 2004, by and between NNN Met Center 10, LLC and PPD, Inc.

   10-Q    5/9/08    10.258   
10.259   

—Second Amendment dated January 10, 2008, to Lease Agreement, dated July 1, 2001, by and between Brandywine Grande C, L.P. and PPD Development, LLC.

   10-Q    5/9/08    10.259   

 

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Table of Contents

Exhibit
Number

  

Description

   Registrant’s
Form
   Dated    Exhibit
Number
   Filed
Herewith
 
10.260^   

—Employment Agreement, effective July 28, 2008, between PPD Development, LP and Christine A. Dingivan, M.D.

   8-K    7/25/08    10.260   
10.262     

—Eleventh Amendment dated March 31, 2008, to Lease Agreement, dated April 30, 2001, by and between Greenway Office Center, L.L.C and PPD Development, LP.

   10-Q    8/7/08    10.262   
10.263     

—Third Amendment dated July 7, 2008 to Lease Agreement, dated July 1, 2001, by and between Brandywine Grande C, L.P., and PPD Development, LP.

   10-Q    11/5/08    10.263   
10.264     

—Deferred Compensation Plan for Non-Employee Directors, as amended and restated on January 1, 2009.

   10-K    2/24/09    10.264   
10.265     

—Deferred Compensation Plan for Executives, as amended and restated on January 1, 2009.

   10-K    2/24/09    10.265   
10.266^   

—Employment Agreement, effective May 19, 2009, between PPD, Inc. and David L. Grange

   8-K    5/22/09    10.266   
10.267     

—Amended and Restated Employment Agreement, effective May 19, 2009, between PPD, Inc. and Fredric N. Eshelman.

   8-K    5/22/09    10.267   
10.268     

—Amended and Restated Corporate Aircraft Policy, effective May 19, 2009.

   8-K    5/22/09    10.268   
10.269     

—Sixth Amendment dated February 6, 2006, to Lease Agreement dated January 28, 1998, by and between Duke Realty Limited Partnership and PPD Development, LP.

   10-Q    11/3/09    10.269   
10.270     

—Seventh Amendment dated September 1, 2009, to Lease Agreement dated January 28, 1998, by and between Duke Realty Limited Partnership and PPD Development, LP.

   10-Q    11/3/09    10.270   
10.271     

—Ninth Amendment dated September 1, 2009, to Lease Agreement dated June 26, 1998, by and between Duke Realty Limited Partnership and PPD Development, LP.

   10-Q    11/3/09    10.271   
10.272^   

—Muldelta Development and License Agreement dated as of November 16, 2009 by and among Janssen Pharmaceutica, N.V. and PPD Therapeutics, Inc., as amended February 9, 2010.

   10-K    2/26/10    10.272   
10.273^   

—Muldelta Master Services Agreement dated as of November 16, 2009 by and among Janssen Pharmaceutica, N.V. between PPD Therapeutics, Inc.

   10-K    2/26/10    10.273   
10.274^   

—Topo Development and License Agreement, dated as of November 16, 2009 by and among Janssen Pharmaceutica, N.V. between PPD Therapeutics, Inc., as amended February 15, 2010.

   10-K    2/26/10    10.274   
10.275^   

—Topo Master Services Agreement dated as of November 16, 2009 by and among Janssen Pharmaceutica, N.V. between PPD Therapeutics, Inc.

   10-K    2/26/10    10.275   
10.276     

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

   10-Q    11/5/10    10.276   
10.277     

— Fifth Amendment dated December 29, 2010, to Lease Agreement, dated July 1, 2001, by and between Brandywine Grande C, L.P. and PPD Development, LLC.

              X   
21         

—Subsidiaries of the Registrant.

              X   
23.1         

—Consent of Deloitte & Touche LLP.

              X   

 

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Table of Contents

Exhibit
Number

  

Description

   Registrant’s
Form
   Dated    Exhibit
Number
   Filed
Herewith
31.1   

—Certification of the Chief Executive Officer pursuant to Rule 13a-14(a).

            X
31.2   

—Certification of the Chief Financial Officer pursuant to Rule 13a-14(a).

            X
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.

            X
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.

            X
101   

—Financials in XBRL format

            X

 

^ Confidential treatment requested for portions of this exhibit.

 

63


Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm

     F-2   

Consolidated Statements of Income for the Years Ended December 31, 2008, 2009 and 2010

     F-3   

Consolidated Balance Sheets as of December 31, 2009 and 2010

     F-4   

Consolidated Statements of Equity and Comprehensive Income for the Years Ended December  31, 2008, 2009 and 2010

     F-5   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2009 and 2010

     F-6   

Notes to Consolidated Financial Statements

     F-7   

 

F-1


Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Pharmaceutical Product Development, Inc. and Subsidiaries

Wilmington, North Carolina

We have audited the accompanying consolidated balance sheets of Pharmaceutical Product Development, Inc. and Subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Pharmaceutical Product Development, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Charlotte, North Carolina

February 25, 2011

 

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Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010

(in thousands, except per share data)

 

     2008     2009     2010  

Net revenue:

      

Service revenue

   $ 1,434,252      $ 1,315,767      $ 1,363,056   

Reimbursed revenue

     117,132        101,003        107,514   
                        

Total net revenue

     1,551,384        1,416,770        1,470,570   
                        

Direct costs

     807,170        731,755        763,292   

Research and development expenses

     7,621        13,339        16,733   

Selling, general and administrative expenses

     393,439        389,624        437,955   

Depreciation and amortization

     59,150        63,855        65,138   

Restructuring costs

     —          3,892        —     

Impairment of intangible asset

     1,607        —          —     
                        

Total operating expenses

     1,268,987        1,202,465        1,283,118   
                        

Operating income

     282,397        214,305        187,452   

Interest income, net:

      

Interest income

     16,660        5,187        3,961   

Interest expense

     (537     (676     (1,012
                        

Interest income, net

     16,123        4,511        2,949   

Impairment of investments, net of recoveries

     (17,741     (2,076     (4,999

Loss from equity method investment

     —          (1,278     (701

Other income (expense), net

     (1,362     (964     3,468   
                        

Income from continuing operations before provision for income taxes

     279,417        214,498        188,169   

Provision for income taxes

     91,469        62,892        60,840   
                        

Income from continuing operations

     187,948        151,606        127,329   

Discontinued operations, net of provision for income taxes

     (429     7,689        (3,662
                        

Net income

   $ 187,519      $ 159,295      $ 123,667   
                        

Net loss attributable to noncontrolling interests

     —          —          374   
                        

Net income attributable to shareholders

   $ 187,519      $ 159,295      $ 124,041   
                        

Income per common share from continuing operations:

      

Basic

   $ 1.58      $ 1.28      $ 1.07   
                        

Diluted

   $ 1.56      $ 1.28      $ 1.06   
                        

Income (loss) per common share from discontinued operations:

      

Basic

   $ —        $ 0.07      $ (0.03
                        

Diluted

   $ —        $ 0.06      $ (0.03
                        

Net income per common share:

      

Basic

   $ 1.58      $ 1.35      $ 1.05   
                        

Diluted

   $ 1.56      $ 1.34      $ 1.04   
                        

Dividends declared per common share

   $ 0.43      $ 0.58      $ 0.60   
                        

Weighted-average number of common shares outstanding:

      

Basic

     118,792        118,007        118,692   

Dilutive effect of stock options and restricted stock

     1,305        762        984   
                        

Diluted

     120,097        118,769        119,676   
                        

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

 

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Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2009 AND 2010

(in thousands, except share data)

 

     2009     2010  
Assets     

Current assets:

    

Cash and cash equivalents

   $ 408,903      $ 479,574   

Short-term investments

     144,645        79,976   

Accounts receivable and unbilled services, net

     429,670        435,876   

Income tax receivable

     16,887        12,327   

Investigator advances

     13,980        16,032   

Prepaid expenses

     24,458        24,535   

Deferred tax assets

     26,068        30,910   

Cash held in escrow

     12,415        10,304   

Other current assets

     55,115        44,172   
                

Total current assets

     1,132,141        1,133,706   

Property and equipment, net

     388,459        385,863   

Goodwill

     323,383        291,217   

Long-term investments

     88,558        78,747   

Other investments

     44,641        47,833   

Intangible assets

     24,315        31,444   

Deferred tax assets

     11,959        819   

Other assets

     16,747        22,417   
                

Total assets

   $ 2,030,203      $ 1,992,046   
                
Liabilities and Equity     

Current liabilities:

    

Accounts payable

   $ 34,005      $ 29,858   

Payables to investigators

     54,428        56,612   

Accrued income taxes

     4,043        1,918   

Other accrued expenses

     200,720        208,128   

Unearned income

     297,844        317,191   
                

Total current liabilities

     591,040        613,707   

Accrued income taxes

     34,268        32,924   

Accrued pension liability

     15,434        10,989   

Deferred rent

     14,334        16,411   

Other long-term liabilities

     29,000        27,348   
                

Total liabilities

     684,076        701,379   
                

Redeemable noncontrolling interests

     —          1,657   

Commitments and contingencies (Notes 3, 8 and 13)

    

Total Equity:

    

Shareholders’ equity:

    

Common stock, $0.05 par value, 190,000,000 shares authorized; 118,256,209 and 119,045,160 shares issued and outstanding, respectively

     5,913        5,952   

Paid-in capital

     576,069        609,281   

Retained earnings

     776,110        682,160   

Accumulated other comprehensive loss

     (11,965     (17,140
                

Total shareholders’ equity

     1,346,127        1,280,253   
                

Noncontrolling interests

     —          8,757   
                

Total equity

     1,346,127        1,289,010   
                

Total liabilities and equity

   $ 2,030,203      $ 1,992,046   
                

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

 

F-4


Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010

(in thousands, except per share data)

 

     Years Ended December 31,  
     2008     2009     2010  
     Shares     Amount     Shares      Amount     Shares      Amount  

Common Stock, par value

              

Beginning balance

     119,095      $ 5,955        117,631       $ 5,881        118,256       $ 5,913   

Issuance of common shares under various stock compensation plans

     971        48        625         32        789         39   

Repurchases of common stock

     (2,435     (122     —           —          —           —     
                                                  

Ending balance

     117,631        5,881        118,256         5,913        119,045         5,952   

Paid-in Capital

              

Beginning balance

       502,898           544,891           576,069   

Stock compensation expense

       24,596           19,219           19,258   

Issuance of common shares under various stock compensation plans

       25,366           12,263           15,017   

Income tax from stock compensation, exercise of stock options and disqualified dispositions of stock, net

       2,966           (304        (1,063

Repurchases of common stock

       (10,935        —             —     
                                

Ending balance

       544,891           576,069           609,281   

Retained Earnings

              

Beginning balance

       626,025           684,768           776,110   

Net income

       187,519           159,295           124,041   

Adjustment to apply measurement date component of new accounting standard, net of tax of $36

       (94        —             —     

Repurchases of common stock

       (78,245        —             —     

Dividends ($0.43, $0.58, $0.60 per share, respectively)

       (50,437        (67,953        (71,327

Net assets contributed to Furiex

       —             —             (146,664
                                

Ending balance

       684,768           776,110           682,160   

Accumulated Other Comprehensive Loss

              

Beginning balance

       15,218           (54,544        (11,965

Translation adjustments

       (34,849        20,313           (9,922

Pension liability adjustment

       (4,843        (1,700        2,073   

Change in fair value on hedging transactions

       (16,760        14,498           2,549   

Reclassification of hedging results included in direct costs

       5,484           3,426           (4,580

Unrealized gain (loss) on investments

       (18,794        6,042           4,705   
                                

Ending balance

       (54,544        (11,965        (17,140
                                

Total Shareholders’ Equity

     117,631        1,180,996        118,256         1,346,127        119,045         1,280,253   

Noncontrolling Interests

              

Beginning balance

       —             —             —     

Noncontrolling interests acquired

       —             —             9,122   

Net loss attributable to noncontrolling interests

       —             —             (365
                                      

Ending balance

       —             —             8,757   
                                                  

Total Equity

     117,631      $ 1,180,996        118,256       $ 1,346,127        119,045       $ 1,289,010   
                                                  

Comprehensive Income

              

Net income

       187,519           159,295           123,667   

Translation adjustments

       (34,849        20,313           (9,922

Pension liability adjustment

       (4,843        (1,700        2,073   

Change in fair value on hedging transactions

       (16,760        14,498           2,549   

Reclassification of hedging results included in direct costs

       5,484           3,426           (4,580

Unrealized gain (loss) on investments

       (18,794        6,042           4,705   
                                

Total Comprehensive Income

       117,757           201,874           118,492   

Net loss attributable to noncontrolling interests

       —             —             365   
                                

Comprehensive Income attributable to shareholders

       117,757           201,874           118,857   
                                

Redeemable Noncontrolling Interests

              

Beginning balance

       —             —             —     

Noncontrolling interests acquired

       —             —             1,666   

Net loss attributable to noncontrolling interests

       —             —             (9
                                

Ending balance

       —             —             1,657   
                                

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

 

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Table of Contents

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010

(in thousands)

 

     2008     2009     2010  

Cash flows from operating activities:

      

Net income

   $ 187,519      $ 159,295      $ 123,667   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     60,426        65,092        66,154   

Impairments of investments, net

     17,741        2,076        4,999   

Impairment of intangible

     1,607        10,361        —     

Stock compensation expense

     24,596        19,219        19,258   

Provision for doubtful accounts

     9,471        3,386        640   

Gain on sale of business, net of taxes

     —          (21,460     —     

Provision for deferred income taxes

     1,667        4,095        8,563   

Net gain on sale of investments

     —          —          (3,660

Other

     (685     (484     5,330   

Change in operating assets and liabilities, net of acquisitions:

      

Accounts receivable and unbilled services, net

     38,977        (12,246     (17,189

Prepaid expenses and investigator advances

     (5,293     (9,378     1,720   

Accrued income taxes

     (167     (28,175     2,803   

Other assets

     (435     (1,424     315   

Accounts payable, other accrued expenses and deferred rent

     (7,619     6,384        12,293   

Payables to investigators

     (13,129     12,204        2,632   

Unearned income

     65,801        44,053        20,220   
                        

Net cash provided by operating activities

     380,477        252,998        247,745   
                        

Cash flows from investing activities:

      

Purchases of property and equipment

     (66,884     (54,677     (62,524

Proceeds from sales of property and equipment

     190        463        212   

Net proceeds from sales of businesses

     —          40,267        3,464   

Purchase of intangibles

     (1,500     (500     —     

Purchases of investments

     (198,216     (148,734     (53,451

Maturities and sales of investments

     376,390        41,060        133,594   

Purchases of other investments

     (4,068     (36,325     (9,894

Proceeds from sale of other investments

     1,920        1,179        4,709   

Advances to related parties

     —          —          (19,200

Repayments from related party

     —          —          2,000   

Net cash paid for acquisitions

     (32,208     (119,918     (23,135

Changes in restricted cash

     —          (21,975     7,507   
                        

Net cash provided by (used in) investing activities

     75,624        (299,160     (16,718
                        

Cash flows from financing activities:

     <