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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

OR

For the transition period from                          to                         

Commission file number 0-27570

PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.

(Exact name of registrant as specified in its charter)

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

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

None

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

Common Stock, par value $0.10 per share

(Title of class)

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 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 an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  x  No  ¨

The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $1.25 billion as of June 30, 2002, based on the closing price of the Common Stock on that date on the Nasdaq National Market System. 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 affiliates. This determination of affiliate status might not be conclusive for other purposes.

As of February 3, 2003, there were 55,577,181 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The Company’s definitive Proxy Statement for its 2003 Annual Meeting of Stockholders (certain parts as indicated in Part III).

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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 1 under the heading “Factors that Might Affect our Business or Stock Price.”

Item 1. Business

Overview

We are a leading global provider of drug discovery and development services to pharmaceutical and biotechnology companies. Our corporate mission is to help clients maximize the return on their research and development investments. We offer therapeutic expertise, advanced technologies and extensive resources for both drug discovery and drug development.

We have been in the drug development business for more than 17 years. Our development services include preclinical programs and Phase 1 to Phase 4 clinical development. We have extensive clinical trial experience across a multitude of therapeutic areas that encompass various parts of the world, including regional, national and global studies. In addition, we also offer post-market support services for drugs that have received approval for market use, such as product launch services, patient compliance programs, and medical communications programs for consumer and healthcare providers on product use and adverse events.

With more than 5,300 professionals in 24 countries around the world, we have provided services to 41 of the top 50 pharmaceutical companies in the world as ranked by 2001 healthcare research and development spending, in addition to many leading biotechnology companies. We believe that we are one of the world’s largest providers of drug development services to pharmaceutical and biotechnology companies based on 2002 annual net revenues of contract research organizations.

Building on our outsourcing relationships with pharmaceutical and biotechnology clients, we established our discovery services business in 1997. This business focuses on early stage research to help our customers address the bottleneck at the beginning of the development process. This business primarily involves functional genomics, which is the study of gene functions to identify drug targets within the body, medicinal chemistry research and preclinical biology services, as well as preclinical evaluations of anticancer therapies.

In addition, we have developed an innovative risk-sharing research and development model to help pharmaceutical and biotechnology clients develop compounds. Through arrangements based on this model, we help our clients research and evaluate the development potential for early stage compounds, while their investment is significantly less than the amount at risk later.

We believe that our integrated drug discovery and development services offer our clients a way to identify and develop successful drugs more quickly and cost effectively. We also use our proprietary informatics technology to support our drug discovery and development services. In addition, because we are positioned globally, we are able to accommodate the multinational drug discovery and development needs of our customers. As a result of having these core areas of expertise in discovery and development, we can provide integrated services across the entire drug development spectrum, from target discovery to market and beyond.

Industry Overview

Discovering and developing new drugs is an extremely expensive and time-consuming process. The Tufts Center for the Study of Drug Development estimates that the cost to develop a new prescription drug increased from

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$231 million in 1987 to $802 million in 2001 and that it 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 the pharmaceutical and biotechnology industries. This industry has evolved from providing limited clinical trial services in the 1970s to a full-service industry today that encompasses broader relationships with customers, covering the entire drug development process, including preclinical evaluations, study design, clinical trial management, data collection, biostatistical analysis and product registration support.

Over the past 20 years, technological advances have dramatically changed the drug discovery process. New and improved technologies have evolved such as combinatorial chemistry, ultra high-throughput screening, new in vitro and in vivo preclinical profiling techniques, and the revolution in genetic-based drug research commonly referred to as genomics. The objective of these innovations is to find more drug targets and to screen against targets much more quickly with literally millions of chemical compounds. This process should produce many more molecules having the ability to affect biological activity. These molecules then need to be tested quickly and economically.

The Drug Discovery and Development Process

Drug discovery and development is the process of creating drugs for the treatment of human disease. The drug discovery process aims to generate safe and effective drug candidates, while the drug development process involves the testing of these drug candidates for safety and efficacy in animals and humans.

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. Based on this information, scientists are now using a new set of technologies called genomics to pinpoint genes responsible for cellular disease functions. Once genes are identified, they are tested in cellular assays or animals to identify which genes seem to have a causal link between cellular function and occurrence of disease. 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, in which chemicals are screened for their ability to alter the functional activity of the target. Thousands of chemicals can be quickly screened when these assays are incorporated into high-throughput screening processes. Assays can produce chemicals that interact with a drug target known as “hits.” Hits that have good potency and selectivity are called “leads” and are then tested for their potential as drug candidates.

Lead Generation. Scientists now 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. Once a hit is identified in a functional assay, the compound is profiled for drug characteristics such as solubility, metabolism, stability and feasibility for commercial production.

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 the ease with which compounds can be produced in these larger quantities, typically by minimizing the number of production

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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. The following discussion describes the role of the Food and Drug Administration, or FDA, in the drug development process in the United States. 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, or IND, application containing details for at least one study protocol and outlines of other planned studies. The company must provide available manufacturing data, preclinical data, information about any use of the drug in humans for other purposes and a detailed plan for the proposed clinical trials. 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 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 patients 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. These trials are usually grouped into the following three phases, with multiple trials generally conducted within each phase:

After the successful completion of all three clinical phases, a company submits to the FDA a New Drug Application, or NDA, or a Product License Application, or PLA, requesting that the drug be approved for marketing. The NDA or PLA is a comprehensive, multi-volume filing that includes, among other things, the results of all preclinical and clinical studies. The FDA’s review can last from a few months to several years, depending on the drug and the disease state that is being treated. Drugs that successfully complete this review may be marketed in the United States. As a condition to its approval of a drug, the FDA might require additional 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, known as Phase 3b and Phase 4 trials, which allow new drugs that show early promise to reach patients without the delay typically associated with the conventional review process.

Trends Affecting the Drug Discovery and Development Industry

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

Rapid Technological Change and Increased Data. Scientific and technological advancements are rapidly changing the drug discovery and development processes. The technology to understand gene function, known as

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functional genomics, is dramatically increasing the number of identified potential drug targets within the human body. All of the human therapeutic drugs on the market today are directed at approximately 500 targets. The genomics revolution is projected to expand the number of identified potential targets to between 5,000 and 10,000. This proliferation of targets increases the need for companies to use state-of-the-art technologies to validate targets effectively. Rapid methods are needed to analyze large numbers of compounds to identify and optimize promising lead drug candidates. This technology and the human expertise necessary to manage and keep up with it are costly. Companies can reduce their fixed costs by outsourcing this technology.

Increase in Potential New Drug Candidates. The increase in potential new drug candidates resulting from the genomics revolution has caused a bottleneck in the drug development industry. While the number of drug candidates is rapidly increasing, the time to develop a new drug candidate has increased in the last 30 years. Pharmaceutical and biotechnology companies do not have the internal resources to pursue development of all of these new drug candidates on their own. Consequently, these companies are looking to the drug development services industry for cost-effective and rapid means of developing new drugs.

Biotechnology Industry Growth. The United States biotechnology industry has grown rapidly over the last 10 years. This industry is generating significant numbers of new drug candidates that will require development and regulatory approval. Many of these new drug candidates are now moving into clinical development, but 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 fixed cost involved, these companies often do not have the inclination to develop their own staff in this area.

Need for Large Scale Global Support. More pharmaceutical and biotechnology companies currently are filing drug registration packages in several major jurisdictions simultaneously, rather than following the past practice of filing sequentially. The 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.

Cost Pressures of Introducing New Drugs. Market forces and governmental initiatives place significant pressure on pharmaceutical and biotechnology companies to reduce drug prices. Pressures on profit margins have arisen primarily from increases in the cost of the drug discovery and development process. In addition, increased competition as a result of patent expiration, market acceptance of generic drugs, and governmental and private managed care organization efforts to reduce healthcare costs have added to the pressures of introducing a new drug. The industry is responding by consolidating, downsizing operations, decentralizing the internal discovery and development process, and minimizing fixed costs. In addition, increased pressures to differentiate products and justify drug pricing are resulting in growth in healthcare economics services with respect to drugs under development and those already on the market. Consequently, pharmaceutical and biotechnology companies are attempting to increase the speed of new drug discovery and development. By identifying possible lead compounds and eliminating others from the discovery process as early as possible, companies can focus their research and development efforts more efficiently. Turning drug discovery and development processes over to third parties also minimizes these companies’ fixed costs.

The PPD Solution

We address the needs of the pharmaceutical and biotechnology industries for drug discovery and development by providing integrated services to help our clients maximize the return on their research and development investments. We believe that our application of innovative technologies, therapeutic expertise and commitment to quality throughout our integrated drug discovery and development services offers our clients a way to identify and develop successful drugs more quickly and cost effectively. We have developed significant drug development expertise from over 17 years of operation. During the past five years, we have expanded our services to include drug discovery services to help our clients identify potential new drug candidates, reduce drug discovery time and minimize unproductive compound development. We also use our proprietary informatics technology to support our drug discovery and development services. Finally, because we are positioned globally, we are able to accommodate the multinational drug discovery and development needs of our customers.

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Our Strategy

Our corporate mission is to help clients maximize the return on their research and development investments. The key parts of our strategy to accomplish this mission include the following:

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Our Services

We have been providing our core drug development services for more than 17 years. Over the past few years, we have expanded our service portfolio to include discovery and post-market support services. We provide services designed to increase efficiency, reduce timelines and save costs through our global infrastructure, integrated research and development technologies and experience, and customer-focused communications. We operate in two segments: Discovery Sciences and Development. See Consolidated Statements of Operations for segment information regarding revenues and see Note 16 of Notes to Consolidated Financial Statements for segment information regarding total assets and a measure of profit or loss.

Our Discovery Sciences Group

Our Discovery Sciences Group focuses on the discovery research segment of the pharmaceutical research and development outsourcing market. We have acquired or developed proprietary genetic and chemical technologies to improve the productivity of biopharmaceutical research and development. These technologies cover a number of discovery techniques, including:

Functional Genomics. Genomics is revolutionizing the process of drug discovery through the sequencing of the human genome and the identification of genes associated with disease. It is estimated that there are approximately 35,000-40,000 genes in the human genome. Genes are comprised of chemical structures called nucleotides. It is the order of these nucleotides that make up a gene sequence. Through a complex sequence of events, genes specify, or encode, proteins that have specific functions in cells. Neither a gene sequence nor gene disease association data alone provide sufficient information to identify cellular proteins that make effective drug targets. Our proprietary functional genomics technology provides the means to link gene sequences with cellular mechanisms known or believed to be involved in disease to develop effective screens for drug discovery.

The basis for and the advantage of our proprietary GSX system are that it identifies essential genes in a disease pathway based on function. A change in biological function observed by our scientists enables them to identify a gene that has a causal link to a particular disease. In the GSX system, we start with a set of genes that we want to test as potential drug targets. These genes are then broken up to generate a collection of small, random strings of nucleotides, referred to as gene fragments. These gene fragments are then put into test cells where the fragments will be converted into protein, or “expressed.” Our scientists observe the test cells to detect any change in a particular function. We expect that some of the gene fragments will alter the activity of a component of the test cells causing a desired change in a cellular property, or “phenotype.” Thus, it is essential to have cells that display a desired biological property that is known or believed to be part of a disease pathway. For example, a malignant cell is useful for identifying a gene fragment that alters the growth pattern of the cell and therefore potentially has anti-tumor activity.

Our scientists look for cells in which a particular function, such as malignant growth, has been inhibited by the gene fragment introduced into the cell. The functional inhibition results from expression of gene fragments in the cells that can effectively inhibit the function of the whole, or full-length, gene corresponding to the fragment. In general terms, the gene fragments are said to be acting on targets that are essential to the cellular function that is inhibited. Each inhibitory gene fragment is called a genetic suppressor element, or GSE. After our scientists identify

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cells with altered phenotypes, they isolate the cells that display the desired phenotype and recover the inserted GSE from these cells. Our scientists then determine the nucleotide sequence of each GSE. Upon searching large databases containing gene sequences of the human genome using a GSE sequence, we can frequently find the gene from which that GSE came.

Because of their inhibitory nature, GSEs can themselves be used as therapeutic compounds, or they can be used as drug discovery tools. Typically, GSEs are used to identify and validate drug discovery targets based on the premise that if a GSE causes a desired effect on a target, then a drug acting on the same target as the GSE should produce the same outcome. Once we identify a target using our GSX system, a scientist can easily test the ability of a chemical compound to inhibit the activity of the target using any one of a variety of conventional biological assays, preferably in a high-throughput screening format to expedite the process.

Our GSX system can be applied to finding treatment for such diseases as cancer, heart disease, viral infections and others. In principle, the technology permits identification of all necessary components of any disease pathway as long as the component is involved in an observable phenotype. We offer our GSX system as part of our services to collaborators throughout the drug discovery process.

Target Validation. Our scientists utilize state-of-the-art systems to determine the relevance of newly identified target genes to a particular disease state. These systems include blocking target expression of a target gene using GSEs or inhibitory RNA molecules to interfere with the activity of that target gene and determine the effect on disease progression. Our biologists perform tumor model experiments that link target activity with tumor development. As an adjunct to our core validation techniques, we offer systems to determine gene expression patterns to better understand the biological activity of a target in a disease state.

Chemistry. Our chemistry group assists our customers from lead generation through lead optimization. These services include providing chemicals with selected structures for screening, computational chemistry and synthesis expertise to help determine which hits and leads have drug-like characteristics that make them worthy of additional study or optimization. We provide a broad range of chemistry services, including:

Custom-designed libraries. We design and produce custom libraries of compounds for our clients. These libraries are generally focused toward specific target families or our customer specifications. We also produce custom-designed libraries for internal research and development programs.

Lead Generation. The availability of high quality compound libraries with structures relevant for screening specifically against important targets and that are designed for rapid lead optimization is a rate-limiting step in the drug discovery process. We have developed synthesis protocols to produce small molecule libraries so that any leads generated require less optimization and have a greater likelihood of success of becoming drug candidates. Our chemists can create chemical structures according to customer specifications or directed toward specific targets. We can also provide library synthesis for a customer’s in-house or previously purchased compound libraries. The chemical synthesis strategy we employ typically yields between one to 10,000 different chemicals. We use all available components to input a range of diversity for production of customer-unique libraries. We invest significant effort in the process and synthesis of each library to ensure that the compounds generated are of known purity, structure, diversity and amount. We analyze the library during each stage of its development to ensure the identity of each compound and to maintain quality.

We have developed proprietary software that uses various parameters to define diversity in a library. Our SAR System^™ software analyzes how changes in chemical structure correlate with physical and chemical parameters of compounds in a virtual library. The SAR System software can be used prior to library synthesis to construct a virtual library based on customer specifications. We can then minimize the components of the virtual library to identify compounds that potentially interact with a particular target to be screened as leads.

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Lead Optimization. Our medicinal chemists can optimize structures to improve the profile of a compound or lead series generated from multiple starting points, including leads provided by our customers, leads generated internally from our custom libraries, and leads from internally generated libraries designed and synthesized to customer specifications. Regardless of the lead’s source, we emphasize simultaneous improvement of multiple parameters of lead compounds. Our experts are able to evaluate and re-engineer compounds to improve compound solubility, absorption, half-life, inherent toxicity, delivery or pro-drug generation.

Our chemistry group also offers chemistry services, including:

Preclinical Biology. Our preclinical biology group integrates pharmacology, metabolism, pharmacokinetic and toxicology expertise to provide preclinical program design and project management services. These services assist in the identification and prioritization of portfolio compounds that have the best chance of success in clinical development. We provide a broad range of preclinical services and products including:

Lead Profiling and Prioritization Resources. Our lead profiling and prioritization services facilitate the early screening process and enable our customers to choose compounds that have the best chance of success in the preclinical and clinical arenas. We can also perform computational analysis to predict absorption, toxicity or metabolite characteristics of a lead compound. We can employ a variety of assays to profile lead compounds including assays that use Pharmazyme^™ isozymes, our patented recombinant human cytochrome P450 enzymes. Cytochrome P450s are enzymes primarily responsible for metabolizing many drug substances. We can identify metabolizing enzymes and identify metabolites. Using these in vivo assays, we can also determine pre-formulation, solubility and stability characteristics. We also employ a process known as cassette dosing, which allows us to simultaneously evaluate a number of compounds in screening pharmacokinetic studies.

Preclinical Program Design and Proprietary Preclinical Project Management Software. Once a potential drug candidate is identified, we offer services and products that enable our customers to decide whether to advance the drug candidate into a preclinical program both faster and with a greater probability of success. We offer our customers access to our proprietary Web-based interactive tool called First Pass^™, a software program that helps the user prepare an efficient preclinical development plan based on a variety of parameters. The program estimates costs, amount of material required and study timelines. The program also helps identify studies critical for development. Our experts can then provide full preclinical development services and can integrate other development services internally.

Specialized Oncology Preclinical Cancer Research Models. We offer preclinical consulting as well as a full range of preclinical efficacy, pharmacokinetic, pharmacodynamic and mechanism models for anticancer

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therapeutic candidates. Our experienced oncology staff design and perform the studies needed to identify, profile and optimize lead compounds.

Toxicology Consulting and Laboratory Support. Supported by our board-certified toxicologists, we develop and implement preclinical toxicology programs. To support the clinical development program, we write the toxicology study protocols, identify qualified good laboratory practice, or GLP, testing facilities, manage the placement and conduct of studies and prepare and review pharmacology, toxicology, absorption and metabolism data for regulatory submissions. Our biologists offer a range of growth inhibition assays and cytotoxicity assays in mouse and human cell lines to test toxicity characteristics of candidate compounds.

Technical Writing and Regulatory Submissions. Our technical writers can prepare pharmacology and toxicology summaries for regulatory submissions and work with regulatory authorities to develop preclinical plans. We offer a full range of regulatory support services, including document submission, preparation and review of all preclinical regulatory submissions required by regulatory agencies, and facilitation of meetings with regulatory agencies to ensure successful outcomes.

Laboratory Support. Our preclinical biology group supports extensive laboratory services. The FDA’s 1997 Drug Metabolism Drug Interaction Guidance suggests that in vitro metabolism studies be used to screen for potential drug-drug interactions in the clinic. Data from in vitro studies demonstrating the lack of interaction can be used to rationalize and streamline the clinical drug-drug interaction program. Our scientists perform assays to identify the metabolizing human cytochrome P450 enzymes and resulting metabolites of a new chemical entity, predict its metabolic profile and assess its drug-drug interaction potential. Our metabolism group performs a variety of drug metabolism services including inhibition assays, induction studies, metabolic stability studies to assess potential for first possible effect, metabolite identification, metabolite profiling, drug-drug interaction studies, serum stability assays, protein binding studies and absorption assays.

Our pharmacokinetics experts help customers evaluate the toxicity of their drug candidates using both GLP and non-GLP pharmacokinetic and bioanalytical analyses. Specialized toxicologists develop screening protocols based on the nature of drug candidates and therapeutic targets. Our expertise includes preformulation and compound preparation, single- and cassette-compound dosing, drug administration via different routes, sample collection based on defined protocols, method development to demonstrate a viable extraction procedure, solution preparation with reference standards, quality control, sample preparation with a variety of techniques, and data analysis. Our pharmacokinetisists are experienced in generating large-scale GLP-compliant analyses and reports that can be integrated into the final toxicology study report.

Drug Development Collaborations. Some biotechnology and pharmaceutical companies have not progressed to the development of previously discovered therapeutic compounds for several reasons, including the fact that these compounds may have efficacy outside of the core therapeutic expertise of the company, the potential market for a particular compound may fall below the company’s minimum threshold, or the company may not have the financial resources to further develop the compound. We believe there are attractive opportunities to selectively in-license these compounds, jointly develop them with a third party and license them out again in collaborative arrangements that combine our global development resources with these compounds. We offer contract clinical research services as part of joint development agreements with owners of chemical compounds in need of development.

For example, in January 2001 we granted ALZA Corporation, which was subsequently acquired by Johnson & Johnson, an exclusive license to our compound dapoxetine for genitourinary indications, including premature ejaculation. We received these rights in 1998 as part of a development collaboration with Eli Lilly and Company. Under the terms of the agreement, ALZA received worldwide rights to develop and commercialize dapoxetine and is responsible for clinical, regulatory, manufacturing, sales and marketing costs resulting from the license. In exchange, we received an up-front payment and will receive royalties on net sales and milestone payments based on product approval and meeting certain sales levels.

In addition, in 2002, we acquired worldwide rights from Bayer AG to undertake additional Phase 1 and 2 clinical studies on implitapide in the areas of arteriosclerosis, elevated triglycerides, pancreatitis and hyperlipidemia.

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In connection with our studies, we will have access to Bayer AG’s existing information from preclinical studies and previously conducted Phase 1 and 2 clinical trials, as well as regulatory filings to conduct clinical trials in the United States, Europe and South Africa.

We expect to continue to use our development expertise in risk-sharing arrangements. We generally structure these risk-sharing arrangements to provide us with up-front fees, milestone payments and royalties as a compound is developed.

Our Development Group

We have designed our various global services to be flexible and integrated in order to assist our clients in optimizing their research and development spending through the clinical stages of the drug development process. We provide a broad range of development services, either individually or as an integrated package, to meet clients’ needs. We provide systems integration services and software development services, and create data links between discovery and development.

Phase 1 Clinical Testing. We are one of the industry’s largest Phase 1 trial providers, with clinical testing services conducted in a 220-bed unit in Austin, Texas, and a 50-bed unit in Leicester, England. Our professional nursing and physician staff administers general Phase 1 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. Special population studies might involve the elderly, women or patients with specific diagnoses, such as renal failure or asymptomatic HIV. Our Austin, Texas site also has a dental research clinic to evaluate the safety and effectiveness of new analgesic compounds in molar extraction models.

Our in-house clinical laboratory supports the Phase 1 operations in Austin. This laboratory performs clinical chemistry assays on volunteer specimens to ensure that each subject qualifies for the study and is not adversely affected by a drug. Having our laboratory in the same facility as the volunteers speeds our response time to unexpected outcomes. This laboratory also provides services to function as a central laboratory for small Phases 2 through 4 studies. We manage our Phase 1 services to maximize scheduling flexibility and efficiency. These services also can be integrated with our other services, such as bioanalytical, data management, pharmacokinetic and biostatistical services.

Laboratory Services. We provide bioanalytical services through good laboratory practice, or GLP, compliant laboratories in Richmond, Virginia and Middleton, Wisconsin. Our bioanalytical laboratories analyze biological fluid samples from animal and human clinical studies. The latter includes those conducted by our Phase 1 units as well as those conducted on behalf of our clients from Phase 1 through Phase 4 for drug and metabolite content and concentration. We currently have over 1,500 validated assays available for our clients’ use in conducting laboratory analyses, qualifying us for a wide range of assignments. Our laboratories also process fluid samples for preclinical studies.

We provide product analysis laboratory services through our good manufacturing practice, or cGMP, compliant laboratory in Middleton, Wisconsin. Our product analysis services include dissolution and stability studies, which are necessary to characterize dosage form release patterns and stability under various environmental conditions in the intended package for marketing. These studies must be carried out from preclinical testing through Phase 4 and maintained over the commercial life of products. 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 bioanalytical methods include gas chromatography/mass spectrometry (GC/MS), liquid chromatography/mass spectrometry (LC/MS), high performance liquid chromatography (HPLC), gas chromatography (GC), radioimmunoassay (RIA) and enzyme linked immunosorbent assay (ELISA). Support services include facilities for handling HIV-positive samples, data management for pharmacokinetic studies from multi-center trials and sample/data archiving.

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We provide global specialty central laboratory services for large clinical trials through our laboratories in Highland Heights, Kentucky and Brussels, Belgium. Our specialty central laboratories provide highly standardized efficacy and safety testing services for pharmaceutical companies engaged in clinical drug development as well as U.S. government (National Institute of Health) funded clinical trials. We are one of the largest specialty central laboratory providers for Phase 1 through 4 global studies involving agents used in cholesterol, endocrine, metabolic and cardiovascular clinical research.

We are one of a few full service companies able to offer our clients the advantages of bioanalytical, product analysis and specialty central laboratory services, as well as Phase 1 clinical testing.

Phases 2 through 4 Clinical Trial Management. The core of our development business is a comprehensive package of services for the conduct of Phases 2 through 4 clinical trials, which in concert with our other services allow us to offer our clients an integrated package of clinical management services. We have significant clinical trials experience in the areas of:

We serve our clients’ needs by conducting clinical trials through a project team. A project manager supervises all aspects of the conduct of the clinical trial, while our clinical research associates are in the field monitoring the trial at the various investigational sites where it is being conducted. Within this project-oriented structure, we can manage every aspect of the clinical trial in Phases 2 through 4 of the drug development process. The services that we offer to initiate clinical trials include protocol development, case report form design, feasibility studies, investigator selection, recruitment and training, site initiation and monitoring, accelerated patient enrollment, development of training materials for investigators and training of clients’ staff.

We monitor our clinical trials in compliance with government regulations and guidelines. We have adopted global standard operating procedures intended to satisfy regulatory requirements in the United States and in many foreign countries and serve as a tool for controlling and enhancing the quality of our clinical trials. All of our standard operating procedures are in compliance with good clinical practice, or GCP, requirements and the International Conference on Harmonization, or ICH, standards. The FDA has adopted these standards in their guidance documents and more recently the members of the European community and Japan have codified these standards into their Clinical Research Regulations. We compile, analyze, interpret and submit data generated during clinical trials in report form to the FDA or other relevant regulatory agencies for purposes of obtaining regulatory

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approval. We provide consulting on conducting clinical trials for simultaneous regulatory submissions to multiple countries.

We provide our clients with one or more of the following Phases 2 through 4 clinical trial management services using parallel processing to accelerate the development process:

Study Design. We serve our clients in the critical area of study design by applying our experience in the preparation of study protocols and case report forms.

Investigator Recruitment. During clinical trials, physicians, who are also referred to as investigators, at hospitals, clinics or other locations, supervise administration of the drug to patients. We recruit investigators who contract either with us or with our clients to participate in clinical trials. We are continually looking for new investigator sites, particularly those that complement our primary therapeutic areas.

Study Monitoring. We provide study-monitoring services, which include investigative site initiation, patient enrollment assistance and data collection through subsequent site visits. We have monitored many clinical trials, including a number of very large studies. For example, we are engaged in a project with the National Institute of Health, begun in 1990, which has approximately 50 protocols open at any given time. Through December 31, 2002, this project had involved approximately 1,000 investigational sites and approximately 110,000 enrolled patients, had generated 400 protocols and more than 4,200 pharmacy, regulatory and operational audits at the sites.

Clinical Data Management and Biostatistical Analysis. We provide clients with assistance in areas such as study design, sample size determination, case report form design and production, database design and construction, fax-based monitoring, and electronic data capture. We also provide statistical analysis and summaries, including: interim and final analyses, data safety and monitoring board summaries and presentations, new drug application preparation and electronic production and presentations and defense to regulatory authorities.

Medical Writing and Regulatory Services. We provide planning services for product development, including preclinical review, chemistry, manufacturing and controls, or CMC; consulting, and clinical protocol development. These activities are complemented by report writing, program management and regulatory services designed to reduce overall development time.

Post-Development Support. We provide custom-designed pharmaceutical and medical information programs in support of marketed pharmaceutical products. Other services include clinical consultations with pharmacists, nurses, veterinarians and other customer assistance specialists.

Healthcare Economics, Outcomes and Marketing Research. We offer a number of services in healthcare economics, outcomes and market research to pharmaceutical and biotechnology companies, as well as managed care payors and providers. These services include prospective health economic and outcomes studies incorporated into Phases 2 through 4 clinical trials; retrospective studies including database evaluations and medical chart reviews to analyze use patterns; mathematical modeling of health economics and outcomes information to real world settings; epidemiological study design and implementation; and development and implementation of publication strategies for health outcomes and marketing research results.

eClinical initiative. Our eClinical initiatives offer efficiencies, enhanced quality and improved communications with our clients. Launched in 2001, PPD DirectConnect^™ Web portals have grown to support over 750 users across 26 pharmaceutical and biotechnology companies. Also in 2001, we re-engineered our data management processes to Oracle Clinical data management system. We are further expanding our capabilities by introducing a Web-based document imaging system in 2003. We are also moving to a Web-based safety system offering expanded functionality and integration with our clinical data management information.

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Informatics. Our informatics division delivers specialized software products and technical consulting services to support many aspects of the pharmaceutical research and development process, including drug discovery, clinical trials, regulatory review and pharmacovigilance. Our informatics clients include international and domestic pharmaceutical and biotechnology companies and government agencies, including the FDA. Our current informatics software products include:

A primary focus of our informatics division is to 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.

The informatics group was expanded to extend its services in the training, validation and software development areas with the acquisition in June 2002 of Complete Software Solutions, Inc., or CSS. CSS, now a division of our informatics group, is a leading supplier of services to the companies that use the Oracle Pharmaceutical Applications Suite. CSS also provides companies with validation and regulatory consulting expertise across a broad range of data management and safety systems. CSS has its main office in San Francisco, California and serves clients in North America, Europe and Japan.

Clients and Marketing

We provide a broad range of research and development and consulting services in the Development and Discovery Sciences Groups to help pharmaceutical and biotechnology companies from target discovery through development to post-market approval.

Our Development Group provides Phase 1 to Phase 4 clinical development and post-market support services. We believe that the key differentiators that help us win development business include our global infrastructure, quality performance and execution based on ongoing training and quality assurance and control practices, dedicated project teams, and cross-functional therapeutic units with dedicated expertise. Our key assets in this regard include Phase 1 trial clinics in the United States and Europe, a broad range of analytical lab services from in vivo analysis through Phase 4 with our GLP bioanalytical, cGMP product analysis laboratories and our specialty central laboratory, as well as integrated technologies and expertise to provide simultaneous, multinational Phase 2 through Phase 4 submissions. In addition, we offer medical and drug information services and market development services for product launch through post-market approval support, integrating services from our medical communications division and our drug development subsidiary. We also offer consulting and technology for clinical management, validation, training, coding and drug safety from our informatics expertise. We market our development services in the Americas, Europe, Africa, the Middle East and the Pacific Rim and expanded our capabilities in Asia with the June 2002 acquisition of ProPharma Pte Ltd, a contract research organization based in Singapore with offices in Hong Kong, Taiwan, Australia and Thailand.

For the year ended December 31, 2002, approximately 79.5% of our Development Group’s net revenue was attributable to clinical services and 20.5% to laboratory services. In regards to geographic alignment, approximately 20.9% of our Development Group’s net revenues in 2002 were derived from outside the United States, primarily in the United Kingdom.

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Our Discovery Sciences Group offers services and technologies to identify and validate novel drug targets, create compounds, and optimize and profile drug candidates for clinical evaluation. This group provides services to clients in the pharmaceutical and biotechnology industries as well as in general chemical, agrochemical, and other industries. In addition, we conduct research on compounds for which we hold licenses. Our Discovery Sciences Group revenues have all been generated in the United States to date.

For the year ended December 31, 2002, total net revenue for all of our services was derived from various industries approximately as follows:

For the 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 medical devices, diagnostics and generic formulations. In addition, we refer to the Standard Industry Classification, or SIC, codes for publicly traded companies to determine their classification.

We believe that concentration of business among certain large customers is not uncommon in our industry. We have experienced this kind of concentration in the past and might experience it in the future. In 2002, no single client accounted for more than 10% of our net revenue. Approximately 36.6% of our total 2002 net revenue was derived from clients headquartered outside the United States, in particular in Europe and Japan. Approximately 20% of our 2002 net revenue was generated from services provided by our employees located in countries outside the United States. See Note 17 of Notes to Consolidated Financial Statements included elsewhere in this report for the breakdown of this revenue.

With a primary focus on large pharmaceutical companies, we promote our functional genomics discovery technology through a dedicated sales team, localized scientist-to-scientist communications and centralized marketing efforts.

For all of our development, medical communications and informatics services and products, we use centralized corporate marketing to support the efforts of dedicated business development staff calling on pharmaceutical and biotechnology companies. Our sales teams focus on client segments and service areas. In addition, while the service area representatives call on particular buying groups within a given pharmaceutical client, sales account managers are responsible for coordinating all outsourcing across our service areas from that client. To further facilitate cross-functional sales, all business development staff for development services and products across the company worldwide report up to the same executive.

The top 20 publicly traded pharmaceutical companies accounted for 83% of research and development spending in 2001, as ranked by Med Ad News, so we concentrate on these companies. The top 50 publicly traded biotechnology companies accounted for 91% of the biotechnology research and development expenditures in 2001, according to Med Ad News. 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 company’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. For example, for our drug development services, recommendations we make to the potential client with respect to study design and implementation are an integral part of our bid proposal process and an important aspect of the integrated services we

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offer. We believe 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 clinical trial.

Our core global marketing and corporate communications activities include online advertising and directory listings on predominant industry Web sources; interactive Web education and information programs, including Web conferences and Webcasts; direct e-mail campaigns; client presentations and detailing materials; global speakers’ bureau; media relations; corporate materials; and marketing at professional trade shows. In addition, we encour