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`SECURITIES AND EXCHANGE COMMISSION
`Washington, D.C. 20549
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`FORM 10-K
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`(Mark One)
`⌧⌧⌧⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
`1934
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`For the fiscal year ended December(cid:160)31, 2005
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`OR
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`(cid:160)
`¨¨¨¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
`OF 1934
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`For the transition period from (cid:160)(cid:160)(cid:160)(cid:160)(cid:160)(cid:160)(cid:160)(cid:160)(cid:160)(cid:160)(cid:160)(cid:160)
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`Commission file number 0-27570
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`PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
`(Exact name of registrant as specified in its charter)
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`North Carolina
`(State or other jurisdiction of
`incorporation or organization)
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`3151 South Seventeenth Street
`Wilmington, North Carolina
`(Address of principal executive offices)
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`56-1640186
`(IRS Employer
`Identification No.)
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`28412
`(Zip Code)
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`Registrant’s telephone number, including area code: (910)(cid:160)251 -0081
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`Securities registered pursuant to Section(cid:160)12(b) of the Act: None
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`Securities registered pursuant to Section(cid:160)12(g) of the Act:
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`Common Stock, par value $0.05 per share
`(Title of class)
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`Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.(cid:160)(cid:160)(cid:160)(cid:160)Yes(cid:160)(cid:160) ⌧(cid:160)(cid:160)(cid:160)(cid:160)No(cid:160)(cid:160) ¨
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`Indicate by check mark if the registrant is not required to file reports pursuant to Section(cid:160)13 or Section(cid:160)15(d) of the Act.(cid:160)(cid:160)(cid:160)(cid:160)Yes(cid:160)(cid:160)
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`¨(cid:160)(cid:160)(cid:160)(cid:160)No(cid:160)(cid:160) ⌧
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`Indicate by check mark whether the registrant (1)(cid:160)has filed all reports required to be filed by Section(cid:160)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)(cid:160)has been subject to
`such filing requirements for the past 90 days.(cid:160)(cid:160)(cid:160)(cid:160)Yes(cid:160)(cid:160) ⌧(cid:160)(cid:160)(cid:160)(cid:160)No(cid:160)(cid:160) ¨
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`Indicate by check mark if disclosure of delinquent filers pursuant to Item(cid:160)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.(cid:160)(cid:160) ¨
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`Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
`“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
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`Large accelerated filer(cid:160)(cid:160) ⌧(cid:160)(cid:160)(cid:160)(cid:160)Accelerated filer
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`(cid:160)(cid:160) ¨(cid:160)(cid:160)(cid:160)(cid:160)Non -accelerated filer(cid:160)(cid:160) ¨
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`Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).(cid:160)(cid:160)(cid:160)(cid:160)Yes(cid:160)(cid:160) ¨(cid:160)(cid:160)(cid:160)(cid:160)No(cid:160)(cid:160) ⌧
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`The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $2.33 billion as of June(cid:160)30, 2005, 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 an affiliate. This determination of affiliate status might not be conclusive for other purposes.
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`As of February(cid:160)28, 2006, there were 116,480,752 shares of the registrant’s common stock outstanding.
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`DOCUMENTS INCORPORATED BY REFERENCE
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`The Company’s definitive Proxy Statement for its 2006 Annual Meeting of Stockholders (certain parts, as indicated in Part III).
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`TABLE OF CONTENTS
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`Part I
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`Item(cid:160)1. Business
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`Item(cid:160)1A. Risk Factors
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`Item(cid:160)1B. Unresolved Staff Comments
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`Item(cid:160)2. Properties
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`Item(cid:160)3. Legal Proceedings
`(cid:160)(cid:160)
`Item(cid:160)4. Submission of Matters to a Vote of Security Holders
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`Executive Officers
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`Part II.
`Item(cid:160)5. Market for the Registrant ’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
`Item(cid:160)6. Selected Financial Data
`Item(cid:160)7. Management ’s Discussion and Analysis of Financial Condition and Results of Operation
`Item(cid:160)7A. Quantitative and Qualitative Disclosures about Market Risk
`Item(cid:160)8. Financial Statements and Supplementary Data
`Item(cid:160)9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
`Item(cid:160)9A. Controls and Procedures
`Item(cid:160)9B. Other Information
`Part III.
`Item(cid:160)10. Directors and Executive Officers of the Registrant
`Item(cid:160)11. Executive Compensation
`Item(cid:160)12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
`Item(cid:160)13. Certain Relationships and Related Transactions
`Item(cid:160)14. Principal Accountant Fees and Services
`Part IV.
`Item(cid:160)15. Exhibits and Financial Statement Schedules
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`PART I
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`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(cid:160)1A, “Risk
`Factors.”
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`Item(cid:160)1. Business
`Overview
`We are a leading global contract research organization providing drug discovery and development services, post-approval expertise and
`compound partnering programs. Our clients and partners include pharmaceutical, biotechnology, medical device and government organizations.
`Our corporate mission is to help clients and partners maximize returns on their research and development investments and accelerate the delivery
`of safe and effective therapeutics to patients.
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`We have been in the drug development business for more than 20 years. Our development services include preclinical programs and Phase I
`to Phase IV clinical development services. We have extensive clinical trial experience across a multitude of therapeutic areas and various parts of
`the world, including regional, national and global studies. In addition, for marketed drugs, biologics and devices, we offer support services such as
`product launch services, medical information, patient compliance programs, patient and disease registry programs, product safety and
`pharmacovigilance, Phase IV monitored studies and prescription-to-over-the-counter, or Rx-to-OTC, programs.
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`With offices in 28 countries and more than 8,000 professionals worldwide, we have provided services to 46 of the top 50 pharmaceutical
`companies in the world as ranked by 2004 healthcare research and development spending. We also work with leading biotechnology and medical
`device companies and government organizations that sponsor clinical research. We believe that we are one of the world’s largest providers of
`drug development services to pharmaceutical, biotechnology and medical device companies and government organizations based on 2005 annual
`net revenues generated from contract research organizations.
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`Building on our outsourcing relationship with pharmaceutical and biotechnology clients, we established our discovery services business in
`1997. This business primarily focuses on preclinical evaluations of anticancer and diabetes therapies and compound development and
`commercialization collaborations. We have developed a risk-sharing research and development model to help pharmaceutical and biotechnology
`clients develop compounds. Through collaborative arrangements based on this model, we assist our clients by sharing the risks and potential
`rewards of the development and commercialization of drugs at various stages of development. In February 2005, we completed the acquisition of a
`biomarker business. The acquisition expanded our discovery sciences business by adding biomarker discovery and patient sample analysis
`capability to the services offered by us.
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`We believe that our integrated drug discovery and development services offer our clients a way to identify and develop drug candidates
`more quickly and cost-effectively. We use our proprietary informatics technology to support these development services. In addition, with global
`infrastructure, we are able to accommodate the multinational drug discovery and development needs of our customers. As a result of having core
`areas of expertise in discovery and development, we provide integrated services across the drug development spectrum.
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`Industry Overview
`Discovering and developing new drugs is an extremely expensive, high risk and time-consuming process. In May 2003, the Tufts Center for
`the Study of Drug Development released a study that estimates the total fully allocated cost to develop a new prescription drug increased from
`approximately $231 million in 1987 to
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`approximately $897 million in 2000. Adjusted for inflation, this 2000 figure rises to $971 million in 2004 dollars. 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.
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`The drug development services industry provides independent product development services to pharmaceutical, biotechnology and medical
`device 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 customers and by service offerings that encompass the entire drug
`development process, including preclinical evaluations, study design, clinical trial management, data collection, biostatistical analysis, regulatory
`consulting, clinical laboratory and diagnostic services, product registration support and post-approval support.
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`Over the past 20 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, biomarker research, 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 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. Moreover, many industry participants,
`including pharmaceutical, biotechnology and contract research companies, have broadened their efforts to collaborate technically and financially
`to optimize their drug pipelines.
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`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 and to meet regulatory requirements.
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`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 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.
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`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.” Thousands of chemicals can be quickly screened when these assays are
`incorporated into high-throughput screening processes. Hits that have good potency and selectivity are called “leads” and are then tested for
`their potential as drug candidates.
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`Lead Generation. 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. 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.
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`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.
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`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 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.
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`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. 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 Food and Drug
`Administration, or FDA, in the clinical drug development process in the United States. Similar regulatory processes exist in other countries.
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`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 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.
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`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:
`• (cid:160) Phase I trials involve testing the drug on a limited number of healthy individuals, typically 20 to 80 persons, 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.
`• (cid:160) Phase II trials involve testing a small number of volunteer patients, typically 100 to 200 persons, 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.
`• (cid:160) Phase III trials involve testing large numbers of patients, typically several hundred to several thousand persons, 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.
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`After the successful completion of all three 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,
`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 IIIb and Phase IV trials, which allow new
`drugs that show early promise to reach patients without the delay typically associated with the conventional review process.
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`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. 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 have historically targeted no more than an estimated
`500 human gene products. With an estimated 30,000 or so human protein-coding genes, there exists an enormous untapped pool of targets for
`therapeutic intervention. This proliferation of targets increases the need for companies to use state-of-the-art technologies to effectively validate
`and optimize promising targets and lead candidates. Industry participants are also looking to applications such as biomarker technology to save
`development time and costs, as well as enable more precise diagnosis and personalized treatment of disease. These evolving technologies and the
`human expertise necessary to manage them are costly and involve significant investments in capital, intellectual property and sophisticated
`instrumentation. Thus, drug discovery and development service firms that have the capability and expertise to provide early stage research and
`development services offer the potential to offset some of these investments and potentially reduce the financial risk of drug discovery efforts.
`Moreover, industry participants must continue to make significant investments to keep pace with competitive technologies.
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`Changes in the Regulatory Environment. The drug research and development process is heavily regulated by the FDA and its Center for
`Drug Evaluation and Research, or CDER. The war on terror, the risk of vaccine shortages in the United States and the threat of new potential
`pandemics have elevated the FDA’s focus on research in the areas of bio-terrorism and vaccine development. In addition, recent product safety
`concerns, such as the cardiovascular and other risks identified as being related to COX 2 inhibitors, and drug pricing and importation issues have
`placed the FDA and other regulatory agencies under increased scrutiny. As a result of these and other events, drug safety, cost and availability
`factors are under intense monitoring and review by Congress, the FDA and other government agencies. These events are likely to cause
`significant changes to the regulatory environment for the drug development process and could have a lasting and pronounced impact on the drug
`discovery and development industry.
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`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 Institute of Health, or NIH, for 2004 was an estimated $28 billion,
`representing more than 19% compound annual growth since 1993. The full year 2006 NIH budget request of nearly $29 billion includes significant
`appropriations for drug research and development in the areas of biodefense, vaccines, AIDS, and chronic diseases such as diabetes as part of
`NIH initiatives. In addition, the budget allocations for R&D contracts increased by $130 million in the full year 2006 budget proposal compared to
`full year 2005 budget appropriation for the Institute. As a result, drug research and development service providers and contractors, including
`CROs, should continue to benefit from government sponsored research and development initiatives.
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`Increase in Potential New Drug Candidates. The increase in potential new drug candidates resulting from new and enhanced drug
`discovery technologies has caused a bottleneck in the drug development industry, particularly in the early stages of drug 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 has 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.
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`Declining 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 has remained relatively flat or even declined. Pharmaceutical and biotechnology companies
`have responded by focusing on efforts to extend the value of existing products, improve clinical success rates and to 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.
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`Biotechnology Industry Growth. The U.S. 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 clinical 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 cost involved, these companies rely heavily on contract research
`organizations to conduct clinical research for their drug candidates.
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`Need for Large Scale Global Support. Pharmaceutical and biotechnology companies are increasingly filing drug registration packages and
`recruiting study volunteers in multiple countries and regulatory jurisdictions. 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 and governmental safety initiatives place significant pressure 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 private managed care organization efforts to reduce healthcare costs have added to drug pricing pressures.
`The industry is responding by consolidating, streamlining 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 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.
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`PPD’s Solution
`We address the needs of the pharmaceutical, biotechnology and medical device industries 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 20 years of operation, and in 2003 we expanded into the medical device industry. We use our
`proprietary informatics technology across our discovery and development services to support and help accelerate the process. Finally, with global
`infrastructure and expertise in key regions throughout the world, we are able to accommodate the multinational 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 and accelerate the delivery of
`safe and effective therapeutics to patients. The key parts of our strategy to accomplish this mission include the following:
`• (cid:160) Continue to build our core competencies. We are an established company led by professionals with significant discovery and development
`experience helping major pharmaceutical, biotechnology and medical device companies and government organizations bring successful
`products to market throughout the world. This experience and expertise constitute our core operational strengths. Our performance in
`development services has made us, we believe, 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.
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`• (cid:160) Continue to provide a broad range of integrated drug discovery and development services and products. We offer a broad range of integrated
`services and products that are designed to address our clients’ needs from the preclinical through post-approval phase. By integrating
`extensive discovery and development services and products across our customers’ product life cycles, we can more effectively serve
`existing clients and attract new customers. We believe that our range of discovery and development services and products is one of the
`most extensive available from a single company.
`• (cid:160) Continue to incorporate advanced technologies into our service offerings. Using advanced technologies can improve quality while creating
`efficiencies in cost and accelerating the discovery and development processes. We have broad experience in the use of technology in drug
`discovery and development services. 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 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.
`• (cid:160) Continue to pursue collaborative drug development relationships. We plan to continue to selectively seek opportunities to develop earlier
`stage compounds based on our risk-sharing model. These types of arrangements could provide us with opportunities to receive up-front
`license fees, milestone payments and royalties on sales of drugs successfully developed and commercialized. We also periodically evaluate
`in-licensing opportunities from companies and academic institutions seeking outlets for the continued development of their discoveries. We
`intend to selectively pursue out-licensing arrangements, which might also involve us providing discovery and development services for the
`continued development of the potential drug candidate.
`• (cid:160) Continue to develop intellectual property rights. We believe that one of the keys to our long-term performance is the development of our
`intellectual property rights in a variety of areas, including proprietary clinical development processes, tools and software, as well as rights to
`the compounds and methods of use developed from risk-sharing arrangements.
`• (cid:160) Continue strategic global expansion to meet client needs. We currently have operations in the Americas, Europe, Africa, the Middle East,
`Asia and Australia, which we believe positions 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.
`• (cid:160) Continue to pursue strategic acquisitions and investments. We will continue to actively seek strategic ac