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Testing Times for SFBC International

By Gene Marcial It seldom happens -- that shares of a company plunges 36% in just a couple of days. But that's what happened to the stock of SFBC International (SFCC), a small, little-known outfit that specializes in conducting clinical trials for the big pharmaceutical companies.

At least two reasons are behind the stock's steep fall -- from $42 a share on Nov. 1 to $27 two days later. One reason, analysts say, is that its order backlog sequentially dropped 10% in the most recent quarter.

INDUSTRY LEADER. But the other reason, one that is of more concern to investors, is the possibility that the company might face a government inquiry into how it conducts clinical trials on up and coming drugs.

The monthly magazine Bloomberg Markets in its December issue raises questions about how the FDA regulates clinical trials, citing specific cases of the lack of effective oversight by SFBC in conducting human drug testing. Some 3.7 million people have enrolled in drug tests sponsored by major drug makers, which have outsourced 75% of experimental drug trials to outfits like SFBC, a leader in the $14 billion drug-testing industry, notes Bloomberg.

The magazine detailed the lack of quality controls and audits to ensure the safety of patients enrolled in such tests and SFBC's failure to advise test participants on the risks involved. Most of the enrollees are immigrants in Florida, where the company is based.

FAMILY TIES. SFBC provides early- and late-stage clinical drug trials around the world. It has more than 30 offices in North America, Europe, South America, and Asia. In most instances, says Bloomberg, the FDA has outsourced the monitoring of these trials to private groups, called "institutional review boards," which are funded by the pharmaceutical companies.

One such group, which calls itself the Southern Independent Review Board (IRB), hasn't given the impression of being quite that independent: Until she retired in February, the wife of an executive officer at SFBC was the CEO of Southern IRB, which says less than 5% of its studies are monitored by IRB.

Analyst Ricky Goldwasser of UBS, who rates SFBC "neutral," says in a report to clients that "we could see controls put in place to make sure study participants are both well informed and compliant[with rules and requirements] which could result in an additional layer of costs." Adds the UBS analyst: "Increased compliance and controls could hurt margins."

But other analysts remain bullish on SFBC despite the report on the company's poorly managed clinical trials. The sell-off, says David Windley of Jefferies & Co., who rates the stock a buy, was a "loud vote of no confidence in SFBC's outlook," caused in part by the lack of transparency in orders and margins. Shares rebounded slightly on Nov. 7, closing at $30, up $3.00 on the low hit last week.

"SEVERE DISTORTION." The Bloomberg story did not help, he adds, but he is confident that the fourth-quarter revenue expectations will be met, as affirmed by management. He sees SFBC earning $1.93 a share on revenues of $335 million this year, and $2.20 on sales of $380 million in 2006, and $2.49 on revenue of $428 million in 2007.

In a conference call with analysts on Nov. 3, SFBC Chairman Lisa Krinsky said the Bloomberg story was a "severe distortion of our work," and asserts that the company has complied with all regulatory standards and has never been issued a warning by the FDA.

Marcial is Inside Wall Street columnist for BusinessWeek

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