Taking the Long Side of SFBC Battle

A recent Bloomberg article has highlighted the reality that getting drugs to market may not be the prettiest game around, and industry player SFBC International (SFCC - commentary - Cramer's Take) has unfairly borne the brunt of the fallout from it.

While I'm not pounding the table about the long side on this stock, I do believe that it's a reasonable speculative stock for investors prepared to take on a calculated risk. It's a risk the company's insiders have doubled-down on.

SFBC has had great growth addressing the needs of the pharmaceuticals industry in testing new drugs. The industry has made a move to outsourcing clinical trials, and SFBC is one of numerous firms that have benefited. It is not the largest player in its industry, but it has been a fast grower. In the first nine months of this year, the company increased revenue and EPS by 184% and 34%, respectively.

Growth is slowing as SFBC grows larger, but this is not what has whacked this stock down recently.

The Ugly Side of Human Clinical Trials

The turmoil that has lately surrounded SFBC is related to a hard-hitting piece of investigative journalism in the December issue of Bloomberg Markets magazine titled, "Big Pharma's Shameful Secret." The article throws a very bright spotlight on everything that is unflattering about the reality of human drug trials, and specifically uses SFBC as the poster child for the ugliness. The Web-based teaser for the article shouts, "Every year, drug companies spend $14 billion to test experimental substances on humans. Across the U.S., the centers that do the testing -- and the regulators who watch them -- allow scores of people to be injured or killed." The article further asserted that there is excessive use of illegal immigrants in the testing centers.

No one should be surprised to hear that all those potential side effects listed in fluffy pharmaceutical ads actually happened to someone in the clinical trials used to test them. Human trials are critical to bringing life-improving and lifesaving drugs to market. But we are supposed to be shocked to find out that those nasty rashes, numbness, breathing trouble, kidney failures and yes, the occasional death, did not occur within a test population that included a large percentage of bankers, lawyers, equity analysts or average Joes and Janes with online brokerage accounts.

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At the time of publication, Moreland was long SFBC, although holdings can change at any time.

Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights, founder of the Web site InsiderInsights.com and the director of research at Insider Asset Management LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland appreciates your feedback; click here to send him an email.