SFBC Parts With Miami Chief

Melissa Davis

SFBC (SFCC), a company that tests drugs for others, has learned a little something about the safety and efficacy of its own operations.

In a nutshell, SFBC's early clinical trial business in Miami seemed to cause more harm than good. The company has by now started closing that once-lucrative business and, this week, severed ties with the remaining leader of that operation. Gregory Holmes, a board-certified pharmacologist who once lent some measure of credibility to the unit, has now followed his disgraced bosses out the door.

Holmes had technically been serving as president of corporate development for the entire company, but he had spent most of his time attempting -- in vain -- to turn the Miami division around. He was the last remaining holdover who, together with SFBC's ousted CEO and president, used to run the show before a Bloomberg expose raised grave safety concerns about the Miami division.

Baird analyst Eric Coldwell celebrated Holmes' exit on Tuesday.

"Certain of our interactions with Dr. Holmes caused us concern, including his response to detailed questions at various times in 2005," writes Coldwell, whose firm hopes to secure investment banking business from SFBC over the next three months. So "given less-than-positive past experiences with this executive -- and his role in building legacy operations -- we view the departure as positive to SFCC's remediation efforts and the company's attempt to rebuild credibility, though we remain on the sidelines with a neutral rating" for now.

Investors expressed some relief as well, pushing the company's stock up 2% to $14.54 Tuesday. Still, the stock continues to trade near the bottom of its 52-week range of $12.38 to $45.73.

Meanwhile, bearish investors -- who have sold 63% of the company's available stock short -- questioned even measured enthusiasm in response to the latest news.

"They've fired the CEO, the president, the head of legal affairs -- and now Holmes, who everybody said was clean and an important clinical asset for the whole company," says one short-seller who first started betting against the company before its big collapse. "How can acknowledging another bad apple be a net positive for the future of SFBC?"

Final Paycheck

Just over a year ago, SFBC was inking generous new employment contracts with its now-departed leaders.

Former CEO Arnold Hartman and former President Lisa Krinsky picked up big raises that left them pocketing $650,000 apiece in base salary alone. Holmes, who scored a giant pay hike of his own, collected $550,000.

"These three executives, acting together, function as the office of the chief executive," SFBC's 2005 proxy statement explains. "Each of these key executives has and continues to make major contributions to the growth and success of SFBC."

But their days were clearly numbered. Six months after signing those three-year deals, the executives saw their status threatened by the Bloomberg expose.

Hartman and Krinsky left the company last year with millions of dollars in severance payments. Holmes will now collect nearly $1 million in cash himself, along with various other benefits.

Deserted Ruins

Meanwhile, the division that those people ran -- once the crown jewel of the company -- lies in ruins.

Last month, in fact, SFBC gave up on its Miami operations altogether. The company had little choice. The Miami-Dade County Unsafe Structures Board had rejected the company's remediation plans for its Miami clinic, and ordered the building's demolition. The company elected to shut the money-losing operation instead of fighting for it any further.

Jefferies analyst David Windley breathed a sigh of relief. Just one day before SFBC announced the planned closure, Windley had suggested that the company cut its losses in Miami and move on.

By then, Windley already had wound up burned by his faith in current management. Indeed, he admitted as much when hoping for some decisive action in Miami.

"I am guilty of not recognizing the longer turnaround for Miami, in particular," confessed Windley, whose firm has received non-investment banking business from SFBC in the past 12 months. "Even as 4Q results and guidance took longer than expected to produce in March, the guidance at that time clearly, clearly was too optimistic. ... While we are encouraged by [management] comments, it's probably prudent to err on the side of cautious optimism."

That said, Windley still recommends buying the stock even today.

"SFCC is too cheap to abandon," he insisted last month, with the stock approaching $16. "This is a rare 'value' story in the [contract research organization] space."

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