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Ride Gets Bumpier for aaiPharma

Given its expanding product line, it's a wonder that aaiPharma (AAII) hasn't added motion sickness medicine to its formulary.

Certainly, investors in the Wilmington, N.C.-based company need something to settle their stomachs. Over the last four trading days alone, aaiPharma has dropped 23%, jumped 9%, slid 11% and, on what passed for a quiet Tuesday, dropped 3%.

AaiPharma's lurching offers a lesson to investors in the drug industry: Extreme volatility isn't just the province of tiny biotech companies that have a lot of dreams and no revenue. No, even a fast-growing niche player like aaiPharma -- a maker of pain management drugs whose $34.3 million profit for 2003 doubled year-ago earnings -- can find that analysts look at the same data and come to profoundly different conclusions.

In this version of Rashomon Meets Wall Street, the analyst coverage includes several bulls, one longtime bear and one analyst who has become increasingly concerned about aaiPharma. The last is Adam Greene of First Albany, who dropped his rating on aaiPharma to neutral from buy on Feb. 5, triggering the first sharp drop in the stock. That was the second time in less than two months that Greene had lowered his rating.

Quality Questions

The shift in the focus of Greene's attention on this stock helps to tell the tale of the frantic action in aaiPharma. The first time Green cut his rating -- to buy from strong buy -- he talked about an overheated stock price. The second time, though, he worried about the quality of sales and earnings, in part echoing comments made by bears on the stock.

Greene warned clients last Thursday about that growing uncertainty, and the market took notice. His fears rippled through the market on the day aaiPharma's stock sank by 23%.

Greene's source of worry is the company's inventory and its decision to set aside a $15.9 million reserve to account for products that are returned. "This reserve is likely to further fuel speculation regarding the quality of sales and earnings," Green wrote last Thursday. "We are moving to the sidelines and prefer to wait for the dust to settle." He doesn't own shares; his firm is a market-maker in aaiPharma's stock.

Not Seeing Eye to Eye
Analysts' divergent earnings estimates on aaiPharma
Analysts' reports and Thomson First Call

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