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PharmaNet Outlook Leaves Investors Queasy

Shares plunge 30% on disappointments in the company's lucrative early-stage trial business.

OKLAHOMA CITY -- A weak forecast from

PharmaNet's

(PDGI)

has caused some nasty side effects.

With its clients backing away from orders for early-stage drug trials -- a business tainted by scandals in the past -- PharmaNet on Thursday offered a dismal outlook for the future. The company's stock plunged 30% to $28.89 as a result.

The drug-development services company said it expects to earn just $1.42 to $1.57 per share this year. Analysts had been forecasting full-year profits of $1.72 instead.

PharmaNet offered a weak sales forecast as well, with its projected range of $401 million to $409 million falling below analysts' target of $414.8 million. The company also missed its fourth-quarter sales target, generating $92.3 million instead of the $94.5 million Wall Street had anticipated.

PharmaNet did beat profit forecasts for the quarter. Net income almost doubled to $12.1 million, with operating profits of 33 cents topping analysts' average estimate by 2 pennies.

PharmaNet, at least, saw reason to celebrate.

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"We are pleased with our 2007 financial results, having made significant progress over the past year," CEO Jeffrey McMullen said in a statement. "In 2008, we look forward to continued growth and market expansion, while optimizing our operations, increasing resource utilization and reducing costs."

Investors, however, found cause for alarm. For starters, PharmaNet's operating margins shrank by nearly two-thirds to just 3.2% in the latest quarter. To be fair, some one-time costs -- covering legal fees and new facilities -- dampened the company's performance. But so did ongoing costs caused by an expanding workforce.

As it turns out, PharmNet's growing staff is landing fewer orders than it anticipated, especially for lucrative early-stage drug trials. The company reported that a number of early trials "were rescheduled, postponed or cancelled during the latter part of the fourth quarter." Operating margins for that business narrowed from 19% to just 12% as a result.

PharmaNet once relied on high-margin early-stage trials for the bulk of its profits. But the company revamped its business, focusing more on late-stage trials -- despite the skinnier margins -- when scandal engulfed the company a few years ago. At the time,

safety concerns were hammering the company's early-stage business and threatening its survival as a whole.

PharmaNet has spent the last two years clawing back from that disaster.

Now, PharmaNet is reporting some weakness in both of its core businesses. Notably, the company has seen its backlog, representing future orders, decline as a result of "cancellations of certain projects in the early and the late-stage segments."

Clearly, investors had been hoping for better. Just last month, they sent PharmaNet's stock to a 52-week high of $43.05 a share -- more than doubling its price in less than a year.

Insiders have been selling stock in the meantime. So have bearish outsiders. By late January, short sellers -- long attracted to the name -- had sold more than 15% of PharmaNet's stock short in anticipation of a fall.