SFBC's Sinking Feeling

The stock slides as the company feels the Miami heat again.
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stumbled again Wednesday.

The shares plunged more than 25% after the company reported a major first-quarter miss and slashed its full-year guidance because of a serious downturn in its early-clinical trial business. The stock, which bottomed at $17.25 halfway through Wednesday's session, is now revisiting the same lows it saw when management delayed its quarterly update last time around.

Now, however, SFBC has delivered more pain than relief.

Excluding special charges, which pushed overall results $4.1 million into the red, the company reported a first-quarter profit of 13 cents a share -- or less than half what Wall Street had anticipated. The company's new full-year profit guidance of 73 cents to 85 cents a share falls similarly short and, even worse, depends heavily on second-half improvements.

SFBC blamed its tainted early-trial business, particularly its operations in Miami, for the pain. While the company generates more revenue from its late-stage trials,


pointed out two months ago, it has relied on its high-margin early-sage business for a disproportionate share of its profits in the past.

But these days, that division -- hurt by a


expose on safety issues -- has started losing money.

"We experienced weaker-than-expected performance in our early-clinical development segment," CEO Jeffrey McMullen admitted on Wednesday. And "the time and resources necessary to fully address these issues have significantly exceeded our original expectations."

Still, short-sellers have been warning about a downfall for some time. They expected a sharp dive in first-quarter earnings but felt that some key metrics -- such as the company's backlog and cash position -- could have looked even worse. Thus, they still see further deterioration ahead.

Short-sellers profit when they sell borrowed shares and repurchase them for a lower price down the road. They had sold 78% of SFBC's available stock short at last count.

"When do you cover?" one pondered on Wednesday. "Not here."

Lousy Shot

To be fair, SFBC did hit a couple of targets for the quarter.

The company posted direct revenue of $80.1 million -- up 4% from a year ago -- that just beat the consensus estimate. It also reported solid results from its late-stage business.

Other than that, however, it offered nothing but disappointments.

It's an "across-the-board miss," declared Baird analyst Eric Coldwell, who has a neutral rating on the stock. So "we're slashing estimates and lowering (our) price target to $17 from $24. SFCC likely deserves an underperform rating, but the horse is out of the barn -- and we believe a rating downgrade, at this point, would be reactive."

Moody's actually downgraded SFBC's debt a month ahead of the company's latest results.

For now, the agency has a speculative Caa1 rating on the company's corporate-level debt with a negative outlook for the future. However, it is paying close attention to the company's early-rial business in particular.

"It is crucial that the company continues to expand its early-development business, excluding Miami, and maintain the current trends in its late-stage development business," Moody's wrote last month. "The ratings could face downward pressure if results at the Miami facility deteriorate at a rate greater than anticipated or the non-Miami business weakens."

Notably, SFBC has gone on to report not only a sharp dive in its Miami business but also a lowered outlook for its Anapharm early-trial business as well. While Miami has come under heaviest fire for safety concerns, Anapharm has dealt with problems -- particularly a tuberculosis scandal -- of its own.

Looking ahead, Moody's has warned that SFBC could face "deteriorating financial liquidity and flexibility" as cash flow comes under pressure and legal threats mount.

These days, however, SFBC has made its liquidity a top priority. Recently, it arranged for a $45 million credit facility -- although that is half the size of the credit facility it replaces. Meanwhile, it actually increased its cash position by $15.1 million to $53.9 million in the latest period.

Short-sellers believe the company escaped further pain as a result.

"If they had burned cash," one said, "the stock would be at $14 today."

True Survivors

Still, even Coldwell believes that SFBC will survive in the end.

Meanwhile, Jefferies analyst David Windley actually continues to recommend the stock. Windley started embracing SFBC after the company replaced several of its top executives months ago.

But some holdovers, including the CFO, remain. And a lawyer connected to two ousted managers continues to be in position to accept any ethics complaints from SFBC employees, according to the company's Web site.

At the same time, those ousted managers -- founders Jerry Seifer and Lisa Krinsky -- have been raking in a little extra dough. The pair sold a $4.5 million waterfront mansion in south Florida last month.

"It consists of six bedrooms and 8.5 bathrooms in 7,087 square feet of living area on an 11,221-square-foot lot,"

The Miami Herald

reported on April 16. "The Old World Mediterranean-style mansion was built in 2003 but has never been lived in."

The Herald

lists Seifer and Krinsky as husband and wife. The company never disclosed their relationship when they were there.