Now what? AaiPharma's ( AAII) CEO, Dr. Philip Tabbiner, was replaced Monday by the embattled company's founder and chairman, Frederick D. Sancilio. The company's stock dropped 61 cents, or 7.2%, to $7.86 in late-morning trading. The Wilmington, N.C.-based aaiPharma has been beset by a series of recent problems that have caused the company's stock to drop 75% since mid-January. Financial revelations have triggered several cuts in Wall Street equity ratings; provoked one equity analyst to drop coverage; sparked a downgrade to negative from stable by Standard & Poor's; and prompted Moody's Investor Services to place several aaiPharma debt issues under review for a possible downgrade. Tabbiner also resigned as a director and will become a consultant to aaiPharma "for an extended period to facilitate this transition," the company said. The company also appointed Gregory F. Rayburn as interim chief operating officer, replacing David M. Hurley, who resigned Feb. 12 to head a start-up medical company. Hurley had been chief operating officer for only five weeks. He had been employed by aaiPharma for two years. Rayburn is a senior managing director with a consulting firm, FTI Consulting, whose corporate headquarters is in Annapolis, Md. Tabbiner joined the company in 2000 after holding jobs at several larger drug companies. He became chief operating officer in the spring of 2002 and was elevated to chief executive in July 2002, as Sancilio took the titles of executive chairman and chief science officer to focus on scientific strategy. Sancilio had held the CEO since he founded aaiPharma in 1979. "We see this change as forward progress in getting to the heart of difficulties and addressing issues as soon as possible," said David W. Maris, of Banc of America Securities, in a research report Monday. Maris cut his rating to neutral from buy four weeks ago. (He doesn't own shares, but his firm is a market-maker in aaiPharma's stock and has had an investment banking relationship with the company in the past 12 months.)
Those "difficulties" and "issues" include the disclosure March 1 that the company had discovered "unusual sales" in two product lines during the second half of 2003. This disclosure came four weeks after the company announced its 2003 fourth-quarter and full-year earnings. As a consequence, aaiPharma withdrew its financial guidance for 2004's first quarter as well as for the full year. The company has appointed an independent group of board members and hired an outside law firm to investigate the irregularities that affect the sales of Darvocet, a painkiller, and Brethine, an asthma medication. Several analysts, most notably Michael Krensavage of Raymond James -- have complained that some of aaiPharma's drugs have been piling up in drug distributors' warehouses, creating inventory backlogs and distorting revenue figures. In early February, the company announced it had created a $15.9 million reserve against revenue for the fourth quarter of 2003 due to "significantly greater" returns of one product. And in mid-March, it announced that it would delay by two weeks the filing of its 10-K year-end financial report with the Securities and Exchange Commission until the sales irregularities were analyzed. The company said it now expects to file the 10-K Tuesday.