SFBC ( SFCC) investors might want to do a little math before they place any more bets on the company.

Over the past two months, SFBC shares have nearly doubled off of their two-year low as newly installed leaders try to reinvent the company in the wake of a devastating expose by Bloomberg. The series raised major questions about early drug trials carried out at SFBC's clinic in Miami. Former employees, caught up in massive layoffs at the site, have since told TheStreet.com that business there has dried up in the wake of that negative publicity.

Current management has attempted to downplay SFBC's operations in Miami and shift investor attention to the company's PharmaNet business instead. After all, PharmaNet leaders now run the show. And they have been quick to stress that the company's early-stage trials in Miami generate far less revenue than their own late-stage business at PharmaNet does.

Specifically, they say that Miami accounts for just 15% to 20% of company revenue, as compared to 50% at PharmaNet.

They have yet to show just how much the company depends on Miami for its earnings. But some short-sellers, who have combed through the company's financial reports and recent comments to investors, believe they have a clue.

"Even if they lose just 25% of their business in Miami, or 5% of their total revenue, the hit to earnings would be huge," one said.

SFBC itself has signaled that sales in Miami could drop by even more than that this year. So have some experts on Wall Street, who -- won over by new management -- have found themselves recommending the stock regardless.

The news comes as SFBC is due to post fourth-quarter earnings after the bell Thursday. The company's media spokesman and investor relations firm both failed to answer questions for this story.

Two Cents' Worth

Without addressing the subject directly, SFBC has by now offered some hints about how valuable its early-stage trial business could be.

CFO David Natan provided a crucial detail in a mid-December conference call. Natan said that the loss of a single SFBC client in Miami had cost the bottom line to the tune of 2 cents a share. The company would go on to say that the client accounted for "far less than 1%" of its revenue.

Short-sellers, who bet on the decline in a company's share price, pulled out their calculators.

If a Miami account had cost SFBC 2 cents worth of profits -- but represented, say, just one-half of 1% of its revenue -- it was generating after-tax profit margins of 23%. In contrast, they noted, the company as a whole was reporting margins of 9.3%.

Assuming that the lost account was representative of other business at the site, they concluded SFBC has been relying on Miami for as much as half of its earnings.

Jefferies analyst David Windley has assumed far less exposure. When upgrading SFBC from hold to buy last month, Windley predicted that a 50% drop in Miami revenue would lower companywide profits from $1.93 to $1.65 -- or less than 15%. Windley's $1.65 projection hovers just a penny above the current consensus estimate.

He did offer a few words of caution, however.

The "risks (are) not totally gone," he acknowledged. Indeed, "our primary near-term fundamental concern -- particularly since the new CEO and CFO are combing the non-PharmaNet financials -- is the persistently high accounts receivables in the early development segment."

SFBC's treatment of accounts receivables has drawn questions elsewhere as well.

Fuzzy Math

Windley has been known to dwell on this particular issue in the past. During the fall 2004 conference call, in fact, he specifically asked management how it planned to bring down its days sales outstanding, which were approaching 100 at the time. DSOs, as they are known, are a measure of how fast a company is collecting its accounts receivables. A high number can indicate underlying sales are weak.

"I know you've talked about how there are some differences in your business" vs. competitors, Windley said. "But that's a number that seems like it's growing. ... It could be a very nice source of cash if you were able to bring that number down to, you know, even 60 or 70 days -- which is still higher than the industry average."

SFBC made some vague promises. But the company still attempted to justify its high DSOs in the end.

"The days outstanding receivables is really a self-fulfilling activity," former CEO Arnold Hantman said, "due to the fact that our very early Phase I and II trial business generates a lot of early revenue that isn't collectable until after we've commenced the work."

SFBC has since acquired PharmaNet, with its lower DSOs, and reported a drop in that number. Specifically, the company claimed that its DSOs had plunged by nearly half to 50 during its latest conference call.

But short-sellers, reviewing the formal quarterly report that followed that call, have no idea how management could have reached such a number. They have used a simple method for estimating DSOs for the quarter -- basically dividing accounts receivable by revenue and multiplying it by 90 days -- and come up with nearly 100 days instead.

At the same time, they note, SFBC reported an influx of client advances -- which pushed cash flow into positive territory -- as well.

"So why are their DSOs still so much higher than the industry average?" one short-seller asked. "It's not because they are carrying clients on these trials, because client advances suggest they are, in fact, doing just the opposite."

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