Troubled clinical drug development company SFBCInternational (Nasdaq: SFCC ) is paying its two most senior executives a total of $3.8 million in severance. While investors might not like the pay deal, they seem to have liked the fact that the company has clearly shown a new direction and hired what appear to be experienced individuals to lead the executive team. The stock was up more than 20% on the news Tuesday, before settling up about 18%. Is it time to buy?
SFBC's stock was reportedly hammered following an unflattering story published by Bloomberg in November, after the company reported that third-quarter revenue was up 135% over the year-ago period and earnings were up 41%. According to an analyst interviewed by the Associated Press, the story portrayed the company as a patient mill that supplied poor immigrants to participate in clinical trials. That news weighed on the stock, pushing it down 20% to just under $30 a share.
Subsequently, an independent counsel's report was issued that, the company says, exonerates it. The report was written by two law firms hired by SFBC's board of directors to look into the Bloomberg claims.
The roller-coaster ride down would end at $12.38 in mid-December after Bloomberg reported that a study participant had exposed staff and volunteers to active tuberculosis. Although the company called the Bloomberg story misleading, it did acknowledge that nine volunteers tested positive for tuberculosis, yet none developed active tuberculosis.
Between those two stories, the company's largest facility, located in Miami, reported remodeling issues that forced it to reduce its bed count to 350 from 675. The company said it did not expect to see a material impact, but the shares lost more than a quarter of their value as investors became increasingly concerned.
SFBC helps drug companies in phase 1 and early phase 2 testing. Its Miami facility is believed to be the largest testing facility of its kind in North America.
Analysts had been expecting earnings to compound by 22% a year for the next five years. Earnings for 2005 were pegged at $1.86 a share; the company is now targeting $1.71 to $1.76 (which includes write-offs it will be taking). That prices the stock at a very reasonable 10.7 to 11 times forward earnings.
So, is this a value play? Maybe. While SFBC is giving guidance of $1.80 to $1.86 a share for 2006, the two departed executives also leave open questions about the operations that might hide other problems that could lower guidance for this year and beyond. Plus, the company reports that one client has canceled two contracts due to the Bloomberg articles. At best, the news background is mixed.
At this point, SFBC is a speculation. For those looking for long-term investments in clinical testing, larger rivals Pharmaceutical Product Development (Nasdaq: PPDI ) and Covance (NYSE: CVD ) would make a good place to start investigating.
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