PharmaNet to suffer formal SEC scrutiny

The formal scrutiny stems from an informal investigation launched by the SEC in 2005 after allegations came to light that it made misleading SEC filings in regards to revenue recognition, earnings, company operations and related party transactions surrounding the Miami site.

The company's 350-bed flagship Miami facility had been plagued by government, legal and media scrutiny since 2004 after allegations were first made in a Bloomberg article over its inadequate clinical trial patient recruitment and informed consent practices.

As a result, PharmaNet, then known as SFBC, was subject to a US Senate Committee investigation, which was closed in early August 2006 with no resulting actions.

The firm's troubles were only just beginning though.

Just prior to the Bloomberg report, the local plannings department in Florida ordered the company to shut down and demolish the Miami facility after it was found to be unsafe and in breach of serious building- and fire-code violations.

Company founders Lisa Krinsky and Arnold Hantman and vice president of legal affairs, Gerald Seifer, all subsequently resigned.

After an appeal, the site was eventually closed in early August 2006 and the company managed to sell key assets from the Miami operations, including a clinical laboratory, as well as equipment and a 46-station cardiac monitoring suite, to Canada's Allied Research International (ARI).

The building has since been demolished and the site is up for sale.

PharmaNet has moved all its early-phase operations to Canada.

The Miami site was formerly the largest drug-testing facility in the US and the source of around 20-30 per cent of SFBC's revenue, so the closure came as a severe financial blow to the firm.

Meanwhile, PharmaNet also came into the firing line from shareholders and two class actions have since been launched, the first in February 2006, citing that the firm "publicly issued a series of false and misleading statements regarding its business and financial prospects, thus causing its shares to trade at artificially inflated prices."

In November, the Arkansas Teacher Retirement System joined in the action, alleging that "the company and its senior officers and directors violated the federal securities laws by making false and misleading periodic filings with the SEC and making other false and misleading statements to investors."

Specifically, the complaint alleged that the firm "misrepresented the condition of its Miami facility, failing to disclose that this facility violated several occupancy, zoning, and other regulations, which forced the facility to suspend operations; failed to disclose unethical and dangerous clinical testing practices and conflicts of interest; failed to disclose related-party transactions; and misrepresented the qualifications of its senior management team."

Litigation is still pending.

Amidst the swirling storm, the troubled firm changed its name from SFBC to PharmaNet in August 2006 in the hope of changing its fortunes, and yet its troubles drag on, particularly in light of the SEC's decision to now take its investigation further.

Hardening the blow is the fact that only at the beginning of this month PharmaNet insisted it is beginning to make progress in its attempt to leave its early-phase troubles behind.

For the fourth quarter of 2006 the contract research organisation's (CRO) operating profit sharply fell by 23 per cent to $7.4m (€5.6m) from the comparable 2006 quarter, with a reflective pre-tax profit dip of 25 per cent to $6m. Sales were equally disappointing, rising by only 3.3 per cent.

A strong 16.4 per cent sales growth in the company's Late Clinical Development unit was virtually neutralised by another dismal performance in its Early Clinical Development segment, where sales dropped 12.6 per cent.

The Q4 results were, however, an improvement on Q3, where an operating profit of $6.0m and a pre-tax profit of $3.7m was recorded, and Q2, which saw the company experience an operating loss of $6.6m and a pre-tax loss of $10.8m.

Although the firm said that it believes the formal SEC investigation " will not have any impact on the company's 2006 year-end earnings previously disclosed on March 1, 2007," it has said that "its management and its independent registered public accounting firm now need additional time to finalise the company's year-end audit."

As a result, it will be delaying the release of its 2006 annual report, which is now expected no later than Friday, March 23, 2007.