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Aftermath of a Drug-Testing Firm

ResearcH Project: Lisa Krinsky (above) "built this company from nothing, and you now have people running her business that are effectively the people she brought on after she bought out their less successful companies," Krinsky's lawyer says. In 2005, Fortune magazine named Krinsky the 15th-richest executive at a fast-growing small public company. Photo: Daniel Portnoy

Twenty-five years ago, pharmaceutical companies and academic research institutions that were developing drugs typically did their own testing -- including conducting human trials as part of the federal approval process. But by the 1990s, as pharmaceutical companies streamlined their operations, they increasingly turned to contract research organizations to test drugs in development for effectiveness and for side effects.

Typically, those contract research organizations (CROs) operate facilities where they solicit and sometimes house the volunteers who participate in the drug trials. Depending on the trial, volunteers can earn from several hundred to several thousand dollars for taking part. They come from all walks of life, ranging from the sick to the healthy, from physicians wishing to further their research efforts to poor immigrants willing to turn their bodies over to science in exchange for money.

Some industry experts say contract research organizations' safety standards are just as rigorous as those of the pharmaceutical companies that run their own trials. CROs have a comparable safety record, says Ken Getz, a senior research fellow at Tufts Center for the Study of Drug Development. "If anything, the CRO industry acts as an additional layer of oversight because they're once removed from the (drug) sponsorships. The CRO doesn't have a stake in the success or failure of the investigational treatment."

Questions have arisen, however, as the volume of clinical trials has increased. Do patients -- particularly immigrants who may have limited English-language skills -- really understand the risks described to them in the informed consent process required by the federal government, for example? Additionally, institutional review boards, the bodies that oversee human trials to ensure they are safe, have complained to the federal Food and Drug Administration that they are being stretched thin as the volume of testing increases.

Meanwhile, the CRO industry has become a huge business. In 2005, $14 billion of the $56 billion that pharmaceutical and biotechnology companies spent on research and development went to outsourcing services offered by CROs. Market analysts predict that could grow to $20 billion by 2010.

Among the clinical trial firms that rode the outsourcing boom was a Miami company called SFBC International. SFBC came about in 1999 through the merger of two south Florida clinical research firms -- South Florida Bioavailability Clinic and South Florida Kinetics. The six-employee South Florida Kinetics was founded in 1995 by Lisa Krinsky, a Miami native and the daughter of a pharmacist. Krinsky had worked as a licensed clinical laboratory technician after getting a medical degree from Spartan Health Sciences University, a medical school on the Caribbean island of St. Lucia. Her lawyer, Fort Lauderdale attorney Alvin Entin, says Krinsky's interest "has always been research." South Florida Bioavailability Clinic was owned by Arnold Hantman, a former executive vice president and director of American Hospital Management Corp. who also worked as a certified public accountant for 20 years. After the merger, Hantman kept his CEO title, and Krinsky became president and chairwoman of the new company.

On Oct. 11, 2000, two years after SFBC International's founding, its executives took the firm public. An IPO raised $8.5 million that SFBC used to acquire competitors and expand the size of clinical trials the company conducted at its Miami headquarters. "To bring a company from its infancy to being able to ring the bell on the stock market (was) an amazing feeling," Krinsky told the Miami Herald in an interview less than a year later.

Some of SFBC's paid volunteers for trials reportedly tried to earn extra money by dodging rules meant to keep them from taking part in more than one trial at a time.

By 2003, SFBC ranked third on Forbes' list of the "200 Best Small Companies," based in part on the dramatic rise of its stock price, which had almost quadrupled from its $8-a-share IPO level to nearly $30. By 2005, SFBC's revenue had grown from $19 million at the time of the IPO to $180 million, and its workforce had swelled from 117 to more than 2,000. SFBC was conducting up to 180 studies a year at its Miami test center on behalf of some of the world's largest pharmaceutical companies, including Merck, Johnson & Johnson and Abbott Laboratories. Those contracts had made the Miami facility the largest single-site clinical studies location in North America -- the "Plaza Hotel" of the contract research industry, as Krinsky once described it.

The company's success also had made Krinsky, its largest stockholder, wealthy. Within a month of a 3-for-2 stock split early in 2004, she and Hantman together sold $2.6 million worth of shares. Nine months later, in March 2005, the duo cashed in another $13.4 million. That same year, Fortune magazine named Krinsky the 15th-richest executive at a fast-growing small public company, with an estimated $40 million in stock and stock options.

Downfall: Miami-Dade officials deemed SFBC's Biscayne Boulevard building -- a former Holiday Inn -- unsafe in 2006 and ordered it demolished. The site is now up for sale.
Daniel Portnoy

The storm

In late 2005, however, the company's fortunes took an abrupt turn.

The company had bought its test center -- a former Holiday Inn on Biscayne Boulevard that it had been leasing -- for $12 million in 2004. In company documents, Krinsky lauded the "state-of-the-art" facility that she said SFBC planned to remodel so it could double its space and grow its lucrative clinical trials. "We think it gives us a great opportunity to profit immensely," Hantman told investors in an April 2004 conference call.

In October 2005, however, an inspection by Miami-Dade County officials pinpointed numerous structural deficiencies and fire code violations at the facility. SFBC and the county were at odds over how many people the building could handle. SFBC said it was fit for 750 beds, but the county had approved only 440. The county also found that numerous structural changes done without permits rendered the building prone to collapse. The county cited holes cut in load-bearing walls and the addition of large concrete slabs that exceeded the floor's weight-bearing capacity by more than 300%.

Then, in late October, Hurricane Wilma slammed into south Florida. SFBC suspended normal operations to transform its Miami headquarters into a temporary aid station. As it supplied its employees, their families and the company's drug trial participants with food, water, fuel and ice, it announced that it would have to delay its quarterly earnings release by a few days.

Before the company could finalize its numbers, another storm hit.

On Nov. 2, Bloomberg Markets magazine published a report on the nation's clinical trial research industry -- focusing on issues related to regulation and the safety of the drug trials. Among numerous firms mentioned in the article was SFBC. One story reported how some of the paid volunteers for trials tried to earn extra money by dodging rules meant to keep them from taking part in more than one trial at a time. The story quoted a participant in an SFBC trial and described SFBC's facility and operations unflatteringly.

After the article appeared, company president Krinsky was quoted as telling analysts in a phone call that "approximately 99% of the information that was documented regarding SFBC is a total fabrication, and the remaining 1% was entirely misquoted." The company retained Miami law firm Tew Cardenas and Chicago-based Winston & Strawn to investigate the substance of the Bloomberg story.

Meanwhile, the company's business suffered. Within six weeks of the article's publication, SFBC's stock had fallen 68%, and U.S. Sen. Chuck Grassley (R-Neb.) had launched a Senate Finance Committee investigation into how the company treated its patients. Shareholders began filing suits claiming they were the victims of securities fraud in December 2005. By early 2006, the Securities and Exchange Commission had begun a probe.

Tew Cardenas and Winston & Strawn issued their report on SFBC's practices within six weeks after the Bloomberg article appeared. The Dec. 12, 2005, report, addressed to Sen. Grassley, defended
SFBC's practices and accused Bloomberg of making "unsupported allegations." The report vigorously defended SFBC's safety record and operating standards. It concluded that Congress should consider creating a centralized database to house basic information about clinical study participants so that companies could track participants' involvement in other studies, note adverse reactions to medications and crack down on participation by illegal immigrants.

The law firms' report also responded to a later Bloomberg story that an SFBC executive asked several former drug trial participants to sign affidavits refuting statements attributed to them by Bloomberg reporters. The story also reported that the executive threatened some drug trial participants with deportation.

The Tew Cardenas/Winston & Strawn report acknowledged that SFBC's vice president of legal affairs, Gerald "Jerry" Seifer, had spoken with several former trial participants about the Bloomberg
report, asked about their immigrant status and asked them to sign affidavits refuting portions of Bloomberg's article. The report stated that Seifer had "raised his voice at the participants" and suggested it was "apparent from our interview of Seifer that he takes substantial pride in SFBC and was upset by the release of the articles." The report concluded, however, that such behavior was "inappropriate."

Gutted: SFBC's Miami facility was the largest single-site clinical studies location in North America -- the "Plaza Hotel" of the contract research industry, as Krinsky called it. Photo: Daniel Portnoy

Bailing out

Hantman said Seifer was suspended with pay for 30 days. In mid-December, Grassley requested that Krinsky, Seifer and other employees come to Washington to be interviewed by his committee. On Dec. 19, a week after the report, Seifer resigned. Krinsky and Hantman resigned on Dec. 31, 2005. The company did not cite reasons for their departures.

Krinsky's severance agreement included a $1.8-million payment and the repayment of "reasonable attorneys' fees" related to the Senate and SEC inquiries. Hantman's cash payout totaled $2.025 million. SFBC noted in filings with the SEC that "had their employment agreements been terminated without cause, Arnold Hantman and Lisa Krinsky would each have been entitled to an immediate payment of three times their base salaries and immediate vesting of all outstanding options and restricted stock units" but that they each waived their right to 15,913 restricted stock units and 32,520 options.

At some point in December 2005, Seifer married Krinsky. Records indicate that between 1996 and 2005, the couple together or individually had acquired a Miami Beach condo, a home in Aventura, a house in North Captiva in Lee County and a $15-million waterfront mansion -- properties which Seifer and Krinsky have since refinanced for $26 million using an offshore company and a corporation called LAKJS Enterprises, documents show.

Taking over after Krinsky, Seifer and Hantman resigned was Jeffrey McMullen, who had joined SFBC in the company's 2004 $248-million acquisition of PharmaNet, a New Jersey-based pharmaceutical testing company. The company's stock rebounded slightly in the months following the resignations, but McMullen faced plenty of problems, including the dispute with the city over the condition of the Miami test center.

SFBC also operated clinical trial facilities in Fort Myers and two in Canada, but the Miami site remained the most profitable -- company documents and filings indicate it was handling more than two-thirds of SFBC's workload and generating 30% of the company's operating profits. Ultimately, in May 2006, the Miami-Dade County Unsafe Structures Board deemed the building "unsafe" and ordered it demolished. The site is up for sale, and the building has been razed.

The shareholders suit mentions the condition of the facility as part of the securities fraud allegations. With litigation still pending, the company declined to comment about the building. "It's a difficult situation. I do apologize about that, but we really can't comment," replied company spokeswoman Anne-Marie Hess.

Following the county's demolition order, SFBC's stock again plummeted, and the company decided to phase out all of its Florida operations and shift ongoing trials to its clinics in Canada. The company also severed its ties with more Miami staffers, including former president of corporate development Gregory Holmes, who resigned in June.

"Following the recent decision to shut down the company's operations in Florida, we mutually agreed to Greg's departure because his focus had largely been related to these operations," McMullen said.

In August 2006, the company officially closed its Miami headquarters, changed its name to PharmaNet Development Group and moved its operations to Princeton, N.J., to build on the reputation and strong market positions of its PharmaNet and Anapharm subsidiaries. "The name change comes at a dynamic period for the company and our clients," McMullen said. "We have realigned corporate functions and established the right corporate executive management team to focus on building a long-term sustainable business that will enhance client and shareholder value."

Since the move, the company has rebounded. PharmaNet reported net earnings of $3 million for the third quarter of 2006, and the company's stock has been trading for about $21 a share, up from about $14.50 in June 2006.

'New things to do'

Meanwhile, according to both Krinsky's attorney Entin and PharmaNet's SEC filings, Sen. Grassley has concluded his inquiry. Krinsky and Seifer met separately with Grassley in the course of his investigation on Jan. 11, 2006. On March 1, Krinsky hired former U.S. Rep. Bill Livingston, now a lobbyist, and his partner and former chief of staff, J. Allen Martin, to represent her with regard to the "investigation and oversight pertaining to clinical trials," according to federal lobbying records. She paid them $120,000 through June of last year.

Entin believes the SEC also has concluded its investigation. "We contacted the attorney who was responsible for that at the local office of the SEC, to indicate our willingness on behalf of Ms. Krinsky and Mr. Seifer to appear and answer questions, but we were told that was not necessary," Entin says.

In January of this year, PharmaNet and the other defendants in the securities suit, including Krinsky and Seifer, filed a motion to dismiss the case.

Krinsky did not respond to requests for an interview. Entin, her lawyer, says Krinsky "built this company from nothing, and you now have people running her business that are effectively the people she brought on after she bought out their less successful companies. It was her vision and her ability, and now they're running it." Entin also represents Seifer, who he says was wrongly denied a severance valued at approximately $450,000 when he left the company.

A year after leaving SFBC, Krinsky is "happy doing nothing for the time being and looking for new things to do," says Entin.