SciClone Pharmaceuticals (SCLN) is restating its financials from 2011 and the first nine months of 2012, an announcement that causes additional concern for this U.S.-based, China-focused pharmaceutical company. While 2011 earnings decline, according to the restatement, 2012 rises, however, accounting discrepancies for any company associated with China simply makes investors nervous. Additionally, SciClone announcing this news after the market closed on Friday suggests that the company wanted the news to be less visible , and that may be because its blue chip accounting firm, Ernst & Young, has informed the company that it won’t work with SciClone after the 2012 books are closed. The fact that SciClone does business in China was risky, and a key support was that it had U.S. auditors and accountants. With Ernst & Young walking away, and more importantly, no replacement announced, confidence in this China-focused business is likely to take a hit. Investors have long approached China-centric firms with a skeptical eye, hence, this is why SCLN trades at such a steep discount to peers (see our prior article here) . SciClone posted surprisingly disappointing results in 3Q 2012 and has offered guidance for Zadaxin in 2013 that features growth rates well below prior expectations. As a result, the surprise negative 3Q earnings results, the slowdown in business prospects, and the accounting restatement and loss of Ernst & Young (along with no announced replacement), are likely to keep investors away from the stock until the company begins to deliver on expectations. As a result, we think SCLN management has some proving to do, and would not be surprised to see it take a couple of quarters of good performance before the shares start appreciating again in a meaningful way. A new credible auditor would go a long way toward supporting the stock, so we await the company’s next move in this regard. Expect shares of SCLN to trade lower on the restatement news and remain in a trading range until management proves that the business really is on solid ground and growing again.
According to SciClone, the accounting restatement is primarily related to its Chinese subsidiary NovaMed, which it acquired in 2011. The restatements, say SCLN, will increase 2012 revenue by approximately $3M and increase income before taxes by approximately $2M. For 2011, the changes will decrease revenue by approximately $1M and income before taxes by almost the same. SciClone believes the impact will also increase goodwill related to the acquisition of NovaMed by roughly $2M. In reality, these changes simply don’t mean much; it’s China, it’s unstable, and investors are going to have trouble trusting SciClone until the business demonstrates stability for a some time.