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By Jake King

SciClone Pharmaceuticals (NASDAQ: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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: PropThink is a team of editors, analysts, and writers. This article was written by Jake King. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. Use of PropThink’s research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein.You should assume that as of the publication date of any report or letter, PropThink, LLC and persons or entities with whom it has relation ships (collectively referred to as "PropThink") has a position in all stocks (and/or options of the stock) covered herein that is consistent with the position set forth in our research report. Following publication of any report or letter, PropThink intends to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. To the best of our knowledge and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and not from company insiders or persons who have a relationship with company insiders. Our full disclaimer is available at www.propthink.com/disclaimer.

Source: SciClone's Credibility Takes Another Hit; So Will The Stock