Salix's shares plunge up to 42 percent on restated inventory levels for key drugs

Shares in Salix Pharmaceuticals fell as much as 42 percent after the company reported that wholesale inventory levels for its four main drugs, including Xifaxan and Glumetza, are higher than previously indicated. The drugmaker indicated that supply levels for Xifaxan and Apriso are approximately nine months, while inventory levels for Glumetza and Uceris are around seven months and five months, respectively.

Stern Agee Group analyst Shibani Malhotra remarked that’s "a level that’s extremely high for this industry." Malhotra said "we know what happened, but we don’t know why it happened and how it happened."

Salix indicated that it is "negotiating with its principal wholesalers to enter into distribution services agreements for each of the products," which it hopes will "improve its visibility...and enable the company to better forecast revenue and expenses." Salix added that it hopes to reduce wholesaler inventory levels for Xifaxan, Apriso and Uceris to approximately three months by the end of 2016.

CEO Carolyn Logan said that the board’s audit committee was reviewing management’s earlier characterisations of inventory levels and had hired outside lawyers. "Management believes that the company’s accounting with respect to sales to wholesalers has at all times been appropriate," Logan commented. However, the company announced that chief financial officer Adam Derbyshire had resigned from his position, with Timothy Creech, senior vice president for finance and administrative services, assuming the role on an interim basis.

Derbyshire had previously suggested that Salix was working to reduce inventory levels by the end of June this year. "Ideally, all of our inventories for all of our products would be in that 10- to 12-week range," Derbyshire earlier remarked.

The Wall Street Journal, citing people close to the matter, said that the accounting revision played a role in the breakdown of recent discussions between Salix and Allergan about a possible takeover. The sources noted that the parties were near to reaching a deal in September, but Allergan backed away after concluding that Salix had more drug supplies than expected. A person close to Salix said although inventory levels were a sticking point in talks, the company believed it was a surmountable issue.

The news of the accounting revision came as Salix reported third-quarter sales of $354.7 million, up 49 percent year-over-year, but below predictions of $392.3 million, and a loss of $88.6 million, compared to a profit of $47.3 million in the year-ago period. The drugmaker also cut its full year guidance, saying that it now expects profit of $5.20 per share on revenue of $1.4 billion. Salix had previously forecast profit of $6.16 per share on revenue of $1.6 billion, with analysts estimating profit of $6.17 per share on revenue of $1.6 billion.

To read more Top Story articles, click here.