Salix Faces Lawsuit Over Wholesale Inventory Management

Salix Pharmaceuticals Inc.  a specialty pharmaceutical company, has outlined plans to improve its wholesale inventory management through wholesale distribution-services arrangements. The move follows the resignation of the company’s chief financial officer and a filing of a class-action shareholder lawsuit against the company for allegedly providing misleading information that understated its inventory levels between November 2013 and November 2014 and which overstated its revenues for this period.

Salix reported a loss in the third quarter of 2014 and for the first nine months of 2014 despite posting product revenue gains.The company’s third-quarter 2014 revenues increased 49% to $354.7 million compared to the year-ago period. Total net product revenues for the first nine months of 2014 increased 66% to $1.1 billion compared to $676.2 million for the first nine months of 2013. In the third quarter of 2014, the company reported a GAAP net loss of $88.6 million compared to GAAP net income of $47.3 million in the year-ago period. For the first nine months, the company’s GAAP net loss was $129.2 million compared to GAAP net income of $90.8 million in the year-ago period. GAAP net income (loss) included $45.5 million and $140.1 million, respectively, for the three-month and nine-month periods ended September 30, 2014, for transaction costs related to the acquisition of the specialty biopharmaceutical company, Santarus, and the terminated merger with the specialty pharmaceutical company, Cosmo Technologies Limited.

In its third-quarter earnings release, the company addressed the issues of wholesale inventory management for several of its products. The company estimated that it had the following wholesaler inventory levels: Xifaxan 550 (rifaximin), approximately 9 months; Apris (mesalamine), approximately 9 months; Glumetza (metformin), approximately 7 months; and Uceris (budesonide), approximately 5 months. The company estimated that wholesaler inventory levels of Xifaxan 550 and Apriso were largely constant during the first nine months of 2014. Wholesaler inventory levels of Uceris and Glumetza were approximately two months and less than one month, respectively, at the time of the consummation of the Santarus transaction. 

Salix said it believed that current wholesaler inventory levels for its key products are appropriate in light of the long shelf lives of the products and their high prescription growth rates, but that a
fter reviewing the company's portfolio and its inventory history, it believed its lack of distribution-services arrangements with wholesalers contributed to the company's difficulty in forecasting revenue on a quarter-to-quarter basis and in projecting and appropriately budgeting for the level of wholesaler discounts to be incurred in any reporting period. As a result, Salix said its is currently negotiating with its principal wholesalers to enter into distribution-services agreements for each of the products in its portfolio.

“Salix believes these agreements will improve its visibility into wholesaler inventory levels and its inventory management and planning, provide valuable inventory and sales data, ensure proper service levels to pharmacies and other indirect customers, and enable the company to better forecast revenue and expenses. In addition, Salix believes entering into distribution-service agreements will enhance the company's profitability over the long term because service fees under the agreements are expected to be less, in the aggregate, than the aggregate discounts given to wholesalers in recent periods.”

Salix expects that these agreements, when finalized, will enable it to reduce wholesaler inventory levels of Xifaxan 550, Apriso, and Uceris to be approximately three months at or before the end of 2016, depending on future demand for these products. The company believes this is an appropriate level of inventory for its products under a distribution-services agreement structure, given the prescription growth rates of its products and the expected service levels that will be required of the wholesalers under the agreements. Salix expects these distribution-services agreements to be finalized and become effective in the first quarter of 2015.

In addition, the company expects that it will work with its wholesalers under these distribution-services agreements to reduce their inventory levels of Glumetza during 2015. The company's expectation is that wholesaler inventory levels of Glumetza will fall to approximately one month or less as a generic competitor enters the market in early 2016.

In its lawsuit, Shareholders Foundation, which is representing the plaintiffs’ claims, said that between November 8, 2013 and November 6, 2014 that the company made “allegedly false and misleading statements and allegedly concealed material information” regarding deteriorating demand and wholesaler inventory levels for the company’s top-selling drug, Xifaxan and products. The plaintiffs further alleged that the company’s reserves for outstanding inventory were understated and, because of this understatement, its reported quarterly and annual net revenue and earnings per share figures were overstated, and that its disclosure controls and procedures and its internal controls over financial reporting and accounting were subject to material weaknesses.

In other news, Salix has appointed Timothy J. Creech, as acting chief financial officer of the company, effective immediately. He succeeds Adam C. Derbyshire, who resigned his position. Creech joined the company in 2007 and has most recently been serving as the company's senior vice president of finance and administrative services. He has more than 30 years of accounting and financial experience, including approximately 10 years at KPMG LLP and over 20 years in positions of significant responsibility at publicly traded companies. The company has retained Korn Ferry, an executive search firm, to assist the company in identifying an individual to serve as the company’s permanent CFO.

Source: Salix Pharmaceuticals Inc.  and Shareholders Foundation

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