November 7, 2014
By Mark Terry, BioSpace.com Breaking News Staff
Raleigh, N.C.-based Salix Pharmaceuticals, Ltd. was very close to an acquisition agreement with Allergan Inc. , when problems with Salix’s inventory levels cropped up during due diligence earlier this month, and those problems continue, after Salix announced yesterday during its third quarter earnings call that key drugs had piled up in inventory. That news and other data caused Salix stock to drop more than 49 percent day-over-day and the share price continued to plummet in Friday trading.
As of September 30, Salix inventory was at $155 million, a 50 percent increase since January. In the conference call, Salix indicated it now projected 2014 profits of $5.20 per share on revenue of $1.4 billion, down from an earlier forecast of $6.16 per share on revenue of $1.6 billion.
In response to the company’s internal problems, Salix Chief Financial Officer Adam Derbyshire resigned Thursday and an audit committee will go over the company’s wholesale inventory. Timothy Creech, a senior vice president, will step up as an interim CFO while a permanent replacement is found.
Two of the company’s top drugs, Xifaxan and Apriso, had increased to about nine months inventory. That is, said Shibani Malhotra, an analyst at Stern Agee Group Inc. in a note to investors, “a level that’s extremely high for this industry….We know what happened, but we don’t know why it happened and how it happened.”
Xifaxan, an antibiotic used to fight bacterial infection in the intestines, such as for travelers’ diarrhea, accounts for almost half of Salix’s annual revenue. The stockpile of inventory and the company’s scramble to fix it in the last three months of the year make it difficult to predict annual sales. It also makes it difficult for investors to assign value to the company.
In addition to the halted Allergan-Salix merger, another possible deal between Salix and Parsippany, N.J.-based Actavis Plc may be at risk as well. Rumors suggest that Allergan may now be in talks with Actavis.
In addition to the share prices, CFO resignation, and inventory problems, the embattled company announced a third quarter net loss of $88.6 million, or $1.39 per share. In the same period in 2013 the company showed a net income of $47.3 million, or 71 cents per share.
The company is attempting, by its audits, to determine exactly how inventory levels got so out of control. “Management believes that the company’s accounting with respect to sales to wholesalers has at all times been appropriate,” said Salix Chief Executive Carolyn Logan in the earnings call.
