According to a news release issued by the Securities and Exchange Commission on October 1, 2018, the SEC has issued charges against Salix Pharmaceuticals, as well as its former CFO, Adam Derbyshire, in connection to allegations the defendants misled analysts and investors on multiple occasions in regard to the company’s prospects. Mr. Derbyshire has agreed to pay over $1 million to settle these charges.
The SEC’s complaints allege against Mr. Derbyshire and Salix Pharmaceuticals allege specifically that they “made false statements to analysts and investors during quarterly earnings calls by significantly understating the amount of Salix drugs that wholesaler customers held in inventory.” The company allegedly had long taken actions to create “a short-term revenue bump” by “flooding the distribution channel” with incentives that induced customers to buy additional products; in spite of the short-term bump, according to the SEC, the practice created “excess supply that imperiled future sales.” According to the complaint against Salix, “wholesalers’ inventory levels of Salix’s products eventually grew so high that wholesalers did not need to purchase Salix products each quarter to keep up with prescription or retail demand.” At the beginning of 2013, the complaint notes, wholesalers had inventory levels exceeding “two or three months on hand” for the company’s two “key products,” Apriso and Xifaxan; the company’s overselling in the first quarter of 2013 resulted in those levels reaching nine months on hand.
As the overselling continued during 2013, wholesalers “cut back significantly on purchases” of these products during the first quarter of 2014, which led to Salix’s failure to meet that quarter’s earning targets. The SEC also alleges that Mr. Derbyshire and Salix Pharmaceuticals failed to disclose in reports to the SEC that this practice affected earnings and posed a substantial risk to investors in the company, which is currently a subsidiary of Bausch Health Companies, a company formerly known as Valeant Pharmaceuticals International; the SEC notes that the conduct alleged in its complaints took place before the Valeant’s acquisition of the company.