Supply Chain

Salix CFO Resigns as Board Reviews Inventory Accounting

Are high levels of inventory at wholesalers indicative of improper accounting of sales?
Matthew HellerNovember 10, 2014
Salix CFO Resigns as Board Reviews Inventory Accounting

Adam Derbyshire has resigned as CFO of Salix Pharmaceuticals amid a board review of whether management mischaracterized wholesaler inventory levels of its key gastrointestinal drugs.

SALIXSalix didn’t say whether Derbyshire’s resignation on Wednesday was related to the review by the board’s audit committee, which was announced Thursday. “[T]he company’s management believes that the company’s accounting with respect to sales to wholesalers has been appropriate,” it said in a regulatory filing.

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But Salix disclosed that wholesalers have a nine-month supply of the diarrhea drug Xifaxan —which generates almost half of Salix’s total revenue — in their warehouses when they should only have about three months.

That level of inventory is “extremely high for this industry,” Shibani Malhotra, an analyst at Sterne Agee Group, told Bloomberg. “We know what happened, but we don’t know why it happened and how it happened.”

According to the Wall Street Journal, Derbyshire had indicated during the second-quarter earnings call in August that the company aimed to keep inventories around two months and that he expected inventories to come down in the third quarter.

“The higher inventory levels indicate Salix sold more to wholesalers than the wholesalers have been selling to pharmacies,” which means “demand for Salix drugs may not have been as large as its revenues in earlier quarters suggested, and the company might not be able to match the same level of sales in future quarters while wholesalers sell off their supplies,” the WSJ said.

Derbyshire, who had been at the drugmaker for 14 years, will be replaced temporarily by Timothy Creech, senior vice president for finance and administrative services, Salix said in a news release. An executive recruiter is conducting a search for a permanent CFO.

The Street noted that Salix has been considered a fast-growing company and “a prime takeover target.” A source with knowledge of the matter told Bloomberg that Allergan backed away from a deal with Salix in part because due diligence revealed issues with inventory accounting.

In after-hours trading Thursday, Salix shares plummeted 37% to $87.75, wiping out more than $3 billion in value. The stock rebounded slightly on Friday, closing at $91.32.