Ex-Salix CFO Fined $1M for Misstating Inventory

The former CFO of Salix Pharmaceuticals has agreed to pay $1 million to settle charges that he lied to analysts and investors by significantly understating the amount of Salix drugs that wholesaler customers held in inventory.

The U.S. Securities and Exchange Commission said Adam Derbyhire failed to disclose that Salix regularly oversold demand, which allowed it to meet quarterly revenue targets in the short term but limited its ability to sell product to wholesalers in the future.

On quarterly earnings calls in 2013 and 2014, the SEC said in a civil complaint, Derbyshire routinely responded to analysts’ inquiries by stating that wholesalers had inventory levels in the range of 10 to 12 weeks on hand for Salix’s key products when, in fact, levels were three times that amount.

“The wholesalers’ high inventory levels were critical to Salix’s business operations and caused its inability to continue to sell product and grow its revenue,” the commission said. “By overselling demand, Salix had virtually guaranteed that future sales of its products would, at some point, drop precipitously.”

Salix’s sales collapsed in the third quarter of 2014 and Derbyshire resigned in November 2014 after 14 years as CFO. To settle the SEC’s charges, he agreed to pay $558,534 in disgorgement and interest plus a penalty of $494,836, and to be barred for five years from serving as an officer or director of a public company.

By the start of 2013, the SEC said, Salix’s sales practices had left wholesalers with inventory levels well in excess of two to three months on hand for Salix’s gastrointestinal disease treatments Xifaxan and Apriso.

In particular, the company used incentives to induce wholesalers into purchasing more of its products, with the overselling in the first quarter of 2013 pushing inventory levels to nine months.

But on the Q1 earnings call, Derbyshire told analysts that inventories were “in that 10-to-12 week range [where] we like to keep them.”

The SEC noted that Derbyshire “personally tracked total distribution channel inventory levels, and he was apprised by the Salix team about wholesalers resistance to Salix’s sales promotion efforts given their already high inventory levels.”