SEC probes former Salix CEO, CFO over investor disclosure-source

By Sarah N. Lynch
WASHINGTON, Feb 9 (Reuters) - U.S. securities regulators are
investigating whether former top executives at Salix
Pharmaceuticals misled investors in connection with the
company's 2014 disclosure that its drug inventory levels were
much higher than previously reported, according to a person
familiar with the probe.
The U.S. Securities and Exchange Commission's investigation
is focusing on what roles former Salix Chief Executive Officer
Carolyn Logan and former Chief Financial Officer Adam Derbyshire
may have played in the disclosures, the source said.
It remains to be seen if the ongoing probe will ultimately
lead to civil charges against the executives, said the source,
who spoke anonymously because the matter is not public.
Valeant Pharmaceuticals International Inc (N:VRX) VRX.TO , which
acquired Salix for about $11 billion last April, said in an
October financial filing that Salix is facing an SEC
investigation over disclosures and accounting issues related to
the inventory amounts in its distribution channel.
It had not been previously reported that the former CEO and
CFO of Salix are major subjects of the SEC investigation.
Logan and Derbyshire resigned from Salix in the months
leading up to Valeant's takeover of the company, with Derbyshire
stepping down in late 2014 and Logan in early 2015.
In late March 2015, just before Valeant's acquisition was
complete, the board voted to claw back all of the two former
executives' unvested equity and to cancel their health benefits.
Thomas Sporkin, an attorney for Derbyshire, and F. Whitten
Peters, an attorney for Logan, declined to comment on the probe.
Phone calls and emails to Logan and Derbyshire were not
returned.
A spokeswoman for Valeant declined to comment. An SEC
spokeswoman declined to comment.
While the disclosure issue at Salix predates Valeant's
acquisition, the probe is still a headache for Valeant, which is
already facing multiple federal investigations over drug pricing
and other matters.
Under some circumstances, prosecutors and regulators may
decide to hold corporations accountable for the misdeeds of
companies they acquire.
Salix's woes started in November 2014, when it revealed in
its third-quarter earnings report that inventory for its
irritable bowel syndrome drug Xifaxan, as well as several other
key drugs, had climbed to nine-month levels.
In at least the two previous quarters, Derbyshire told
analysts on earnings calls that the company was getting
inventory levels toward the 10-12 week range, according to
transcripts of the calls.
Inventory levels are a key measure that investors rely on to
gauge demand for prescription drugs.
Reporting third quarter earnings on Nov. 6, 2014, the
company also announced that Derbyshire was resigning and that
the board's independent audit committee was planning to
investigate the prior inventory disclosures.
A few weeks later, the company announced the results of the
audit committee's review and said it would be restating its
financial results for all of 2013 and the first three quarters
of 2014 to correct errors related to revenue recognition,
revenue-reducing returns and discounts.
In addition to the SEC's investigation, Valeant, Logan and
Derbyshire are also separately battling a class action lawsuit
filed by former Salix shareholders over the inventory
disclosures.