Gastro Drug-Maker Salix Can't Purge Securities-Fraud Suit

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By Phyllis Diamond

April 22 — Salix Pharmaceuticals Ltd., maker of products to treat gastroenterology disorders, lost its bid April 22 to dislodge would-be class securities claims it pumped up its stock price by increasing inventory levels of certain products far beyond demand.

The plaintiff pension funds adequately alleged that Salix and its top executives misleadingly suggested that inventory levels were lower than they actually were, Judge Kimba Wood of the U.S. District Court for the Southern District of New York held.

She also said the alleged misstatements, many of which encompassed representations of current fact, weren't protected by the Private Securities Litigation Reform Act's safe harbor for forward looking statements.

A little over a year ago, Salix reported that it was being investigated by U.S. regulators for possible securities law violations related to its inventory accounting (42 SLD, 3/4/15). Shortly thereafter, it was acquired by Valeant Pharmaceuticals International, Inc., which also reportedly is under Securities and Exchange Commission investigation (40 SLD, 3/1/16).

Channel-Stuffing

According to the plaintiffs, sometime before the start of the class period in late 2013, the defendants launched a plan to “stuff the channel” with the company's key products—i.e., increase inventory levels “vastly beyond prescription demand”—to make Salix appear financially stronger than it actually was.

After two potential acquirers discovered the inventory problem and withdrew their bids, in November 2014, the defendants disclosed the concern's elevated inventory levels and updated its revenue guidance. The move prompted Salix' stock price to plummet from $138.55 to $91.47, a decline of approximately 34 percent in a single day, the district court recapped.

In allowing the lawsuit to proceed, it said the plaintiffs adequately alleged that the defendants made actionable misstatements and omissions, and did so with scienter—culpable intent. As evidence of their scienter, the court noted how easily potential buyers were able to determine Salix's actual inventory levels, the fact that the two individual defendants resigned from the company, the magnitude of the alleged fraud and the fact that it involved Salix's core operations.

The court also said the defendants didn't provide any non-fraudulent inference that was more compelling than the inference of fraud alleged by the plaintiffs.

To contact the reporter on this story: Phyllis Diamond in Washington at pdiamond@bna.com

To contact the editor responsible for this story: Susan Jenkins at sjenkins@bna.com