Skip to main content

RALEIGH, NC ( TheStreet) -- Salix Pharmaceuticals (SLXP) has been rocked by an accounting scandal involving inventory levels of its key gastrointestinal drugs, forcing the company to cut financial forecasts for the rest of the year. Salix's chief financial officer resigned and the company's board of directors has brought in an outside accounting firm to conduct an internal audit.

Salix announced the news in its earnings press release Thursday.  

In Thursday's after-hours trading, Salix shares plummeted 37% to $87.75, reflecting deep investors concern about the reliability of the company's accounting and an inability to accurately predict future sales. Salix had been considered a fast-growing pharmaceutical company and its stock price almost doubled this year fueled by speculation the company would be a prime takeover target.

Now, investors don't know how to value Salix, and the likelihood of the company being acquired with a dark accounting cloud over its head is all but gone. Salix shares closed Thursday's regular session at $138.55.

Salix's future growth has been thrust into uncertainty because wholesaler inventory levels of the company's key drugs are too high and need to be reduced over the next year. For instance, Salix disclosed Thursday that wholesalers have a nine-month supply of the diarrhea drug Xifaxan in their warehouses when they should only have about three months of inventory. Salix did not, or could not, explain how inventory levels got so out of control, but the company said it intends to work with wholesalers to reduce inventory levels to normal levels.

TheStreet Recommends

Xifaxan generates almost half of Salix's total revenue, so reported sales in future quarters will be negatively affected as inventory already in the distribution channel is worked off.

For the remainder of 2014, Salix is now forecasting total product revenue of $1.4 billion versus prior guidance of $1.6 billion. Pro-forma earnings for the year are now forecast to be $5.20 per share versus prior guidance of $6.16 per share. But these new forecasts are being called into question by investors because the company admits it doesn't know the full extent of its accounting problem.

For the third quarter, Salix reported pro forma, or adjusted, earnings per share of $1.53, two cents shy of Wall Street's consensus expectation. Total revenue in the third quarter was $354.7 million, again short of the $392 million consensus expectation. The revenue shortfall was hurt most by disapointing Xifaxan sales of $160 million.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

click here

to send him an email.