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

WASHINGTON (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, 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.

Additional reporting by Olivia Oran in New York, Editing by Soyoung Kim and Martin Howell