Salix Pharmaceuticals, based in Raleigh, North Carolina, has announced that they have been affected by an accounting scandal, which has led to the resignation of their chief financial officer. In the wake of the scandal, the board of directors will be bringing in an external accounting firm in order to carry out an independent internal audit.
The scandal involved the stock levels of one of its key drugs, which is used to treat gastrointestinal problems. Xifaxan is used for diarrhea and for some reason the wholesalers, who normally have only a three months supply, appear to have far too much, with enough for nine months. This means that the levels of inventory will have to be cut back over the next twelve months. Salix said they will be working with the wholesalers with respect to the stock reduction, but were not forthcoming with an explanation as to how the situation had arisen.
Xifaxan is a vital part of Salix’s business, providing nearly 50 percent of total income for the company, which means that future sales of the drug will naturally reduce as the existing stock already held by the wholesalers is sold off.
The company has thus had to reduce its financial forecasts and this, together with investor concerns about the poor accounting procedures, resulted in a downward spiral for its shares, which fell as much as 37 percent. The company had previously been thought of as a prime target for an acquisition which had led to its shares almost doubling over the course of the previous year.
Salix is no longer thought to be an attractive acquisition, having been tainted by the accounting scandal, and even though they have reduced their forecast revenue for the rest of the year, investors are loathe to trust the figures as even the company has no idea how serious the accounting situation really is.