In re Salix Pharmaceuticals, Ltd. Securities Litigation

Court: United States District Court, Southern District of New York
Case Number: 14 CV 9226
Judge: Honorable Kimba M. Wood
Class Period: 11/ 7/2013 - 11/ 6/2014
Case Contacts: Salvatore J. Graziano, John Rizio-Hamilton, Katherine M. Sinderson, Michael D. Blatchley

Securities fraud class action filed on behalf of a class of persons and entities who purchased or acquired the securities of Salix Pharmaceuticals, Ltd. (“Salix”) between November 8, 2013 to November 6, 2014 (the “Class Period”).

On March 23, 2015, the Honorable Kimba M. Wood appointed BLB&G client the Pentwater Funds as Lead Plaintiff and BLB&G as Lead Counsel for the Class.

Headquartered in Raleigh, North Carolina, Salix is a pharmaceutical company that focuses on treatments for digestive system diseases and disorders.  Its principal drug is XIFAXAN® (“Xifaxan”), an antibiotic that is currently approved to treat a condition referred to as “traveler’s diarrhea” and a liver disorder that impairs brain function.  Salix primarily sells its products through wholesalers, which then resell and distribute the Company’s products through pharmacies.  Its wholesaler inventory levels represent the number of weeks’ worth of inventory that Salix’s wholesaler customers kept on hand to fill orders placed by pharmacies.  Accordingly, Salix’s wholesaler inventory levels served as the primary indicator of the strength of Salix’s present and future revenue stream and investors looked to this metric to asses Salix’s value.

The complaint alleges that throughout the Class Period, Defendants made a series of material misrepresentations concerning the wholesaler inventory levels of several of Salix’s most successful products, including Xifaxan.  Defendants repeatedly represented, both before and throughout the Class Period, that wholesalers maintained 10 to 12 weeks of inventory for Xifaxan and other key products.  Defendants also assured the market that they closely monitored Salix’s wholesaler inventory levels that were ultimately reported to investors.  These misrepresentations caused Salix’s stock price to be artificially inflated throughout the Class Period.

In reality, Defendants were engaged in a scheme to “stuff the channel” for Salix’s key drugs in order to make Salix’s growth prospects and financial performance appear far better than they were to spark the interest of a potential acquirer.  Indeed, on November 6, 2014, Salix revealed a sharp increase in wholesale inventory levels for many of its drugs, including its premier drug, Xifaxan.  Specifically, Salix disclosed that the wholesalers who sell Xifaxan to pharmacies had a nine-month supply of the drug, significantly longer than the supply of two months of the drug that the Company claimed it maintained.  The Company also disclosed that the threefold growth in inventories had prompted the audit committee of its board of directors to engage outside counsel to conduct a review of issues related to management’s prior characterizations of wholesaler inventory levels.  Salix further announced that it had replaced its Chief Financial Officer, Adam C. Derbyshire, who had abruptly resigned after fourteen years with the Company.  Following these disclosures, Salix’s stock price declined $47.08 per share, or 34%, representing a market value loss of nearly $3 billion.

Lead Plaintiff filed a consolidated class action complaint on May 8, 2015. Defendants' motion to dismiss is pending.