WSJ: Salix inventory issues helped scuttle Allergan buyout

At one time, Allergan ($AGN) felt confident it could lock up an acquisition of Salix Pharmaceuticals ($SLXP) to thwart Valeant's ($VRX) hostile bid. So confident, in fact, that it reportedly snubbed potential white knight Actavis ($ACT) when it came calling. But those talks have long since stalled, and now, Salix is investigating an inventory blip that The Wall Street Journal's sources say was a dealbreaker for Allergan.

On Thursday, Salix announced that CFO Adam Derbyshire was headed for the door, and CEO Carolyn Logan said on a call with investors that its board's audit committee had launched a review of "issues related to management's prior characterization of wholesaler inventory levels."

The reason? Supply levels for top drug Xifaxan and others are months higher than the company had previously communicated, meaning demand for Salix's products may not have been as high as earlier revenue numbers suggested. As wholesalers sell off their supplies--9 months' worth, in the case of Xifaxan, instead of the 10 to 12 weeks' worth the company had signaled--Salix may not be able to keep sales as high as they've been. On that front, the North Carolina drugmaker said it now expects 2014 net income of $400 million, down from its earlier forecasts of $475 million.

Concerns over those inventory levels stopped the Allergan takeover in its tracks, according to the WSJ. Though the two companies were close to an agreement in September, Allergan took a step back after determining Salix had more product supplies than expected. As Leerink Partners analyst Jason Gerberry wrote in a note to investors on Thursday, the situation also raises questions about Salix's now-dead deal for the Irish unit of Italy's Cosmo Pharmaceuticals, a breakdown the drugmaker blamed on new, stricter U.S. rules on tax inversions.

For Allergan's part, without Salix, the company may be gobbled up by an acquirer in the near future--though the Botox maker is seeming more amenable to that idea lately, provided the acquirer isn't longtime predator Valeant. In what industry watchers consider a thinly veiled reference to Actavis, Allergan said this week it was in talks with an anonymous third party.

The "board has determined that premature disclosure with respect to the possible terms of any transaction might jeopardize continuation of any discussions or negotiations," it said in an SEC filing.

- read the Salix release
- see the Q3 conference call transcript from Seeking Alpha
- get more from the WSJ (sub. req.)

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