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Salix Pharma Plunges 38% Late On Earnings Miss, Audit Probe

Salix Pharmaceuticals missed third-quarter earnings and sales forecasts and announced the sudden resignation of its chief financial officer, sending shares plunging late Thursday.

Earlier, Akorn (AKRX) stock sold off on its messy Q3 results, but investors viewed its issues as mild, relatively, compared with its midsize pharma peer.

Salix Pharmaceuticals (SLXP) reported after the close that earnings excluding one-time items rose 72% to $1.53 a share, but that missed analysts' views by 2 cents, according to Thomson Reuters. The maker of gastroenterological drugs said sales rose 49% to $355 million, missing consensus by more than $37 million.

For Q4, Salix expects EPS $1.16 a share — 79 cents below Wall Street's estimate — compared with $1.06 a year ago. Its sales forecast of $325 million is up 26% from last year but $111 million below consensus.

CFO Out Amid Audit Probe On the post-earnings conference call with analysts, CEO Carolyn Logan said the board of directors' audit committee is probing Salix's statements regarding its inventory levels, the implication being that they suspected the firm of dishonesty.

Logan also said Salix is starting to negotiate distribution service agreements with its wholesalers, aiming to "improve our visibility into wholesaler inventory levels and our inventory management and planning.

On a likely related note, Salix announced that CFO Adam Derbyshire had resigned. Senior Vice President Timothy Creech was named interim CFO until a permanent successor is found.

Hostile Questions The first question on the call, from Piper Jaffray analyst David Amsellem, sounded mighty suspicious.

"You've said historically that there were 10 to 12 weeks of (lead drug) Xifaxan inventory on hand — now we're being told nine months on hand," he said. "Given your comments on inventory in the last couple of calls, how can we now say those comments were not misleading?

Logan said she couldn't comment.

Regarding Q3's woes, Creech said the integration of Santarus, a nearly equal-size firm that Salix bought this year, had produced more salesforce turnover than expected, hurting sales.

Salix's stock dived nearly 38% to 86.50 in after-hours trading.

Earlier, generic drugmaker Akorn also reported results complicated by accounting issues.

Consolidated revenue rose 62% to $132.7 million. That included $39.9 million in costs related to price increases on anti-rash cream clobetasol, which Akorn previously guided at $25 million. Without that cost, revenue rose $173 million.

Earnings without the cost and other one-time items rose 80% to 27 cents a share. That was the fourth straight quarter of accelerating growth.

Analysts had expected EPS of 25 cents on $155 million in sales, but "it's unclear whether consensus estimates include price penalties incurred in 3Q," according to Leerink analyst Jason Gerberry in a research note. He says that apart from that issue, the results were basically in line.

Still, Akorn shares fell 9% to close at 37.88.

On the call with analysts, CEO Raj Rai said Akorn's difficulties came from a mix of good and bad news.

"We won more-than-projected customer awards (for clobetasol)," he said. "We did not realize our projected sales from clobetasol in the third quarter due to various factors, such as high levels of inventory stocking to customers prior to the price increases (and) delays in getting new customer orders at the higher prices due to contractual terms.

"In addition to the surge in new business, we were challenged to fulfill the orders by the end of the quarter. Hence large shipments could not be accounted in the third quarter, and now will be accounted in the fourth quarter. With that said, we expect to end the year with an outstanding fourth quarter.

Akorn guided the full year with the cost of price increases excluded, unlike in its previous guidance. It sees $630 million to $640 million in revenue, about double from last year. Its EPS range is $1.13 to $1.15, also about twice the 2013 number.

Analysts had expected $597 million in revenue and $1.03 a share, although again it wasn't clear how many included the $25 million cost.

On the call, CFO Timothy Dick pointed out that the guidance for the first time included the impact of Xopenex, an asthma inhaler acquired on Sept. 30. With all those adjustments, Dick admitted that Akorn winds up at the lower end of its prior guidance, but said that the firm will exit Q4 at a higher run rate than previously expected.

Dick also said Q4 sales should be about $215 million to $225 million, up from $85 million a year ago, with EPS of 44-46 cents vs. 15 cents in 2013. That excluded the cost of price increases, which Dick said would knock 3-4 cents. Even with that subtracted, it would top analysts' consensus of 38 cents a share on $201 million in revenue.

"Management had previously communicated that it would incur the clobetasol price penalty, so the messiness of 3Q reporting should not come as a surprise to most investors," Gerberry wrote. "Bottom line: Updated '14 sales & EPS guidance excluding pricing penalties implies 10 cents of greater underlying earnings power in 2015+."