Cahill Gordon & Reindel LLP

April 4, 2019

Bradley J. Bondi

Cahill Gordon & Reindel LLP

Eighty Pine Street

New York, NY 10005-1702

Re:

SEC v. Salix Pharmaceuticals, Ltd. (Civil Action No. 1:18-cv-08886) (S.D.N.Y.)(Sept. 28,

2018) - Waiver of disqualification pursuant to Rule 506(d)(2)(ii) of Regulation D and

Rule 262(b)(2) of Regulation A

Dear Mr. Bondi:

This letter responds to your letter dated September 27, 2018 (“Waiver Letter”), written on

behalf of Salix Pharmaceuticals, Ltd., (“Salix”) and constituting an application for a waiver of

disqualification under Rule 506(d)(2)(ii) of Regulation D and Rule 262(b)(2) of Regulation A under

the Securities Act of 1933 (“Securities Act”). In the Waiver Letter, you requested relief from any

disqualification that will arise as to Salix under Rule 506 of Regulation D and Regulation A under the

Securities Act as a result of the entry of a judgment (“Final Judgment”) on April 4, 2019 in the United

States District Court for the Southern District of New York relating to the complaint filed by the

Commission on September 28, 2018 against Salix.

Based on the facts and representations in the Waiver Letter and assuming Salix complies with

the Final Judgment, we have determined that Salix has made a showing of good cause under

Rule 506(d)(2)(ii) of Regulation D and Rule 262(b)(2) of Regulation A that it is not necessary under

the circumstances to deny reliance on Rule 506 of Regulation D and Regulation A by reason of the

entry of the Final Judgment. Accordingly, the relief requested in the Waiver Letter regarding any

disqualification that may arise as to Salix under Rule 506 of Regulation D and Regulation A by reason

of the entry of the Final Judgment is granted on the condition that Salix fully complies with the terms

of the Final Judgment. Any different facts from those represented or failure to comply with the terms

of the Final Judgment would require us to revisit our determination that good cause has been shown

and could constitute grounds to revoke or further condition the waiver. The Commission reserves the

right, in its sole discretion, to revoke or further condition the waiver under those circumstances.

For the Commission, by the Division of Corporation Finance, pursuant to delegated authority.

Sincerely,

/s/

Elizabeth M. Murphy

Associate Director

Division of Corporation Finance

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September 27, 2018

VIA EMAIL

Timothy B. Henseler, Esq.

Chief, Office of Enforcement Liaison

Securities and Exchange Commission

I 00 F Street, N.E.

Washington, D.C. 20549

Re:

In the Matter of Salix Pharmaceuticals, Ltd. and Trading in

its Securities

Dear Mr. Henseler:

We write on behalf of Salix Pharmaceuticals, Ltd. ("Salix"), a subsidiary of Valeant

Pharmaceuticals International, Inc. ("Valeant"), in com1ection with the settlement and entry of

final judgment (the "Judgment") relating to In the Matter of Salix Pharmaceuticals, Ltd. and

Trading in its Securities. Salix understands that the entry of the Judgment will disqualify it from

relying on ce1iain exemptions under Regulation A and Regulation D promulgated under the

Securities Act of 1933 (the "Securities Act"). On behalf of Salix, we hereby respectfully request

a waiver of any disqualification from these exemptions that will result from the entry of the

Judgment. We respectfully submit that relief from disqualification is appropriate in this case for

the reasons given below.

BACKGROUND

The staff of the Division of Enforcement (the "Staff') has engaged in settlement

discussions with Salix in c01mection with the above-captioned investigation. As a result of these

discussions, Salix submitted a Consent of Defendant Salix Pharmaceuticals, Ltd. (the

"Consent"), which the Staff presented to the United States District Court for the Southern

CAHILL GORDON & REINDEL LLP

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District of New York in com1ection with a complaint (the "Complaint") against Salix related to

the investigation captioned above.

In the Consent, solely for the purpose of proceedings brought by or on behalf of the

Commission or to which the Commission is a party, Salix consents to the entry of a final

judgment permanently restraining and enjoining it from violations of Section lO(b) of the

Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5(b)

thereunder [17 C.F.R. § 240.10b-5(b)], Section 17(a)(2) of the Securities Act [15 U.S.C. §

77q(a)(2)], and Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rule 13a-13

thereunder [17 C.F.R. § 240.13a-13], without admitting or denying the assertions contained

therein (other than those relating to the jurisdiction of the Commission, which are admitted).

The Complaint alleges that Salix's violative conduct occurred from about 2013 to 2014, prior to

Salix being acquired by Valeant.

Valeant is a publicly traded company with its common stock listed on the New York

Stock Exchange and is a repo1iing company under the Exchange Act. Salix is a subsidiary of

Valeant. Valeant acquired Salix on April 1, 2015.

DISCUSSION

Salix understands that, absent a waiver, the entry of the Judgment will disqualify it, its

affiliated entities, and other issuers from relying on certain exemptions under Regulation A and

Regulation D promulgated under the Securities Act. Salix is concerned that, should it or any of

its affiliated entities be deemed to be an issuer, predecessor of the issuer, affiliated issuer, general

partner or managing member of the issuer, promoter, underwriter of securities, or be deemed to

serve in any other relevant capacity, then Salix, its issuer affiliates, and other issuers with which

it is associated in one of those listed capacities and which rely upon or may rely upon these

offering exemptions when issuing securities, would be prohibited from doing so. The

Commission may waive Regulation A or Regulation D disqualifications upon a showing of good

cause that it is not necessary under the circumstances that the exemptions be denied.

Based on the factors set forth by the Division of Corporation Finance for considering

waiver requests 1 and the facts and circumstances set forth below, Salix requests that the

Commission waive any disqualifying effects that the Judgment will have under Regulation A or

under Regulation D.

I. Whether the Conduct Involved the Offer and Sale ofSecurities

The Complaint alleges that Salix made misrepresentations and omissions in connection

with the offer and sale of securities. The Complaint alleges that over a period of three months

See Division of Corporation Finance, Waivers of Disqualification under Regulation A and Rules 505

and 506 of Regulation D (Mar. 13, 2015).

CAHILL GORDON & REINDEL LLP

,.,

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(June 2014 to August 2014), Salix obtained money or property by means of the allegedly

fraudulent statements when it sold common stock to five employees as part of the employees'

exercise of Salix options pursuant to a compensation plan. As described below, Valeant has

taken substantial steps to ensure that the conduct alleged in the Complaint does not recur.

2. Whether the Conduct Involved a Scienter-Based Violation or a Criminal Conviction

The Division of Corporation Finance's statement on "bad actor" waivers states that the

Division of Corporation Finance will "consider whether the conduct involved a criminal

conviction or scienter based violation, as opposed to a civil or administrative non-scienter based

violation." 2 That statement also indicates that "where there is a ... scienter based violation

involving the offer and sale of securities, the burden on the paiiy seeking the waiver to show

good cause that a waiver is justified would be significantly greater." 3

The Complaint alleges that Salix violated Section 10(b) of the Exchange Act and Rule

10b-5(b) thereunder. These are scienter-based claims. The Complaint also alleges that Salix

violated Section 17(a)(2) of the Securities Act, Section 13(a) of the Exchange Act, and Rule 13a13 under Section 13(a) of the Exchange Act. These are not scienter-based claims. The

Complaint relates only to civil causes of action, and no criminal charges were filed against Salix

or any of its directors, officers, or other employees. As mentioned above, Salix neither admits

nor denies the allegations in the Complaint (other than those relating to the jurisdiction of the

Commission, which are admitted).

As discussed in this letter, Salix satisfies the higher burden to show good cause that is

applicable to the scienter-based claims in the Complaint. First, as discussed in fmiher detail

below, Salix satisfies the Commission's criteria for granting a waiver after a change in control

because Valeant acquired Salix on April 1, 2015 and then promptly removed the entire Salix

management team. None of the individuals allegedly responsible for the conduct alleged in the

Complaint is employed by, or exercises any influence over, Salix or Valeant. 4 Second, as

discussed below, Salix and its successor, Valeant, took substantial remedial steps to address

Salix's prior alleged conduct.

3. Responsibility for the Conduct

The Complaint alleges that former officers of Salix are responsible for Salix's conduct

alleged in the Complaint. As a result of an Audit Committee investigation of Salix's inventory

levels, Salix's Board of Directors forced Salix's former CFO to resign in November 2014 and

forced Salix's former CEO to retire in January 2015. Additionally, promptly after Valeant

2

3

4

Id.

Id.

See Securities and Exchange Commission, Disqualification of Felons and Other "Bad Actors" From

Rule 506 Offerings, SEC Release No. 33-9414, 2013 WL 3817311, at* 13 (July 10, 2013).

CAHILL GORDON & REINDEL LLP

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acquired Salix on April 1, 2015, Valeant removed the entire Salix management team. None of

the officers or directors who were employed by Salix or who were on the Board of Salix before

Valeant' s acquisition has any current role with or influence over Salix or Valeant. Consistent

with the Division of Corporation Finance's statement on "bad actor" waivers, Salix and

Valeant's removal or termination of individuals associated with the alleged misconduct weighs

in favor of Salix's waiver request. 5

4. Duration of the Conduct

The Complaint states that the duration of the alleged conduct was limited to

approximately May 2013 to October 2014. All of the alleged conduct occurred prior to

Valeant' s April 1, 2015 acquisition of Salix.

5. Remedial Steps

The Commission has expressed its intention that waivers of Rule 506 disqualification be

issued "upon a proper showing that there has been a change of control and the persons

responsible for the activities resulting in a disqualification are no longer employed by the entity

or exercise influence over such entity."6 In this case, both elements are satisfied. First, there has

been a change of control: Valeant acquired Salix on April 1, 2015, and Salix became subject to

Valeant's management and Board of Directors. Second, none of the individuals allegedly

responsible for the conduct alleged in the Complaint is employed by Salix or Valeant or

exercises influence over either entity-eliminating any prospect of those individuals repeating

the alleged conduct at Valeant. Before the acquisition, Salix's Board of Directors forced the

resignation or retirement of certain officers that the Complaint alleges are responsible for the

alleged conduct. After the acquisition, Valeant promptly removed the entire remaining Salix

management team.

Salix and Valeant have taken additional remedial steps to address the conduct alleged in

the Complaint. Upon learning of allegations involving its inventory levels, Salix's internal and

external counsel immediately took action to determine if those allegations had any merit. After

initial inquiries, all such advisors recommended to the Audit Committee of Salix's Board of

Directors that the Audit Committee should hire counsel to conduct a thorough and independent

investigation. In response to these recommendations, the Audit Committee promptly engaged

counsel (as well as an independent forensic accounting firm to work with counsel) to investigate

the allegations in more detail, and to ascertain whether any additional problems existed. Audit

6

See Division of Corporation Finance, Waivers of Disqualification under Regulation A and Rules 505

and 506 of Regulation D (Mar. 13, 2015) ("[I]f misconduct committed by one or more individuals

resulted in the waiver applicant's disqualification, and the applicant removes or terminates its

association with those individuals, the Division would generally view such actions taken as favorable

to the waiver request.").

See Securities and Exchange Commission, Disqualification of Felons and Other "Bad Actors" From

Rule 506 Offerings, SEC Release No. 33-9414, 2013 WL 3817311, at *13 (July 10, 2013).

CAHILL GORDON & REINDEL LLP

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Committee counsel was engaged formally in mid-October 2014, and in a matter of days Salix

reported the conduct to the SEC on October 29, 2014.

As mentioned above, Salix's Board of Directors forced the resignation or retirement of

certain officers. At that time, Salix's bylaws required it to advance these officers' attorneys'

fees. To ensure their cooperation in the investigation, Salix's Board persuaded each of these

officers to sign agreements requiring, inter alia, that they cooperate with Salix in connection

with any internal investigation or any external investigation or proceeding relating to Salix,

including by agreeing to provide truthful statements or testimony as a declarant or witness in

connection with any such investigation. Those agreements also contained a provision that

permitted the Board to claw back any unvested shares if the Board found that a relevant officer

intentionally engaged in conduct detrimental to Salix. Such a clawback was not previously

available under these officers' then-existing employment agreements.

Subsequently, in March 2015, after reviewing the findings of the Audit Committee's

independent investigation and at Valeant's request, the Board executed the clawback provisions

in those officers' agreements, and clawed back $38.7 million in equity compensation from them.

In addition, Salix eliminated or reduced bonuses for many high-level executives with knowledge

of the alleged conduct.

Additionally, after Valeant acquired Salix, Valeant's own internal controls became

effective with respect to Salix's products. Unlike Salix, which had no inventory management

agreements prior to the acquisition, Valeant immediately applied its wholesaler distribution

agreements to the Salix products. CmTently, Valeant has distribution agreements with the three

largest wholesalers in the United States. 7 Pursuant to these agreements, Valeant receives actual

on-hand inventory and sales data on a daily basis and receives inventory demand data on a

weekly basis, enabling all relevant parties to access accurate data. To limit the amount of

inventory at Valeant's wholesalers, the distribution agreements contain target inventory levels

between half a month and two months of Valeant' s products, based on historical demand. 8

Valeant's management reviews these inventory levels on a weekly, monthly, and quaiierly basis.

Valeant also has specific policies and procedures, to which Salix is subject, which will

prevent the alleged misconduct at issue from recurring in the future. For example, product

returns are processed in accordance with an established return policy, and Valeant only grants

credit for products that are returned within six months before the expiration date of the product

or within 12 months after the expiration date. The return policy does not allow credit for returns

of saleable product, such as a wholesaler's overstock. Any credit for a return outside of the

policy's criteria requires approval pursuant to a matrix that is based on the dollar value of the

product to be returned. Valeant also has an enterprise resource planning system that ensures

delivery of products to wholesalers is booked in the quarter in which the sale contractually

occurred. This system will not allow a shipment to be recorded in a period after the period has

See Valeant Pharmaceuticals International, Inc., Annual Repo1i (Form 10-K), at 90 (Feb. 28, 2018).

See id.

CAHILL GORDON & REINDEL LLP

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ended. In addition, Valeant performs proof-of-delivery testing on shipments to wholesalers to

ensure proper revenue recognition.

6. Impact If the Waiver Is Denied

The disqualification of Salix from relying on the exemptions under Regulation A and

Regulation D would have an adverse impact on third paiiies, namely innocent Salix and Valeant

shareholders who did not benefit in any way from the alleged misconduct at Salix. While Salix

is cunently a wholly owned subsidiary of Valeant, in the future it may be independent and need

to raise capital to finance its operations. For example, in November 2016, Valeant was in

discussions with third parties concerning divesting Salix,9 and Valeant may divest Salix or

pursue other options in the future.

A disqualification would have an unfair, disproportionate, and prejudicial impact on

Valeant's shareholders. Valeant's ability to divest Salix, to spin it off in an initial public

offering, or to merge it with another company for the benefit of Valeant' s shai·eholders could be

thwarted by the uncertainty of Salix' s future eligibility to avail itself of exemptions under

Regulation A and Regulation D. In particular, Valeant's inability to represent that Salix will be

eligible to rely on such exemptions could chill potential acquirers' interest in Salix as an

acquisition target or depress the price a potential acquirer is willing to pay for Salix. These

uncertainties unfairly prejudice Valeant's innocent shareholders because all of the alleged

misconduct occurred prior to Valeant acquiring Salix and Valeant's shareholders did not benefit

in any way from the alleged misconduct at Salix. Denying the waiver requests and hindering

Valeant's efforts to pursue a transaction involving Salix for the benefit of Valeant's shareholders

imposes disprop01iionate harm on Valeant's shareholders.

Furthermore, if Valeant divests or spins off Salix and Salix is prohibited from availing

itself of the exemptions under Regulation A or Regulation D, then the innocent shareholders of

Salix, who did not benefit in any way from the alleged conduct at Salix, would be harmed.

CONCLUSION

For the reasons stated above, Salix respectfully requests that the Commission (or the

Division of Corporation Finance pursuant to delegated authority) waive, effective as of the date

9

See Valeant Pharmaceuticals International, Inc., Valeant Pharmaceuticals Comments on Press Report

Regarding Its

Gastroenterology Business

Unit

(Nov.

1,

2016),

available

at

http://ir.valeant.com/news-releases/2016/11-01-2016-213619928 ("We are currently in discussions

with third parties for various divestitures including but not limited to Salix.").

CAHILL GORDON & REINDEL LLP

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of entry of the Judgment, any disqualification under Regulation A or Regulation D with regard to

Salix arising as a result of such entry. 10

Please let us know if you have any questions.

Sincerely,

Bradley J. Bondi

cc:

10

Johanna Lose1i (SEC)

Michael Kaplan (Davis Polk & Wardwell LLP)

Sophia Hudson (Davis Polk & Wardwell LLP)

The Commission has granted relief under Rule 262 of Regulation A and Rules 505(b )(2)(iii)(C) and

506(d)(2)(ii) of Regulation D for similar reasons or in similar circumstances. See, e.g., Diamond

Foods, Inc., SEC No-Action Letter (Mar. 6, 2014) (waiver after violation of Section l 7(a) of the

Securities Act and Sections l0(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules

l0b-5, 12b-20, 13a-l, 13a-l l, and 13a-13).