Xifaxan Drives Salix - Analyst Blog

Salix Pharmaceuticals, Ltd. (SLXP) posted a loss of 5 cents per share in the third quarter of 2010, narrower than the Zacks Consensus Estimate of a loss of 15 cents and the guidance provided by the company (loss of 13 cents). Salix had reported a loss of 15 cents in the year-ago quarter. Higher revenues helped the company post a narrower loss in the reported quarter.

Third quarter revenues increased 22.8% to $80.6 million, mainly due to strong Xifaxan sales. Revenues were well above the company's guidance of $73 million and the Zacks Consensus Estimate of $76 million.

Quarter in Detail

Salix' third quarter performance was driven by its key product Xifaxan, which posted sales of $65.2 million, up 53%. Prescriptions grew 65% during the third quarter.

Salix reported that Xifaxan 550 mg continued to receive a robust response during the reported quarter. Xifaxan 550, which gained US Food and Drug Administration (FDA) approval in March 2010 for hepatic encephalopathy, was launched for physicians on May 24.

Strong formulary coverage should help drive Xifaxan 550 sales further. Salix reported that Xifaxan 550 is covered by several managed care organizations. The drug has received preferred brand status with no restrictions from two large prescription benefit managers – Medco (MHS) and Express Scripts (ESRX).

The company's Integra and Futura sales forces are promoting Xifaxan 550. Positive phase III data on Xifaxan 550 showing a 58% reduction in the risk of experiencing a breakthrough overt HE (hepatic encephalopathy) episode and a 50% reduction in the risk of experiencing HE-related hospitalization should help drive sales. Salix said that it intends to stop shipping Xifaxan 200 mg by the end of 2011.

Salix' bowel cleansing franchise, consisting of MoviPrep, OsmoPrep and Visicol generated revenues of $17.3 million, up 3.7%.

While research and development expenses declined 24.5% to $19.7 million during the quarter, Salix recorded a 33.1% increase in selling, general and administrative expenses which came in at $39.4 million.

2010 Guidance

Salix expects to deliver $20 million net income on product revenue of approximately $334 million in 2010. Revenues should be driven by continued growth of currently marketed products.

Revenue guidance includes Xifaxan sales in the range of $267 million, bowel cleansing product revenues of approximately $100 million, Apriso revenues of $42 million and other product sales of $17 million. We note that Salix has increased its guidance for Xifaxan, Apriso and the bowel cleansing franchise. Meanwhile, guidance for other products has been reduced by $8 million.

Salix expects to spend approximately $85 million towards its research and development efforts, well below its earlier expectations of R&D spend of $100 million. SG&A spend is expected in the range of $150 million, down from the earlier guidance of $153 million.

Salix is currently seeking approval for the use of Xifaxan 550 for the treatment of non-constipation irritable bowel syndrome and IBS-related bloating. The FDA extended the review period for the candidate by three months - a response should now be out by Mar 7, 2011.

As far as pipeline candidates crofelemer and budesonide foam are concerned, Salix recently reported positive top-line data from the crofelemer phase III study (ADVENT). The company expects to hold a pre- new drug application (NDA) meeting with the FDA by mid-first quarter 2011. The company is looking to file for approval by mid-2011.

This represents a slight delay from the company's earlier plans to file an NDA by year-end 2010. Meanwhile, patient enrollment for two phase III studies with budesonide foam is currently ongoing.

Neutral on Salix

We currently have a Neutral recommendation on Salix, which is supported by a Zacks #3 Rank (short-term Hold rating). The approval of Xifaxan 550 for hepatic encephalopathy indication was a major catalyst for the stock.

We believe that the main potential for Salix lies in gaining approval for additional indications of Xifaxan. We believe Salix will also seek suitable in-licensing opportunities in order to grow revenues. In the meantime, we remain concerned about the possibility of a generic company initiating a patent challenge for Xifaxan.

 
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