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Executives

Michael Freeman – Associate VP, IR and Corporate Communications

Carolyn Logan – President and CEO

Adam Derbyshire – SVP, Finance & Administration, and CFO

Analysts

Bert Hazlett – BMO Capital Markets

Michael Tong – Wachovia Capital

Scott Hirsch – Credit Suisse

Salix Pharmaceuticals, Ltd. (SLXP) Q3 2008 Earnings Call Transcript November 5, 2008 5:00 PM ET

Operator

Good day, everyone, and welcome to the Salix Pharmaceuticals Third Quarter 2008 Earnings Release Conference Call. Today's program is being recorded. At this time I'd like to turn things over to Mr. Michael Freeman, Associate Vice President of Investor Relations and Corporate Communications. Mr. Freeman, please go ahead.

Michael Freeman

Thank you. Good afternoon. Thank you for joining us today. I am Mike Freeman, Associate Vice President of Investor Relations and Corporate Communications for Salix Pharmaceuticals. With me today are Carolyn Logan, our President and Chief Executive Officer, and Adam Derbyshire, our Senior Vice President and Chief Financial Officer.

Adam will begin the presentation with a review of the financial results for the third quarter of 2008. Carolyn then will review operations to complete the foremost segment of today's call. At the conclusion of these comments, management will respond to appropriate questions.

Various remarks that management might make during this conference call about future expectations, plans, and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results might differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our press releases and SEC filings, including our Form 10-K for 2007. Specifically, the information in this conference call related to projections, development plans, and other forward-looking statements is subject to this Safe Harbor.

I now will turn the call over to Adam Derbyshire, our Chief Financial Officer.

Adam Derbyshire

Thank you, Mike. Total product revenue was $42.9 million for the third quarter of 2008 compared to $67.4 million for the third quarter of 2007. Total product revenue for the first nine months of 2008 was $118.2 million compared to $193.8 million for the first nine months of 2007. The decrease in total product revenue for the quarter and nine months was due to the genericization of COLAZAL on December 28, 2007.

XIFAXAN revenue for the third quarter of 2008 was $21.4 million, a 33% increase compared to the third quarter of 2007. XIFAXAN revenue for the first nine months of 2008 was $56.1 million compared to $47.3 million for the first nine months of 2007, an increase of 19%.

MOVIPREP, OSMOPREP and VISICOL, which comprise our bowel cleansing product line, generated revenue of $15.5 million for the third quarter of 2008, compared to $12.1 million for the third quarter of 2007, a 28% increase. Total product revenue for our bowel cleansing product line was $41.5 million for the first nine months of 2008 and $34.6 million for the first nine months of 2007, a 20% increase.

Total cost of products sold was $7.8 million for the third quarter and $22.1 million for the first nine months of 2008. Gross margin on total product revenue was 81.9% for the third quarter of 2008 compared to 80.6% for the third quarter of 2007 and 81.3% for the first nine months of 2008, compared to 80.3% for the first nine months of 2007.

Research and development expenses were $14.4 million for the third quarter of 2008 and $55.7 million for the first nine months of 2008, compared to $16 million and $56.8 million, respectively, for the prior year periods.

Selling, general, and administrative expenses were $23.4 million for the third quarter of 2008, compared to $20.9 million for the third quarter of 2007, and these expenses were $67.6 million and $64.1 million for the first nine months of 2008 and 2007, respectively. The company reported a net loss of $5.4 million, or $0.11 per share, fully diluted, for the third quarter of 2008. Cash and cash equivalents were $121.9 million on September 30, 2008.

Combined product revenue from XIFAXAN and our bowel cleansing products achieved a year-over-year growth of 31% for the third quarter of 2008. We continue to believe several factors should contribute to an increase in product revenue over the coming years, namely the continued growth of our currently marketed products, the launch of new products currently undergoing FDA review, the expanded contribution of rifaximin, if additional indications are approved and the further expansion of our product portfolio via development activities, licensing, and acquisitions.

In August, the company closed on a $60 million convertible note offering. This funding should facilitate our ability to finance development and licensing activities and acquisitions in a timely fashion.

We believe total company product revenue for 2008 will be approximately $178 million to $180 million, including the revenue associated with the initial stocking of APRISO. The current annualized run rates based on dollarizing the latest prescription data for XIFAXAN, our bowel cleansing product line, and other products are approximately $84 million, $67 million, and $31 million, respectively.

With a third quarter loss of $0.11, we anticipate generating a loss of approximately $0.90 per share, fully diluted, for the year ending December 31, 2008 compared to our previous guidance of a loss of approximately $1.02 for the year. This improvement in guidance for 2008 reflects a change in research and development expenditures for the year. Even though enrollment in our two Phase III IBS trials is progressing ahead of goal, research and development expense for the year will be approximately $8 million less than previous guidance, primarily due to the timing of certain smaller supportive studies and the elimination of other smaller studies related to rifaximin and the timing of the initiation of studies related to budesonide foam.

I now will turn the call over to Carolyn Logan, our President and Chief Executive Officer.

Carolyn Logan

Thank you, Adam. Our proprietary products continued to grow and progress during the third quarter of 2008. September, in particular, was a very strong month in terms of product sales. Two of our leading products, XIFAXAN and MOVIPREP, established all time highs during the month.

XIFAXAN prescriptions were 10% year over year for the third quarter and 8% for the first nine months of 2008. Prescription demand for our bowel cleansing products grew 13% and 16% respectively for the third quarter and the first nine months of 2008, compared to the corresponding periods of 2007.

Recent highlights focus on the progress made in both the hepatic encephalopathy and irritable bowel syndrome development programs for rifaximin and the approval of APRISO, our extended–release capsule formulation of mesalamine. In early October, we were pleased to announce the successful completion and outcome of our pivotal Phase III trial to evaluate the efficacy, safety, and tolerability of rifaximin in preventing hepatic encephalopathy. The study demonstrated that a six–month course of rifaximin dosed at 550 mg twice daily provides a highly statistically significant result in preventing hepatic encephalopathy compared to placebo.

Additionally, this primary result was corroborated by the secondary endpoints. Hepatic encephalopathy is a serious medical condition that often results in hospitalization and has no FDA-approved drug therapies available for preventing this relapsing condition. It is our belief that the market is poised for an effective treatment that will work to alleviate the great economic, social, familial and personal burden resulting from this debilitating disease. We look forward to completing and submitting the NDA during the first quarter of 2009. Rifaximin has been granted orphan drug designation by the United States Food and Drug Administration for use in hepatic encephalopathy. We believe that this designation will provide seven years of marketing exclusivity in the United States if rifaximin gains approval from the FDA for hepatic encephalopathy.

During the third quarter of 2008, patient enrollment progressed ahead of goal in TARGET 1 and TARGET 2, our two 600–subject trials to assess the efficacy and safety of rifaximin 550 mg, dosed three times daily, in the treatment of subjects with non-constipation irritable bowel syndrome. Irritable bowel syndrome is among one of the most common chronic conditions and affects approximately 15% of adults in the United States. Based on the most current understanding of IBS and the alterations of bacterial flora in the gut as a potential factor in IBS, we believe rifaximin may be a strong treatment candidate.

The irritable bowel syndrome and hepatic encephalopathy indications present significant potential for the future growth of Salix. Currently, we estimate the commercial opportunity represented by these markets combined is approximately $2.8 billion.

This year's American College of Gastroenterology Annual Scientific Meeting provided a venue for widespread exposure and discussion related to our products and product candidates. Four scientific posters and one oral presentation discussed the use of mesalamine granules in the maintenance of remission of ulcerative colitis. Thirteen scientific posters presented results of investigator-initiated studies investigating the potential use of rifaximin for a variety of indications. Members of the ACG's expert panel on irritable bowel syndrome presented a preview of the College's revised draft treatment guidelines for irritable bowel syndrome. We are pleased that the panel highlighted the guidelines recommendation for the use of antibiotics, notably the non-absorbed agent rifaximin. The final guidelines are scheduled for publication in January 2009 as a supplement to the American Journal of Gastroenterology. Salix currently is assessing the use of rifaximin in the treatment of irritable bowel syndrome.

We were pleased to announce the marketing approval of APRISO last week. APRISO is the first and only once-a-day mesalamine product for the maintenance of remission of ulcerative colitis. We believe APRISO's patent–protected Intellicor delivery system provides a delivery profile that physicians and patients will find beneficial in maintaining remission of ulcerative colitis. We intend to begin stocking the product with wholesalers in December and January and to launch the product to physicians during the first quarter of 2009.

The review of the METOZOLV ODT, that is metoclopramide and balsalazide tablet NDAs continued to progress during the third quarter. We continue to anticipate a decision from the FDA on METOZOLV by November 28 and balsalazide tablet by December 30, 2008.

This completes my formal comments. Thank you for your participation in today's call I will learn the call over to the operator to begin the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. At this time, we invite all listeners to ask questions. (Operator instructions) We will go first to Bert Hazlett with BMO Capital Markets.

Bert Hazlett – BMO Capital Markets

Thanks. Thanks for taking the question. Well, congratulations on the approval, first of all – of the granules. But my question is, how should we expect the launch of the granules to progress, what are you seeing in terms of market dynamics – we do have Lialda out there, we have generic balsalazide, how would you expect the opportunity for that to progress; and then, in that same vein, your additional dosing of balsalazide, what do you think your opportunity will be and how should we model the launch trajectory there? Thanks.

Carolyn Logan

I will let Adam answer your modeling question, but as far as the first part of this, on how we expect the granulated mesalamine or APRISO product to progress, we excite slow, steady growth in this category. But we do expect to be able to compete very nicely. Our Intellicor delivery system is unique, the ph component of that is a ph of 6, which we believe is a significant advantage and that Lialda and Asacol, the ph component for them is a ph of 7, and there is a published paper that shows about 25% of IVD patients do not reach a ph of 7. So, we are quite excited to be able to introduce this product. And of course, we have had numerous meetings with key opinion leaders and advisory boards and we have been very encouraged by the comments that they have made and that they have given us. So, we will be another competitor in this market. It seems as though – it is not intuitive, but it seems as though every new product in this category that has been launched has also grown the market a little bit. So, besides being able to take share from Asacol and Lialda and possibly even Pentasa, then we believe that we will be a good competitor and we will be well.

Adam Derbyshire

Invert to address yourself. Go ahead, Bert.

Bert Hazlett – BMO Capital Markets

I appreciate the color. Just one question on the R&D spends. You mentioned that there was a little delay in the payments. Is this something that we should expect there to be more discipline on going forward for the next several years rather than just this quarter and considering it out one or two quarters delay, I mean, the timing of clinical trials. Is this something that you are really being much more disciplined about the bottom line in terms of R&D spend? Thanks.

Adam Derbyshire

I am not sure if I understand your question.

Carolyn Logan

I think maybe I do. Let me try and then if we haven't answered your question, then just please repeat it and let us know where we missed the mark. I think the answer is – there were some studies that we thought we would need to do, but because of the strength of some of our recent data, those studies are no longer necessary. So they were smaller supported types of study.

Bert Hazlett – BMO Capital Markets

That is there, and I guess the general comments is that R&D spend for the past several quarters has been lower than expectations and I think guidance has held up; but the question is – as you look forward, is R&D something where you would expect to have a much greater discipline and therefore, less spending as you grow the remainder of the business going forward. I guess that you strategically – are you looking to prepare that R&D spend?

Carolyn Logan

Strategically, no. We continue to develop products and that is part of a business model. We want to continue to have products to fuel the future. And we feel we are always very disciplined about every dollar we spend in R&D to try and make sure that when we get the drug to market, that the commercial value will far outweigh the expense it took to get there. So we don't ever spend money in R&D that we haven't put a lot of thought into, and a lot of research into. So, I still don't know if we have answered your question.

Bert Hazlett – BMO Capital Markets

You have, thank you. And I will jump back in queue for now. Thank you very much.

Operator

We will go next to Michael Tong with Wachovia Capital.

Michael Tong – Wachovia Capital

Hi, just a couple of quick modeling questions for Adam. The first one is, based on a commentary on the R&D expenses, are you now expecting R&D to fall somewhere around $80 million for the year?

Adam Derbyshire

Correct.

Michael Tong – Wachovia Capital

Okay. And also based on current run rate of the major products, is there anything in the fourth quarter, any seasonality or any stocking/de-stocking factor that would make those products deviate from the current run rate that you can see right now?

Adam Derbyshire

You mean comparing the rights to ex-factory sale?

Michael Tong – Wachovia Capital

Correct.

Adam Derbyshire

Well, I mean, essentially the run rates are calculated off of prescription data and just dollarizing that prescription data. But for the quarter, if you wait to dollarize the prescriptions for third quarter and compare them to ex-factory sales, they were right on for XIFAXAN, we shipped $21.4 million and if you were to dollarize the prescriptions in the quarter, it was $21.3 million. And then for the bowel cleansing product line, we shipped $15.5 million, and if you were to dollarize prescriptions, it was actually $16.7 million. So we – it is just the timing of shipments, essentially. So for the bowel cleansing product line, we shipped about $1.2 million less than the prescription dictated.

Carolyn Logan

And Michael, there is not seasonality really as much in the fourth quarter as there is holidays. So for example, around Thanksgiving and Christmas, people might choose to schedule their colonoscopies, in the case of OSMOPREP or MOVIPREP. Going into a holiday time is not when a lot of people would choose to do that. So there is not seasonality, but the holidays, we do have low prescriptions as a general rule on holiday weeks.

Michael Tong – Wachovia Capital

Fair enough. And then the last question I have actually has to do with – just trying to think about your – when a patient presents himself or herself with ulcerative colitis to a gastroenterologist, can you help us through the decision-making process for a physician in terms of prescribing balsalazide or COLAZAL, APRISO or Lialda?

Carolyn Logan

I will try to answer that on a general level. Again, it can vary (inaudible) the business, I'm sure you can appreciate. We will talk a lot about our delivery system, both for APRISO and should balsalazide tablet be approved (inaudible) launch in the first part of next year, we will also continue to talk about balsalazide benefits to its delivery system. With APRISO, it does start to release in the small intestine, and we did not have that with balsalazide. Balsalazide, because of how the molecule is cleaved, it does not start; it has to have colonic bacteria, so it doesn't start to release until the beginning of the colon. And that makes it a great drug for colonic disease. But in some UC patients, right at the end of the (inaudible) there could be a bacterial overgrowth that could be some involvement, and of course, even though we are not indicated in Crohn’s disease and we will not prescribe the drugs or promote the drug in Crohn's disease, there is no fiber indicated in Crohn's, but physicians do sometimes use drugs off-label there. And you would need a drug that started to release in the small intestine to treat those patients. And then that combined with the fact of a ph at the beginning of our delivery system, a ph of 6, we believe those are significant advantages for physicians to consider when prescribing drugs to patients.

Michael Tong – Wachovia Capital

Fair enough, thanks.

Operator

(Operator instructions) We will hear now from Scott Hirsch with Credit Suisse.

Scott Hirsch – Credit Suisse

Hi, good afternoon. A few questions, just starting with – I guess this is for you, Adam – on your 84 run rate for XIFAXAN, am I right in saying that that implies a fourth quarter that would pretty much bump significantly at 30% up from where we are here, closer to almost $28 million, $30 million; does that make sense?

Adam Derbyshire

Well, that incorporates a price increase that we have begun in late third quarter.

Scott Hirsch – Credit Suisse

What was the price increase?

Adam Derbyshire

It was up 15%.

Scott Hirsch – Credit Suisse

And any inventory changes or nothing?

Adam Derbyshire

No, as I mentioned, no. That is right.

Scott Hirsch – Credit Suisse

And then, just a follow up on the R&D, I think you have touched on most of it. Of the $8 million that kind of is either pushed out or goes away, how much of that should we assume will be next year and how much of it really are just these trials you no longer need to do?

Adam Derbyshire

We haven’t provided guidance for 2009. So, when we do provide that guidance, we will clarify that.

Scott Hirsch – Credit Suisse

But we can assume that some of it should go away and some of it will come back?

Adam Derbyshire

Right, exactly.

Scott Hirsch – Credit Suisse

Okay. And then, is there any change to SG&A here?

Adam Derbyshire

No.

Scott Hirsch – Credit Suisse

Okay. And then, you guys mentioned previously, I think when you released data that you were going to meet with the FDA for a pre-NDA meeting on HE; have you done that, did anything come out of it?

Adam Derbyshire

No, that meeting is taking place in mid-December.

Scott Hirsch – Credit Suisse

Mid-December, okay.

Adam Derbyshire

So we are on target for a first-quarter filing.

Scott Hirsch – Credit Suisse

And then, do we have any status as to where we are with enrollment on ideas, how far along we are?

Adam Derbyshire

Well, we are not providing actual numbers, but we're clearly ahead of our goal. Actually, we have surpassed what was our original year end goal in late October. So we are running ahead of goal.

Scott Hirsch – Credit Suisse

Okay, thank you very much.

Operator

And Ms. Logan, I'll turn the conference back to you at this time for closing remarks.

Carolyn Logan

I would like to thank our stockholders, our employees, and other supporters for their continued confidence and we look forward to speaking with you in the future. Thank you.

Operator

That concludes today’s conference. Have a wonderful day.

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Source: Salix Pharmaceuticals, Ltd. Q3 2008 Earnings Call Transcript
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