Salix Pharmaceuticals Focuses on Label Expansion

| About: Salix Pharmaceuticals, (SLXP)

Salix Pharmaceuticals, Ltd. (NASDAQ:SLXP) is slated to report fourth quarter as well as fiscal 2009 results on March 9. The current Zacks Consensus Estimate for the fourth quarter of 2009 is a loss of 14 cents. For the full year, the Zacks Consensus Estimate stands at a loss of 89 cents.

Salix suffered a major setback in Dec 2007 when its lead product, Colazal, started facing generics from several companies including Mylan (NASDAQ:MYL). The genericization of Colazal adversely impacted the company’s top-and bottom-line.

Since then, Salix has been working on reviving growth and is now focusing on gaining additional indications for its current growth driver, Xifaxan (rifaximin). More than earnings, we believe that investor focus will remain on the company’s success in gaining approval for additional indications of Xifaxan.

Salix has filed for approval of Xifaxan for the treatment of hepatic encephalopathy (HE). An advisory committee of the US Food and Drug Administration (FDA) recently voted in favor of approval. A response from the FDA should be out by March 24. Approval for the HE indication would be a major boost for the stock.

Estimate Revisions Trend

There have been no estimate revisions for the fourth quarter of 2009 over the past 30 days. The Zacks Consensus Estimate of a loss of 14 cents is in-line with the guidance provided by the company with no potential surprise.

For the full-year 2009, one of the 9 analysts following the stock has revised his or her estimate upward over the past 30 days. The current Zacks Consensus Estimate of a loss of 89 cents is a penny below the company’s guidance of a net loss of 90 cents.

Salix expects revenues to increase to $230 million in 2009. Revenues should be driven by Xifaxan, which is currently approved for the treatment of patients 12 years of age and older with travelers’ diarrhea caused by non-invasive strains of E coli.

We believe that the drug will experience solid, above-market trend growth for traveler’s diarrhea given its safety profile and lack of systemic absorption. Moreover, the product should benefit from price increases and positive data presentation. Xifaxan sales should cross $115 million in 2009.

New product approvals, continued growth for Xifaxan and label expansion for Xifaxan should help Salix swing to profitability in 2010. The current Zacks Consensus Estimate for 2010 is 13 cents.

Over the past 30 days, 2 of the 10 analysts following the stock have reduced their estimates for 2010 with no revisions in the opposite direction. 2010 earnings estimate is down by a cent during this period.

Historically, Salix usually beats its earnings guidance and reports a lower-than-expected loss. In the third quarter of 2009, the company reported a loss of 15 cents, well below the Zacks Consensus Estimate of a loss of 29 cents. A similar trend was observed in the first two quarters of 2009, as well.

There is the possibility that Salix could post a higher-than-expected loss in 2009 if Xifaxan revenues come in below expectations. Moreover, selling, general and administration expenses could be higher than expected with the sales force promoting two new products -- Apriso and Metozolv ODT.

Our Take

We currently have a Neutral recommendation on Salix. We believe the main potential for the company lies in gaining approval for additional indications for Xifaxan (rifaximin). The promotion of newly launched products, Apriso and Metozolv ODT, will also be a high priority for the company.

In the meantime, we remain concerned about the possibility of a generic company initiating a patent challenge for Xifaxan. The entry of generic versions of Xifaxan would be a major setback for Salix.