Salix Pharmaceuticals: Poised To Prosper

| About: Salix Pharmaceuticals, (SLXP)

The Overview

On Tuesday, Salix Pharmaceuticals (NASDAQ:SLXP) reported positive results on Phase 3 testing of a drug for the treatment of opioid-induced constipation in subjects with chronic, non-cancer pain. This marks yet another significant development in Salix Pharmaceuticals' research and development and further bolsters the current state of the company. Over the last 3 months, Salix Pharmaceuticals has seen its stock soar by 79.4%; institutional buying has increased by roughly 3% in its fourth quarter compared with third-quarter reports and Salix Pharmaceuticals overall represents a very attractive investment.

The Niche

Salix Pharmaceuticals is a $2.82 billion specialty pharmaceutical company that acquires, develops, and commercializes prescription drugs for the treatment of gastrointestinal disorders in the United States. It is a very specialized pharmacy that focuses on a specific niche with a wide array of products. Its flagship drugs are Xifaxan 200mg and Xifaxan 550mg. Xifaxan 200mg was approved to treat traveler's diarrhea, which is a recurring ailment for an estimated 20 million people. 1.2 million were prescribed a drug in the U.S. in 2008. Even though Xifaxan 200mg has widespread appeal, it is Xifaxan 550mg that is truly turning heads. Xifaxan 550mg is an orphan drug that is the only approved drug on the market to treat a gastrointestinal condition called hepatic encephalopathy. Because it is an orphan drug (a pharmaceutical agent developed specifically to treat a rare medical condition), Salix Pharmaceuticals can sell it for seven years without market competition under the Orphan Drug Act; as a result, according to analyst David Amsellem of Piper Jaffray, "Xifaxan is one of those rare emerging products that has a remote risk of seeing generic competition anytime soon."

The drug was approved in 2010 and is expected to generate billions of dollars in total revenue. In fact, Salix spokesman Michael Freeman recently pointed out that sales from Xifaxan 550mg could easily generate upward of $1 billion at its peak in 2017. This number could be significantly boosted if Salix Pharmaceuticals is granted FDA approval for Xifaxan 550mg to also be prescribed as a treatment for irritable bowel syndrome, as more than 4 million patients diagnosed with this syndrome seek treatment. Salix also has a host of other products and is poised to benefit from continued research and development, as was the case on Tuesday. Moreover, Salix Pharmaceuticals is also seeking to acquire Oceana Therapeutics for $300 million, which will add more drugs to its product line. Salix Pharmaceuticals has come to dominate its niche in gastrointestinal disorders, and the resulting profitability and expansionist mindset will definitely be positively reflected in its stock performance.

The Result

Salix Pharmaceuticals has experienced explosive growth. In fact analysts surveyed by Thomson Reuters expect a 370% full-year earnings increase this year to $2.54 a share and double digit increases annually through at least 2014." With that said, the 2011 4Q EPS for Salix Pharmaceuticals eclipsed its 2010 4Q EPS by 450% and the fourth quarter delivered a substantial 22.2% earnings surprise. The estimated earnings growth of the current quarter is expected to result in at least a 39% EPS gain compared with that of the same quarter a year back. Salik Pharmaceuticals has had two years of recorded annual EPS growth and sales are also increasing significantly. 4-Q sales figures for 2011 increased 81% compared with those of a year ago, while the 3-Year Sales Growth Rate is a healthy 44%. These earnings and sales figures show that Salix Pharmaceuticals is in excellent financial shape and a prime growth/momentum play.

There are also some less attractive aspects to Salix Pharmaceuticals. Its Annual Return-On-Equity (ROE) and Annual Pre-Tax Margin are somewhat low, 11.7% and 14.2% respectively. Also, its debt/equity ratio is 81%, on the high end of the CAN SLIM spectrum. However, these aspects haven't significantly detracted from the exponential growth of the company, and the overall portrait of Salix Pharmaceuticals' prosperity is still extremely positive.

The Verdict

Salik Pharmaceuticals has been significantly growing and has an extremely positive future considering its flagship drug, Xifaxin 550mg, will most likely hold a monopoly over its target market until 2017. Salik Pharmaceuticals has also shown a strong emphasis on research and development of new drugs, as shown by the positive development in one of its clinical trials on Tuesday. Also, the FDA is widely expected to approve Xifaxin 550mg for the treatment of irritable bowel syndrome; doctors have already used off-label versions of it with success. Salik's acquisition of Oceana Therapeutics will synthesize Oceana's products with Salik's product line, resulting in increased profitability for Salik Pharmaceuticals.Although there are some less attractive aspects of this company's financial performance, overall the figures illustrate the amazing growth Salik Pharmaceuticals has reported and will most likely continue to deliver in the future.

Disclosure: I am long SLXP.

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