Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Salix Pharmaceuticals Ltd. (NASDAQ:SLXP)

Q3 2007 Earnings Call

November 6, 2007 5:00 pm ET

Executives

Michael Freeman - Executive Director of Investor Relations & Corporate Communications

Carolyn Logan - President and Chief Executive Officer

Analysts

Michael Tong - Wachovia Securities

Don Ellis - Thomas Weisel Partners

Angela Larson - SIG

Mitul Desai - Piper Jaffray

Robert Uhl - FBR

Greg Gust - Roth Capital Partners

Operator

Good day, everyone, and welcome to the Salix Pharmaceuticals Third Quarter 2007 Earnings Release Conference Call. Today's call is being recorded.

At this time I would like to turn the call over to Mr. Michael Freeman, Executive Director of Investor Relations and Corporate Communications.

Mr. Freeman, please go ahead.

Michael Freeman

Thank you, and good afternoon. Thank you for joining us today. I am Mike Freeman, Executive Director of Investor Relations and Corporate Communications for Salix Pharmaceuticals.

With me today is, Carolyn Logan, our President and Chief Executive Officer. Carolyn will begin the presentation with a review of the financial results for the third quarter of 2007 and then will review operations to complete the formal 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 release and SEC filings, including our Form 10-K for 2006.

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 Carolyn Logan, President and Chief Executive Officer.

Carolyn Logan

Thank you, Mike. Hello, everyone. Before starting today's call I want to give you a brief update on Adam Derbyshire, our Senior Vice President of Finance and Chief Financial Officer.

As many of you know, Adam was diagnosed with cancer back in the summer. He has successfully completed the chemotherapy portion of his treatment, and on October 22 he underwent surgery to clean up and remove any remaining tumor remnants.

Post surgery it is not uncommon for a few additional chemo treatments to be needed, and that's still being determined for Adam. All phases of his treatment thus far have been very successful, and as soon as he recuperates from this recent surgery and follow-up he'll be back at work as good as new.

Since Adam is out today, Tim Creech, our Executive Director of Finance, will be joining Mike and me on this call and will be available for the question-and-answer portion of the call. I'm sure each of you join all of us here at Salix in wishing Adam a speedy recovery.

Total product revenue increased 32% year over year to $67.4 million for the third quarter of 2007, compared to $51.2 million for the third quarter of 2006. Total product revenue for the first nine months of 2007 was $193.8 million, a year-over-year increase of 33%.

COLAZAL generated revenue of $31.1 million for the third quarter of 2007, compared to $27 million for the third quarter of 2006. COLAZAL generated revenue of $92.4 million for the first nine months of 2007, compared to $73.1 million for the first nine months of 2006.

XIFAXAN revenue for the third quarter of 2007 was $16.1 million, compared to $15.9 million for the third quarter of 2006. XIFAXAN revenue for the first nine months of 2007 increased 44% compared to the first nine months of 2006.

MOVIPREP, OSMOPREP and VISICOL, which comprise our bowel cleansing product line, generated revenue of $12.1 million for the third quarter of 2007, compared to $6.6 million for the third quarter of 2006.

Our bowel cleansing product line contributed $34.6 million in product revenue for the first nine months of 2007, compared to $34 million for the first nine months of 2006. Our other products category generated revenue of $8 million and $19.6 million for the third quarter and first nine months of 2007, respectively; compared to $1.7 million and $6 million for the corresponding periods of 2006.

The year-over-year increases in other products revenue for the third quarter and first nine months of 2007 primarily reflect the contribution of PEPCID OS, which we acquired in February 2007.

Currently, the annualized demand for COLAZAL is $115 million, for XIFAXAN is $66 million and for our bowel cleansing products it's $60 million. Annualized demand is based upon an annualized run rate utilizing the latest prescription data.

Total cost of products sold was $13.1 million for the third quarter and $38.1 million for the first nine months of 2007. Gross margin on total product revenue was 80.6% for the third quarter of 2007, compared to 77.2% for the third quarter of 2006, and 80.3% for the first nine months of 2007, compared to 80% for the first nine months of 2006.

Research and development expenses were $16 million for the third quarter of 2007, compared to $10.3 million for the prior year period. Research and development expenses were $56.8 million for the first nine months of 2007, compared to $32.1 million for the prior year period.

Selling, general and administrative expenses were $20.9 million for the third quarter of 2007 and $64.1 million for the first nine months of 2007, compared to $20.7 million and $63.5 million, respectively, for the corresponding periods of 2006.

The Company reported net income of $14.2 million, or $0.29 per share, fully diluted, for the third quarter of 2007, which represent year-over-year 102% and 93% increases, respectively, compared to third quarter 2006 net income of $7 million and third quarter 2006 EPS of $0.15, fully diluted.

For the first nine months of 2007 the Company reported net income of $27.3 million, or $0.56 per share, fully diluted, which represent 55% and 51% increases, respectively, compared to first nine months of 2006 net income of $17.6 million and first nine months of 2006 EPS of $0.37, fully diluted.

Cash, cash equivalents and investments were $70.2 million on September 30, 2007. As of October 31, 2007 cash, cash equivalents and investments were $118 million, including the collection of approximately $63 million in accounts receivable.

Product revenue achieved $67.4 million for the third quarter of 2007, which is an all-time high level of performance for a quarter. The tax rate for third quarter 2007 was 13.4%. These factors combined to yield reported net income of $14.2 million, or $0.29 per share, fully diluted, for the quarter.

We now believe that total product revenue for the entire year 2007 will be approximately $262 million. We anticipate that the tax rate for fourth quarter 2007 will be approximately 13% and the tax rate for the full year will be approximately 14%.

Additionally, we now expect R&D expenditures should be approximately 26% of revenue and SG&A expenditures should be approximately 33% to 34% of revenue for the entire year.

Taking these factors into consideration, based upon information currently available, we now believe that we will be able to generate $0.88 in earnings per share, fully diluted, for the year ending December 31, 2007.

The projected 2007 EPS of $0.88 represents a 50% increase, on a tax-adjusted basis, compared to 2006 EPS of $0.65.

The Company continued to make advances during the third quarter in the commercialization of our existing products, the ongoing development of our product candidates and the acquisition of new products.

Our bowel cleansing products and XIFAXAN continue to demonstrate strong prescription growth trends. We reported last quarter that during April and May 2007 OSMOPREP and MOVIPREP respectively achieved record levels of prescriptions written during a single month.

I am pleased to report that OSMOPREP and MOVIPREP prescriptions written during August 2007 outpaced these previous record levels by 7% and 8%, respectively. Additionally, we previously reported that during May 2007 XIFAXAN achieved a record high number of prescriptions written during a single month. XIFAXAN prescriptions written during August 2007 outpaced the May level by 3%.

COLAZAL prescriptions for the first nine months of 2007 remained stable compared to the first nine months of 2006 commendable performance in the highly competitive 5-ASA marketplace.

We also achieved several significant product development milestones during the third quarter. On July 17th the Company submitted an NDA to the United States Food and Drug Administration seeking approval to market an 1100 mg tablet formulation of balsalazide disodium designed to reduce pill and dosing burden by decreasing the number and frequency of doses needed to be taken by patients to obtain relief from their ulcerative colitis.

We completed the comparator-controlled, multi-center study of balsalazide tablets during the period, and the trial achieved its primary endpoint of non-inferiority. As planned, these results will be submitted to the FDA in conjunction with the four-month safety update later in November. The application has been accepted for filing and is currently under review. We anticipate receiving a response from the agency on this NDA by May 16th 2008.

In September, we announced the successful completion and outcome of our 680-patient, multicenter Phase IIb trial to assess the efficacy and safety of rifaximin in the treatment of patients with diarrhea-associated irritable bowel syndrome or dIBS. This 14-day course of rifaximin, dosed 550 mg twice-a-day, provided statistically significant improvement in both adequate relief of dIBS symptoms as well as adequate relief of the IBS-related bloating, compared to placebo.

These results provide a solid rationale and basis for further investigation in pursuit of marketing approval. An end-of-Phase II meeting with the FDA has been scheduled for mid-December. We continue to anticipate initiating our Phase III trials of rifaximin in the treatment of dIBS during the first quarter of 2008.

Also during the quarter we announced the successful completion of two Phase III trials to assess the efficacy and safety of our granulated mesalamine for the maintenance of remission in ulcerative colitis patients.

In each of these multicenter trials a statistically significantly greater portion of subjects treated once-a-day with 1.5 grams of granulated mesalamine remained relapse-free over six months of treatment than patients dosed with placebo. We currently anticipate submitting an NDA in December 2007 seeking to market granulated mesalamine for the maintenance of remission of ulcerative colitis.

Granulated mesalamine is unique in that it combines an enteric pH-dependent coating, which provides for delayed release, and a polymer matrix core, which provides for extended release. The formulation is designed to provide for the distribution of the active ingredient beginning in the small bowel and continuing throughout the colon.

Additionally, granulated mesalamine, if and when approved by the FDA, will be the only pH-dependent product in its class that begins to release at a pH of 6. We believe this novel, patent-protected granulated formulation of mesalamine, if approved, should improve the convenience of maintenance therapy for ulcerative colitis patients and serve as an important addition to our 5-ASA product portfolio.

During the second half of October approximately 600 Eisai sales representatives began promoting COLAZAL as a result of our recently announced balsalazide co-promotion agreement. We look forward to the contributions their efforts should make in the near term to increase the share of voice in the marketplace for COLAZAL, as well as in the longer term to expedite the introduction and growth of our patent-protected balsalazide tablet product if approved.

We believe Eisai's primary care sales effort should capture additional business that's available outside the scope of our gastroenterologist-focused sales strategy. We expect this strategic agreement should increase product revenue without incurring significant incremental expense.

In September, Salix acquired the exclusive, worldwide rights to metoclopramide-Zydis. We are pleased to announce that today Wilmington Pharmaceuticals, the licensor, submitted an NDA for the product to the U.S. Food and Drug Administration.

Metoclopramide is indicated for short term therapy for adults with symptomatic, documented gastroesophageal reflux who failed to respond to conventional therapy, as well as for the relief of symptoms associated with acute and recurrent diabetic gastric stasis.

The Zydis technology provides for a freeze dried oral solid dosage form of metoclopramide that disintegrates rapidly on the tongue and can be taken without water. We look forward to the addition, if approved, of this patent-protected, fast-dissolving formulation of metoclopramide to our product portfolio.

We believe that our specialized sales force is positioned to effectively commercialize this patient-friendly formulation of this widely prescribed agent. Additionally, in keeping with our strategy to focus on the U.S. market, during the third quarter we announced the licensing of OSMOPREP marketing rights for France to Mayoly-Spindler.

We are extremely pleased with our accomplishments during the third quarter of 2007, and we continue to build on our successes to expand and commercialize our growing portfolio of innovative products to prevent or treat gastrointestinal disorders and to create exceptional value for our stockholders. This completes my comments. Thank you for your participation in today's call.

And now I would like to turn the call over to the operator to begin the question-and-answer session. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Michael Tong with Wachovia Securities.

Michael Tong - Wachovia Securities

Hi. Good afternoon, Carolyn.

Carolyn Logan

Hi, Michael.

Michael Tong - Wachovia Securities

Just want to get a little bit better clarity on the, I guess the moving around of the operating expenses. What did you see that caused the R&D to spike up relative to your previous expectations and at the same time the SG&A to kind of come down a little bit?

Carolyn Logan

Well, they weren't huge swings. If you remember, we had guided to 25% for R&D. But PDUFA expense went up by about $400,000. In the filing of some of the NDAs we had to do a little additional PK work or some analytical work that increased that a little bit.

And we were very committed to holding on our EPS commitment. So we were able to manage expenses pretty closely on some of the SG&A areas to bring those down or little less.

Michael Tong - Wachovia Securities

And just along the lines of SG&A, do you run the risk of actually slowing prescription for XIFAXAN as well as your bowel cleansing franchise? Because it looked like the last several weeks of prescription data XIFAXAN has been trending just a little bit light?

Carolyn Logan

Well, as you know, with XIFAXAN we have been we've really taken a hard line on not being able to have any thoughts by any agency that we were doing anything to promote the drug off label, which we have never done and never intend to do.

So it has dropped to fourth in our bag, and we are not paying bonus on the product at the current time. So with XIFAXAN, the sales force still is talking about it for traveler's diarrhea. We still get questions that come in through Medical Affairs.

But there is not a high level of activity from our sales force with XIFAXAN right now. Now, we are doing things through Medical Affairs, certainly answering all physician questions and sending data to them that has been publicized and is appropriate to share.

We really don't think we had guided to around 35% on SG&A, so we've only trimmed that back slightly and we certainly wouldn't do anything that we thought would jeopardize prescriptions or growth.

Michael Tong - Wachovia Securities

Great. Thanks. And good to hear that Adam's doing well.

Carolyn Logan

Yes, we're very happy about his progress.

Operator

And our next question will come from Don Ellis with Thomas Weisel Partners.

Don Ellis - Thomas Weisel Partners

Thank you. Good afternoon.

Carolyn Logan

Hi, Don.

Don Ellis - Thomas Weisel Partners

Hi. A couple of questions about I'll ask them one at a time, starting with the Metoclopramide product, can you describe the intellectual property around that product and a little more about the market opportunity?

Carolyn Logan

I believe the intellectual property protection is to around 2022. I think there may be some additional patents pending that would go out to 2025. We haven't considered this to be not a several $100 million product opportunity, but we do think it's a nice addition we think our gastros will really like this product. I think we're thinking that peak sales would possibly be close to maybe $40 million or $50 million.

Don Ellis - Thomas Weisel Partners

Okay, great. And, next, on the co-promote, start with COLAZAL in October with the sectional reps, can you tell us where this is? Is it position one and two, and are there a limited number, a specific number of details that they have to accomplish in a month?

Carolyn Logan

The all of their sales representatives had completed training by the end of October. And they're very excited about the opportunity to promote COLAZAL. It is second in their bag. However, in the gastroenterology marketplace, where they have had a proton pump inhibitor, that's the only product they've had to talk about for quite some time.

I think Eisai management as well as we believes will probably going to get more attention than a second product detail would normally get, and of course we're very happy about that.

So they're really just getting up and running, but the communication between both our companies has been great. Their excitement level seems high. They have a strategic alliance manager as well as we, so there's a lot of communication between the two organizations, and then that also goes down to the field level.

Don Ellis - Thomas Weisel Partners

Okay. And last question is regarding your sales force, where I mean, you told us where XIFAXAN is, I think you said that's number four, where is COLAZAL and OSMOPREP and MOVIPREP in your sales force's bag at this time?

Carolyn Logan

COLAZAL is in the primary position because, as you know, Lialda has been in launch phase. And we have fought aggressively to protect our business there. And we're pretty pleased with what we've been able to do, because they've just recently gone to about a 7% market share in TRx.

And they got about 5% of that from Asacol, about 1% from their own Pentasa and about 1% from us about 1.2% from us. So we think we've held them pretty well, and now with the addition of Eisai we expect to be able to do an even better job of that. So COLAZAL is number one. OSMOPREP or MOVIPREP are number two or three, and then XIFAXAN.

Don Ellis - Thomas Weisel Partners

Thank you very much for taking the questions.

Carolyn Logan

Thanks.

Operator

And our next question will come from Angela Larson with SIG.

Angela Larson - SIG

Hi, Carolyn.

Carolyn Logan

Hi, Angela.

Angela Larson - SIG

I wanted to stay on granulated mesalamine for just a minute. I appreciate the detail you gave in your comments. Could you tell us a little bit more about the number of pills a patient would be taking, and how many times a day, and how that compares to Lialda?

Carolyn Logan

With granulated mesalamine, they'll be taking four capsules once a day. With Lialda, I believe they're indicated at two to four once a day.

Angela Larson - SIG

Okay. And then as you look forward, and I'm definitely not going to tie you to any exact numbers here. But just conceptually, as you look forward to launching the COLAZAL capsules and the granulated mesalamine, you've augmented the sales force support with the Eisai relationship, would you need to continue to expand the sales force?

Carolyn Logan

We don't have any plans to expand the sales force based on the balsalazide tablet or granulated mesalamine approvals. As we get closer to an IBS indication, we had said that we've previously said that we would have plans to expand our sales force at that point to some extent.

I mean, that as the great thing about our business model is when we talk about expanding our sales force, we aren't talking about having to add 200 or 300 representatives. It would be a much smaller number.

And the other thing that could cause us to expand our sales force would be if we acquired something that we thought we had great opportunity or potential to grow into a meaningful product, and in most cases I can't think of a situation that it wouldn't be a patent protected product.

Angela Larson - SIG

Great. Thank you very much for that.

Operator

We will now take a question from Mitul Desai with Piper Jaffray.

Mitul Desai - Piper Jaffray

Hi. Thanks for taking the call. I just was wondering if you could give us an update on the status of the study of XIFAXAN for the prevention of traveler's diarrhea. I believe there's a second Phase III that it's undergoing. I was just wondering when we can expect to see some of that data.

Carolyn Logan

That study has completed, but it has dropped in priority for us because we were very intent on getting our balsalazide tablet filed this year as well as the comparator trial to that NDA as well as the four-month safety update.

And the comparator and safety update will be filed in November. We also were intent upon finishing the two Phase III granulated mesalamine trials and getting that NDA filed by the end of this year, and our development group is on track to do that, to get that filing in December.

And then of course we've put a lot of resources towards getting our large Phase IIb IBS study enrolled and completed and getting the data crunched and requesting a meeting with the FDA for that. So, the traveler's diarrhea prophylaxis trial, from a commercial opportunity, just has to take a back seat to all of that.

Mitul Desai - Piper Jaffray

Okay. So it was just a more a matter of allocation of resources and not necessarily the results of the trial, or…

Carolyn Logan

Right. The study has completed, but I don't believe all the data has been analyzed. I have not seen top line data on it yet.

Mitul Desai - Piper Jaffray

Okay. Thanks.

Operator

Our next question comes from Robert Uhl with FBR.

Robert Uhl - FBR

Oh, thank you. Just in looking out ahead, you know, you've said in the past R&D next year should be 25% and SG&A 35%. Is that still good, or should we alter that really to reflect more of the change you're showing now in the second half of this year?

Carolyn Logan

I would say stick with what we have previously said for next year. We will be giving guidance on our fourth quarter or year-end call. That'll be in February. So if there's any need to fine-tune anything we will give you guidance at that time, but for right now I would just stick with that.

Robert Uhl - FBR

Okay. And then just one other thing, like for example when you're giving this estimated demand of COLAZAL, I think for the three quarters of the year it's declined sequentially, but yet your reported sales go up or stay flattish, and the quarterly sales numbers reflect annual run rates that are higher than your demand estimates so, why do you think that is?

Carolyn Logan

Well, actually, for the first nine-months of '07 compared to the first nine months of '06, we're flat in prescriptions, the same number of prescriptions. And then as far as this recent quarter, if you dollarized our prescriptions it's right on with what we shipped. So our inventory level remains in that eight to ten -weeks really for all our products.

If you dollarized our scripts for COLAZAL and XIFAXAN, it's almost identical to what we shipped. Bowel cleansing, the dollarized prescriptions were a little over $14 million, and we shipped about $12 million, because, as you know, we got distribution on those last year, and so we wanted to get those inventory levels down to this eight to ten-week level. So all of our products are in that level now. So…

Robert Uhl - FBR

I'm sorry. I thought you said COLAZAL was 115 million of demand, and divided by four that's $28.75, which is lower than what your 31.1 reported sales number is. That's what I'm asking about.

Carolyn Logan

Right. Well, the annualized demand is just on the more recent data. So if you look at the nine-month comparison, that's flat. If you look at the most recent quarter, third quarter '06 over third quarter '07 has declined by about 6 or 7% in prescriptions.

So that decline is more recent and when you annualize that out that's why the number drops a little bit. But now with Eisai on board we're hoping to be able to come back to flat or actually what we're hoping is for growth in prescriptions over the previous time period.

Robert Uhl - FBR

Okay. Thanks.

Operator

And our next question will come from Greg Gust with Roth Capital Partners.

Greg Gust - Roth Capital Partners

Good afternoon.

Carolyn Logan

Hi.

Greg Gust - Roth Capital Partners

Hi. Just a really quick question, in case I missed it. Is there any or do you have any update on when you might be releasing formally the Phase II IBS data in detail in a peer review journal or a conference or something?

Carolyn Logan

I don't have an exact date for you on that. Bill Forbes, our Chief Development Officer and Vice President of R&D, is here. But I believe the answer is that so much data was created from that study, we were looking for the top line data.

He's been preparing a briefing package for his meeting with the FDA. I would imagine Bill, am I correct in saying some abstracts will be at DDW?

Bill Forbes

That's correct. Hi, Greg. Yes, we're planning on putting some abstracts into DDW and we're also working with a number of key opinion leaders right now, going through the data with them and working with them to not only pull abstracts together but also talk to them about manuscripts.

As Carolyn alluded to, there's an awful lot of data here and that process obviously takes a little bit of time. But we're hopeful that here in the next few weeks we'll submit to DDW and we'll also in the next few months have something into a peer review journal.

Carolyn Logan

And, Greg, I think you probably realize that a lot of the major medical journals have just become so strict about what you are allowed to say about your data and them still be interested in publishing it.

So if you have noticed over this year, we have just given very top line results, because, I mean, we think the main thing that you'd want to know, we know everybody wants to get down in the data, but after all probably the most critical piece of information is, was the study successful?

And so that's what we've been communicating. But as far as getting into details about the data, we've been very reluctant to do that, because we don't want to burn ourselves on publication.

Greg Gust - Roth Capital Partners

Yes, I understand. Perfect. Thank you very much.

Operator

And this does conclude our question and answer session for today. I'd like to turn it back over to you for any closing remarks.

Carolyn Logan

Thanks. And I'd just like to thank our stockholders, our employees and other supporters for their continued confidence and I look forward to speaking with all of you in the future. Thank you.

Operator

This does conclude today's audio-conference. Thank you for your participation and have a wonderful afternoon.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Salix Pharmaceuticals Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts