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Executives

Michael Freeman - Associate VP of IR and Corporate Communications

Carolyn Logan - President and CEO

Adam Derbyshire - SVP and CFO

Analysts

Scott Hirsch - Credit Suisse

Michael Tong - Wachovia

Salix Pharmaceuticals Ltd. (SLXP) Q2 2008 Earnings Call August 4, 2008 5:00 PM ET

Operator

Good day, everyone and welcome to Salix Pharmaceuticals second quarter 2008 earnings release conference call. Today's conference is being recorded.

At this time, I will turn the conference 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 review of the financial results for the first 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 and plans for the company constitute forwarding-looking statements for purposes of 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

Mike, thank you. Total product revenue was $41.1 million for the second quarter of 2008 compared to $66.7 million for the second quarter of 2007. Total product revenue for the first six months of 2008 was $75.3 million compared to $126.5 million for the first six months of 2007. The decrease in total product revenue for the quarter and six months was due to the genericization of COLAZAL on December 28, 2007.

XIFAXAN revenue for the second quarter of 2008 was $18 million, a 14% increase compared to the second quarter of 2007. XIFAXAN revenue for the first half of 2008 was $34.8 million compared to $31.2 million for the first half of 2007.

MOVIPREP, OSMOPREP and VISICOL, which comprise our bowel cleansing product line, generated revenue of $15.7 million for the second quarter of 2008, compared to $11.4 million for the second quarter of 2007. Total product revenue for our bowel cleansing product line was $26 million for the first half of 2008 and $22.4 million for the first half of 2007.

Total cost of products sold was $7.1 million for the second quarter and $14.4 million for the first six months of 2008. Gross margin on total product revenue was 82.7% for the second quarter of 2008 compared to 80.4% for the second quarter of 2007 and 80.9% for the first six month of 2008, compared to 80.2% for the first six months of 2007.

Research and development expenses were $15.4 million for the second quarter of 2008 and $41.3 million for the first six months of 2008, compared to $19 million and $40.8 million, respectively, for the prior year periods.

Selling, general, and administrative expenses were $23 million for the second quarter of 2008, compared to $21.8 million for the second quarter of 2007, and these expenses were $44.1 million and $43.2 million for the first six months of 2008 and 2007, respectively. The company reported a net loss of $7.1 million, or $0.15 per share, fully diluted, for the second quarter of 2008. Cash and cash equivalents were $90.9 million on June 30, 2008.

Combined product revenue from XIFAXAN, our bowel cleansing products and other products achieved year-over-year growth of 16% for the second 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 commercialization of 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 and acquisitions.

For the third quarter of 2008, based upon information currently available, we expect to generate product revenue of approximately $43 million and report a loss of approximately $0.30 per share, fully diluted. We continue to believe total company product revenue for 2008 will be approximately $180 million, assuming the approval and launch of granulated mesalamine during 2008. The current annualized run rates, based on dollarizing the latest prescription data, for XIFAXAN, our bowel cleansing product line and other products are approximately $73 million, $64 million, and $28 million, respectively.

With a second quarter loss of $0.15, we anticipate generating a loss of approximately $1.02 per share, fully diluted, for the year ending December 31, 2008 compared to our previous guidance of a loss of approximately $1.12 for the year. This improvement in loss per share guidance for 2008 reflects a change in the timing of approximately $5 million in operating expenses, primarily associated with the launch of balsalazide tablet, previously anticipated for 2008 and now anticipated for early 2009.

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

Carolyn Logan

Thanks, Adam. Our proprietary products continued to grow and progress during the second quarter of 2008. XIFAXAN prescriptions grew 7% year-over-year for both the second quarter and the first six months of 2008. During the quarter, XIFAXAN surpassed the 1 million mark in total prescriptions dispensed in the United States since approval. Prescription demand for our bowel cleansing products grew 12% and 18% respectively, for the second quarter and first six months of 2008, compared to the corresponding periods of 2007.

The acceptance and utilization of XIFAXAN as a treatment for traveler's diarrhea continued to expand during second quarter of 2008. We are pleased to announce that the United Nations Medical Services Department recently revised their international travel guidelines to include XIFAXAN, and now will include XIFAXAN in travel kits dispensed by the organization.

The initiation of TARGET 1 and TARGET 2, our Phase 3 multicenter studies to assess the efficacy and safety of rifaximin 550 mg in the treatment of non-constipation irritable bowel syndrome, was the highlight of the second quarter. Based on the most current understanding of irritable bowel syndrome or IBS, we believe Rifaximin, our gut-specific antibiotic, may be a strong candidate for treating this disease that affects approximately 15% of the U.S. population.

On May 16, 2008, the United States Food and Drug Administration informed the Company that it considered the balsalazide tablet New Drug Application to be approvable. Subsequently, on June 30, 2008, the Company submitted a complete response to the FDA's approvable letter. The FDA has up to six months to review the submission, so the Company expects a response from the agency by December 31, 2008.

Both rifaximin and balsalazide tablet were topics of interest at Digestive Disease Week, the 2008 annual meeting in May in San Diego. Statistically significant findings from two analyses of the Phase 2b trial of rifaximin for the treatment of diarrhea-associated irritable bowel syndrome presented at DDW provided further support of the potential of rifaximin as a treatment for IBS symptoms.

Results of the Phase 3 trial of balsalazide tablet presented at DDW demonstrated that twice-daily balsalazide tablet treatment resulted in significant improvement in rectal bleeding, bowel frequency, and bowel healing, as well as emotional and social functions, as early as week 2 compared to placebo. At least 11 abstracts, reporting research findings regarding rifaximin, as well as five abstracts related to granulated mesalamine, will be presented at the American College of Gastroenterology annual meeting in October, in Orlando.

The confirmatory Phase 3 trial of that Vapreotide acetate for the treatment of acute esophageal variceal bleeding was completed during the second quarter. Vapreotide if approved will be the only prescription drug for EVB in the United States. Based on the information currently available, we continue to anticipate FDA action regarding the pending application for this drug product in mid-2009.

In April, the Company and its licensor Norgine reported that they had received a notice of Paragraph IV Certification on behalf of Novel Laboratories Inc, advising of the submission of an Abbreviated New Drug Application or ANDA for MOVIPREP. Salix and Norgine have full confidence in the intellectual property rights that protect MOVIPREP and on May 14, 2008 announced that they had filed a lawsuit in the United States District Court, District of New Jersey, against Novel Laboratories for infringement of Norgine's patent protecting MOVIPREP.

On July 25 the Company received a notice of Paragraph IV Certification on behalf of Novel Laboratories advising of the submission of an ANDA for OSMOPREP. Salix has full confidence in the intellectual property rights that protect OSMOPREP and intends to use all reasonable means at its disposal to continue to vigorously defend and enforce the intellectual property rights protecting its products.

This completes my comments. Thank you for your participation in the call today. At this time, I'll turn the call over to the operator for the question and answer session.

Question-and-Answer Session

Operator

(Operator Instructions). We'll go first to Scott Hirsch with Credit Suisse.

Scott Hirsch - Credit Suisse

Yeah, hi, guys, a few questions for you. First of all, can you give us an update on the AG trial and any status going on with that?

Carolyn Logan

We anticipate that the last patient will come out of that trial in the second half of August. And then, we have said that we hope to announce top line results in the fourth quarter.

Scott Hirsch - Credit Suisse

So fourth quarter we can expect to see data from the AG?

Carolyn Logan

Yes, we expect to announce top line results at that time. We’ve still got a few patients in the trial, so obviously databases can't be locked or, we can't begin to crunch data until those patients finish the trial.

Scott Hirsch - Credit Suisse

Okay. And then, obviously, R&D was kind of dramatically light this quarter versus past quarters. Can you give us a sense of what was the difference in spending there?

Adam Derbyshire

This is Adam. It's just the shift and expense, our timing in expense, so you're going to see that shift into third quarter.

Scott Hirsch - Credit Suisse

So you still expect roughly 88 number for R&D this year; you're just moving it from the second quarter to the second half?

Adam Derbyshire

We roughly expect that, yes.

Scott Hirsch - Credit Suisse

Okay. And now, does guidance include any inventory stocking for, I guess it's now granulated mesalamine and oral Colo Tab, or has that changed? I know previously you guys had said inventory was in there for Colo Tab given submission now, do you expect it, are you still including that or not?

Adam Derbyshire

No, we're including granulated mesalamine.

Scott Hirsch - Credit Suisse

You're including inventory for granulated mesalamine...

Adam Derbyshire

Yes.

Scott Hirsch - Credit Suisse

But not Colo Tab now?

Adam Derbyshire

The initial stocking, correct.

Scott Hirsch - Credit Suisse

Okay. And with respect to the old COLAZAL, are you going to continue to coupon for the lower milligram dose or the 750 dose?

Carolyn Logan

I believe we're going to continue with that program until that tablet is available, yes.

Scott Hirsch - Credit Suisse

You're going to keep couponing for the second half of the year until you guys come out with the 1100 milligram. How do you see the kind of competition from the sales force side between granulated mesalamine and Colo Tab, kind of the same timeframe launch now?

Carolyn Logan

And then just as a point of clarification, and then when the balsalazide tablet is approved, the promotional activities will shift to that product. Everything will cease on the capital and just shift over to the tablet.

Scott Hirsch - Credit Suisse

Okay.

Carolyn Logan

And the two products have different release mechanisms. The tablet is indicated for acute treatment, granulated mesalamine is for maintenance of remission. But the big story that we'll have is the difference in the way the drugs release. For example, the tablet only releases in the colon, and granulated mesalamine starts to release in the small intestine and it has a dual release mechanism, both delayed and extended.

So we'll be talking a lot about that. As you know, none of the drugs in this category have ever been approved for Crohn's disease, yet some of the drugs get the majority of their sales from that because of where they release.

So we would hope to be more competitive in a physician's mind on that front. But of course, we will not be promoting it off-label, as I'm sure you recognize.

Scott Hirsch - Credit Suisse

Right. Okay. And then just lastly, I know you mentioned you're going to defend on the 2 ANDAs, but can you just remind us what the time line is for a potential ANDA on Xifaxan?

Carolyn Logan

We had said earlier, the earliest we believe that we would receive a notification would be around mid-August.

Scott Hirsch - Credit Suisse

Okay.

Adam Derbyshire

But the earliest they could file would have been May 26 of this year.

Scott Hirsch - Credit Suisse

So the earliest they could have filed was May, and then they got the FDA acceptance of the ANDA and then notification to you is around August, mid-August?

Adam Derbyshire

Around mid-August, right.

Carolyn Logan

Yes.

Scott Hirsch - Credit Suisse

Okay.

Carolyn Logan

Scott, the FDA had 60 days to accept and then the ANDA filer would have 20 days upon which to notify us.

Scott Hirsch - Credit Suisse

All right, and then just real quickly lastly, the 5 million in spending you're moving to '09, does that take your expectations for SG&A down throughout by 5 million this year?

Adam Derbyshire

It does.

Scott Hirsch - Credit Suisse

Okay. All right. Thank you.

Adam Derbyshire

Thanks, Scott.

Carolyn Logan

Thanks.

Operator

Next we'll go to Michael Tong with Wachovia.

Michael Tong - Wachovia

Hi, good afternoon. Can you break out other product revenue as well as the Colazal capsule revenue for the quarter?

Adam Derbyshire

The other product revenue, we don't break out, Michael. We do end up breaking that out in our 10-K.

Michael Tong - Wachovia

And what about Colazal capsules?

Adam Derbyshire

Colazal capsules, essentially zero would shift.

Michael Tong - Wachovia

Okay, and with respect to balsalazide tablets, has the FDA confirmed that your submission at the end of June constitutes a complete response?

Carolyn Logan

Yes, they have.

Michael Tong - Wachovia

Okay, great. And then any update on Metoclopramide-ZYDIS other than PDUFA action I believe that was November?

Carolyn Logan

It, we're just getting routine questions and having routine, what our R&D group describes as just normal conversations at this point.

Michael Tong - Wachovia

And then the final question is as I look at the SG&A guidance, originally in your revenue guidance, there was no granulated mesalamine stocking and now there is. So, essentially you're replacing balsalazide tablets with granulated mesalamine. But, then SG&A goes down 5 million. Is that the promotional expense difference between the two products, or am I reading too much into that?

Adam Derbyshire

No, we always knew we had a shot at shipping both balsalazide tablets and granulated mesalamine in the year, and with balsalazide tablet having produced in May, we just thought that would be the one that would more than likely distribute in the year.

And now that we received the approval letter, we've completed the response and now we have a new PDUFA date of December 31. Granulated mesalamine is the one that we'll be able to distribute. In terms of the marketing dollars, it was because of the launch happening just shortly after May, in the July timeframe for balsalazide tablets that was requiring a lot of market dollars. So, granulated mesalamine truly will not be launched from a marketing standpoint in full gear until 2009.

Michael Tong - Wachovia

Okay, great. Thank you.

Operator

(Operator Instructions). It appears we have no other questions at this time. I'll turn the conference back to Ms. Logan.

Carolyn Logan

Thank you. I would also 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. Good bye.

Operator

Again, that will conclude our conference. We do thank you for joining us.

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