Salix Pharmaceuticals: Q4 Beats but Outlook Disappoints

| About: Salix Pharmaceuticals, (SLXP)
This article is now exclusive for PRO subscribers.

Salix Pharmaceuticals, Ltd. (NASDAQ:SLXP) reported a net loss of 13 cents per share in the fourth quarter, a penny better than the Zacks Consensus Estimate and company guidance of a net loss of 14 cents. Salix reported a net loss of 12 cents in the year-ago period. Higher product sales helped the company beat expectations despite an increase in costs.

Full year net loss came in at 88 cents, a penny better than the Zacks Consensus Estimate and flat from the year-ago net loss. Revenues increased 30.3% to $232.9 million in 2009.

Fourth quarter revenues increased 16% to $70.2 million, with Xifaxan sales increasing 4.6% to $24.9 million. The bowel cleansing franchise, consisting of MoviPrep, Visicol and OsmoPrep generated fourth quarter revenues of $30.4 million, up 54% from the year-ago period.

Fourth quarter gross margin declined both sequentially and annually to 75.1%, mainly due to a change in the product revenue mix. While research and development expenses declined to $19.9 million during the quarter, Salix recorded an increase in selling, general and administrative expenses which came in at $36.4 million.

2010 Guidance Disappoints

Salix provided disappointing financial guidance for 2010. The company expects to earn 4 cents per share on product revenue of approximately $334 million in 2010. The earnings guidance is well below the current Zacks Consensus Estimate of a net income of 15 cents per share.

Revenues should be driven by continued growth of currently marketed products, new product launches, and label expansions for Xifaxan. Revenue guidance includes Xifaxan sales in the range of $125 million, bowel cleansing product revenues of approximately $84 million, Apriso revenues of $19 million and other product sales of $35 million.

Revenue guidance is based on the assumption that Xifaxan (550 mg) will gain approval for the hepatic encephalopathy (HE) indication.

Salix expects to spend approximately $100 million towards its research and development efforts. The company has plans to submit new drug applications (NDAs) for Xifaxan (for irritable bowel syndrome) and crofelemer (for HIV-associated diarrhea) in 2010.

Salix expects to incur approximately $153 million in selling, general and administrative expenses. This includes expenses associated with the launch of Xifaxan for the HE indication.

For the first quarter of 2010, Salix expects to generate a loss of 50 cents per share on product revenues of $40 million. This is again wider than the Zacks Consensus Estimate of a net loss of 7 cents.

The company stated that the first quarter 2010 guidance includes the impact of the Xifaxan 550 mg business on the Xifaxan 200 mg business, assuming the 550 mg dosage gains approval for the HE indication in March.

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. Xifaxan is currently under US Food and Drug Administration (FDA) review for the maintenance of remission of HE. A decision regarding the approvability status of Xifaxan for the HE indication should be out by March 24, 2010.

Meanwhile, the promotion of newly launched products, Apriso and Metozolv ODT, will also be a high priority for the company. With $192.5 million in cash and equivalents, we believe Salix will also seek suitable in-licensing opportunities and acquisitions to grow revenue.

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 the company.