Back to Neutral on Salix - Analyst Blog


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We recently downgraded Salix Pharmaceuticals, Ltd. ( SLXP ) to a Neutral recommendation with a target price of $51.00. Although Salix' fourth quarter 2011 results exceeded expectations with higher revenues boosting performance, the company provided mixed guidance for 2012. While revenue guidance was above the Zacks Consensus Estimate of $697 million, earnings guidance was well below the Zacks Consensus Estimate of $2.63 per share. As a result, the Zacks Consensus Estimate for 2012 declined by 33 cents to $2.30 per share. The company carries a Zacks #3 Rank (short-term 'Hold' rating).

We expect Xifaxan (rifaximin), Salix' lead product, to continue driving the top line. Xifaxan sales came in at $371.7 million in 2011, up 48.4%. We expect Xifaxan sales to exceed $420 million in 2012. We are pleased to see that Salix is working on developing new indications for Xifaxan 550. We are also encouraged by Salix' plans to develop a next generation rifaximin.

Salix has also been working on expanding its product portfolio over the past few years through acquisitions and in-licensing of candidates in late stage clinical development. The company has an important regulatory event coming up later this month (April 27) with the FDA expected to respond on the company's supplemental new drug application (sNDA) for the use of Relistor in chronic non-cancer pain patients with opioid-induced constipation.

Salix has plans to bring an oral formulation of Relistor to market. The company presented impressive phase III data from a study conducted in patients with chronic, non-cancer pain and expects to file for approval in the third quarter of 2012. Salix has an exclusive agreement with Progenics Pharmaceuticals, Inc. ( PGNX ) for the worldwide (excluding Japan) rights to Relistor.

While we are encouraged by Salix' efforts to expand Xifaxan 550's label, we note that the company faced a major setback in its efforts to get Xifaxan 550 approved for non-constipation irritable bowel syndrome with diarrhea (IBS-D). The company received a complete response letter from the FDA in March 2011. The IBS-D indication represents significant commercial potential and the delay in gaining approval for this indication is a big disappointment. In keeping with the requirements of the FDA, Salix is conducting a phase III study (TARGET 3) with Xifaxan 550 for the IBS-D indication. With the study expected to be conducted over a two-year period, approval for the IBS-D indication is not likely to come before late 2014/early 2015. We expect investor focus to remain on development updates for the IBS-D indication.

Moreover, we are concerned that generic companies could seek to market generic versions of Xifaxan, Salix' main growth driver. With Xifaxan contributing more than 65% to 2011 revenues, the entry of generic versions of Xifaxan would be devastating for Salix. Salix has already faced a major setback with the genericization of Colazal, which resulted in the company losing a major part of its revenues and earnings. Another product, Pepcid, started facing generic competition in 2010.

PROGENICS PHARM ( PGNX ): Free Stock Analysis Report
SALIX PHARM-LTD ( SLXP ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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