Salix Pharmaceuticals Thrives With Promising GI Drugs

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Salix Pharmaceuticals ( SLXP ) has piqued investor interest as business has heated up for its flagship gastrointestinal drug, Xifaxan, with promising prospects.

The specialty drugmaker focuses on gastrointestinal ailments. Xifaxan (rifaximin) is an oral antibiotic that's approved by the Food and Drug Administration to treat travelers' diarrhea and a liver condition called overt hepatic encephalopathy, but doctors prescribe it for other uses off label.

Salix's Xifaxan franchise has taken off, with sales more than doubling to $514.5 million in 2012 from $250.5 million in 2010, making it a growth story that's revved up investor enthusiasm.

"Salix has been one of the top-performing stocks in specialty pharmaceuticals with an increase of 80% year-to-date," said Leerink Swann analyst Jason Gerberry. "The strength of the stock has to do with its key product franchise Xifaxan. The growth of that product franchise was stronger relative to what investors had expected."

More To Explore

Salix is exploring potential additional indications, formulations, clinical trials and co-promotion arrangements to capitalize on the potential for Xifaxan.

A big opportunity lies in its use in the treatment of irritable bowel syndrome (IBS). The company is in the midst of its so-called Target 3 Phase 3 trial of Xifaxan for IBS with diarrhea.

The company expects an FDA decision regarding approval in mid-2014.

If it gets the FDA nod, "Salix will have a pathway in the IBS market, which is very large," said Gerberry.

Xifaxan fights bacteria in the digestive tract. It's a "GI-specific" antibiotic in that it remains only in the GI tract and doesn't spread throughout the body.

The FDA first approved Xifaxan at 200 mg in May 2004 for the treatment of travelers' diarrhea. A stronger, 550 mg, version got the nod in 2010 to reduce the risk of recurrence of overt hepatic encephalopathy. It's a condition that occurs when the liver does not work normally. Xifaxan is the only drug in the U.S. approved for that purpose with "orphan" drug exclusivity through March 2017.

"You have to credit the company for developing these products from nothing and developing a market and expanding the market through new indications and great marketing," said S&P Capital IQ analyst Herman Saftlas. "Investors who buy this company are hoping they're successful in expanding the uses of their products and developing new ones."

While Salix's Xifaxan has two FDA approvals, it has "multiple uses," for many different diseases, says Gerberry.

But its use for the approved treatment of overt hepatic encephalopathy, the biggest contributor to its sales, has been "driving the strength of the product," he says.

Gerberry figures Xifaxan generates about 70% of the company's sales. He forecasts the product's sales will climb to $632 million for 2013. Salix is seeking approval for the 550 mg strength Xifaxan to treat IBS with diarrhea.

Gerberry upgraded Salix to outperform from market perform in a September report, noting that was "based on our improved outlook for Xifaxan in IBS-D (diarrhea predominant irritable bowel) heading into Target 3 data read-out (around) 1Q, 2014 -- supported by a recent MEDACorp survey and a check with a MEDACorp regulatory specialist formerly with the FDA's GI division."

Among his key takeaways: "Xifaxan's forecasted penetration in IBS-D is well above consensus expectations. We believe Target 3 has high probability of success. As previously published, we believe Target 3 has a good probability of reporting positive data."

He estimates an 80% probability of success for Target 3.

Gerberry forecasts Xifaxan's peak sales will hit $1.6 billion in 2018. The potential for the drug's approval for IBS with diarrhea is included in his estimate.

Salix's other products include Apriso, a once-a-day treatment for the maintenance of remission of ulcerative colitis, and Relistor. Relistor, under license to Salix fromProgenics Pharmaceuticals ( PGNX ), is a subcutaneous injection used to treat opioid-induced constipation in cancer patients.

FDA Discussions

Salix and Progenics have submitted a new drug application for Relistor use in non-cancer patients taking opiates for chronic pain as well.

In July, Salix and Progenics received a Complete Response Letter from the FDA, saying it will need further clinical data on its Relistor injections.

Salix and Progenics announced on Oct. 1 that the FDA will hold an advisory committee meeting March 10-11 to consider the new drug application.

"They're looking to get the product approved for the broader market for non-cancer patients, which is a much larger market," said Saftlas. "The FDA didn't give the OK, but the Street expects it will eventually. It is potentially a big number if they do get approval."

Meanwhile, Salix saw its profit rise 33% to 76 cents a share in the second quarter, missing analysts' consensus by 5 cents, according to Thomson Reuters. Sales popped 30% to $235 million, ahead of views. Xifaxan sales were up 29% to $150.6 million. Its 550 mg prescription business grew 26% vs. a year earlier.

Apriso saw strong 45% prescription growth and Relistor prescriptions rose 48%.

Analysts polled by Thomson Reuters expect Salix to show a 9% decline in third-quarter company earnings to 86 cents a share when it reports results Thursday after the close.

The expected year-to-year decline is driven by a few factors, including a 35% increase in its 2013 tax rate vs. 2012 and an expected increase in its share count to 66.7 million vs. 63 million in 2012, says Gerberry.

"The Street also assumes some gross margin compression as well," he said. But, he adds, Wall Street expects third-quarter sales to grow to $240 million from $185 million a year earlier.

And analysts expect a nice 22% profit gain in the fourth quarter. For the full year, they forecast a 1% rise in earnings to $3.24 a share.

Gerberry says all the general factors that impacted the third quarter apply to the full-year numbers with differences in exact amounts.

Salix is the 20th-largest company by market capitalization out of 41 in IBD's Medical-Ethical Drugs industry group. The group, whose largest constituents areRoche Holding ( RHHBY ),Pfizer ( PFE ) andNovartis ( NVS ), is currently ranked No. 26 of 197 groups tracked.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: NVS , PFE , PGNX , RHHBY , SLXP

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