Salix Q3 Earnings Marred by Inventory Issues, Cuts View - Analyst Blog

Salix Pharmaceuticals, Ltd. ( SLXP ) posted third quarter 2014 earnings of $1.37 per share, above the Zacks Consensus Estimate of 73 cents and the year-ago earnings of 81 cents per share. Excluding the impact of depreciation and stock-based compensation expense, the company reported third quarter earnings of $1.53 per share, up 71.9% from the year-ago quarter.

Third quarter revenues increased 49% from the year-ago period to $354.7 million. However, revenues were down 7.1% on a sequential basis and missed the Zacks Consensus Estimate of $393 million and the company's guidance of $395 million.

Quarter in Detail

Xifaxan (rifaximin) posted sales of $159.7 million. Scrips for Xifaxan 550, which gained FDA approval in Mar 2010 for hepatic encephalopathy, grew 23% from the year-ago period.

Salix is working on the development of a next generation rifaximin - rifaximin soluble solid dispersion (SSD). The company is enrolling subjects for a phase II, double-blind, placebo-controlled, dose-ranging study for the prevention of complications of early decompensated liver cirrhosis. Enrollment is scheduled to complete by year end.

Salix is also looking to develop a delayed release version of rifaximin for Crohn's disease. The company is enrolling patients for the 52-week phase III study.

Salix's purgatives, MoviPrep and OsmoPrep, generated revenues of $(1.2) million. Apriso sales were $26.5 million, while scrips increased 15% during the quarter. Relistor sales were $10.8 million. Deflux sales were $7 million.

Santarus products like Uceris, Glumetza, Zegerid and Cycloset posted sales of $49.3 million, $62.9 million, $27 million and $6.7 million, respectively.

While research and development expenses increased 32.9% to $50.8 million during the quarter, Salix recorded a 78.7% increase in selling, general and administrative expenses which came in at $120.1 million. The inclusion of additional personnel and marketing costs led to higher SG&A spend.

Inventory Issues Revealed & Guidance Cut

Along with presenting third quarter results, Salix said that wholesaler inventory levels for its products (Xifaxan 550: approximately 9 months; Apriso: approximately 9 months; Glumetza: approximately 7 months; and Uceris: approximately 5 months) were higher than previously announced.

Salix is now working on entering into distribution services agreements with its principal wholesalers for the products in its portfolio. The target is to cut wholesaler inventory levels of Xifaxan 550, Apriso and Uceris to approximately 3 months at or before the end of 2016. The company expects to have these distribution services agreements in place in the first quarter of 2015.

Salix also intends to work with its wholesalers to reduce their inventory levels of Glumetza during 2015. Glumetza is expected to start facing generic competition in early 2016.

Salix now expects 2014 revenues and earnings of $1.4 billion and $5.20 per share, respectively. This is well below the previously provided guidance of revenues and earnings of $1.6 billion and $6.16 per share, respectively.

Fourth quarter 2014 earnings are expected to be about $1.16 per share on product revenues of $325 million.

Salix also announced the resignation of its Chief Financial Officer, Adam C. Derbyshire.

Our Take

Salix's third quarter results were disappointing especially given the company's disclosure regarding the inventory levels. Revenues were also impacted by slower-than-expected prescription growth. Outside counsel has been appointed by the Audit Committee to probe the inventory issues. The higher wholesale inventory levels are a matter of concern - they indicate a gap in demand and actual sales and this will affect future quarter sales until inventory levels are worked down.

The inventory issues have also raised concerns about the company's ability to provide an accurate outlook about future sales. These issues will also lower Salix's chances of being acquired in the near future. In this context, we remind investors that Allergan ( AGN ) was rumored to be interested in acquiring Salix. We expect the inventory issues to have a negative impact on Salix's shares.

Salix is a Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the health care sector include Auxilium Pharmaceuticals ( AUXL ) and Biogen Idec ( BIIB ). Both are Zacks Rank #1 (Strong Buy) stocks. Allergan is a Zacks Rank #2 (Buy) stock.

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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.

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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