Zacks_Analysts' Blog : Salix Beats on Higher Revenues - Analyst Blog

Salix Pharmaceuticals, Ltd. (SLXP) posted third quarter earnings of 77 cents per share, well above the Zacks Consensus Estimate of 58 cents and the year-ago earnings of 14 cents. Higher revenues drove results.

Third quarter revenues, which increased 81% to $146.2 million, exceeded the Zacks Consensus Estimate of $142 million. Revenues also exceeded the company’s guidance of $140 million.

Quarter in Detail

Salix’ third quarter performance was driven by its key product Xifaxan, which posted sales of $96.7 million, up 48% from the year-ago period. Prescriptions grew 44% during the quarter. Growth was driven by the launch of Xifaxan 550 mg, which gained US Food and Drug Administration (FDA) approval in March 2010 for hepatic encephalopathy. Strong formulary coverage should help drive Xifaxan 550 sales further.

Positive phase III data on Xifaxan 550 showing a 58% reduction in the risk of experiencing a breakthrough overt HE (hepatic encephalopathy) episode and a 50% reduction in the risk of experiencing HE-related hospitalization should help drive sales.

Salix announced that it is working on the development of a next generation rifaximin. The company expects to commence a pharmacokinetic study with several rifaximin next-generation formulations by the end of 2011.

Salix’ bowel cleansing franchise, consisting of MoviPrep and OsmoPrep, generated revenues of $27 million. Apriso scrips increased 54% during the quarter with sales coming in at $14 million.

Salix’ sales force is also promoting Relistor for the treatment of opioid–induced constipation in patients with advanced illness who are receiving palliative care, when response to laxative therapy has not been sufficient to physicians. Relistor sales came in at about $8 million. Scrips grew 18% sequentially. Salix granted a license to Link Healthcare in October 2011 to market Relistor in Australia, New Zealand, South Africa and Asia. The company is currently looking for a distribution partner in Europe.

While research and development expenses increased 25.9% to $24.8 million during the quarter, Salix recorded a 5.1% increase in selling, general and administrative expenses which came in at $41.4 million.

2011 Revenue Guidance Up

Salix raised its revenue guidance for 2011 by $15 million and now expects to deliver product revenue of $535 million, representing year-over-year growth of 59%. Revenue guidance includes Xifaxan sales of $395 million (up from $380 million), bowel cleansing product revenues of approximately $95 million (no change), Apriso revenues of $68 million (up from $60 million), Relistor US revenues of $16 million and other product sales of $11 million.

The company lowered its total R&D and SG&A guidance by $6 million to $270 million.

Pipeline Update

Salix suffered a huge regulatory setback in March 2011 when it received a Complete Response Letter (CRL) for its supplemental New Drug Application (sNDA) for Xifaxan (rifaximin) 550 mg. Salix is looking to get Xifaxan 550 mg approved for the treatment of non-constipation irritable bowel syndrome (non-C IBS) and IBS-related bloating.

The FDA had indicated that it will need re-treatment information on the candidate. Salix met with the FDA on June 20 to discuss its requirements for approval. There could well be a 2-year delay in gaining approval for the IBS indication. Per the requirements of the agency, the IBS data will first be reviewed by an advisory panel of the FDA on November 16. The panel will focus on the design of the study for the retreatment of patients. Salix will most likely commence the study in late 2011/early 2012.

The delay in Xifaxan 550 mg’s approval for the IBS indication is disappointing for Salix. Xifaxan has become the company’s primary growth driver following the introduction of generic versions of Colazal in December 2007 by generic players like Mylan (MYL).

The timely approval of Xifaxan 550 mg for the IBS indication would have been a major boost for the company -- the IBS indication represents significant commercial opportunity.

As far as pipeline candidate crofelemer is concerned, Salix said that the FDA has asked for additional analytical data. The company intends to submit the NDA by year end.

However, on November 4, 2011, Salix received a written notice from its partner Napo Pharmaceutical regarding the termination of their collaboration agreement for crofelemer. Earlier this year, Napo had filed a lawsuit against Salix claiming that the latter has violated its commitments under their agreement for the development of crofelemer.

Salix filed a supplemental new drug application (sNDA) in late August seeking approval for the use of Relistor in non-cancer pain patients with opioid-induced constipation. A response should be out by April 27, 2012. Moreover, Salix has plans to bring an oral formulation of Relistor to market. The oral formulation is currently in phase III studies in patients with chronic, non-cancer pain. Results should be out later this year/early next year.

Meanwhile, the company expects to file for US approval of budesonide foam in late 2012/early 2013.

Combined peak annual sales of candidates like Xifaxan for IBS, Relistor (subcutaneous injection and oral Relistor for chronic, non–cancer pain), crofelemer, budesonide foam and Lumacan are estimated to total $4 billion.

Announces Intention to Acquire Oceana

In addition to announcing third quarter results, Salix announced its intention to acquire Oceana Therapeutics for $300 million cash. Oceana Therapeutics is a privately–held global provider of gastroenterology and urology therapeutics. With this acquisition, which is scheduled to close by year end, Salix will add two more products to its portfolio - Solesta (launched in September 2011) and Deflux (marketed since 2001). While Solesta is a biocompatible tissue bulking agent approved for the treatment of fecal incontinence, Deflux is the only FDA–approved alternative to major ureteral reimplantation surgery for the treatment of vesicoureteral reflux.

The Oceana Therapeutics acquisition is expected to be modestly accretive in 2012 and significantly accretive thereafter. While we expect Deflux to be a modest contributor to sales ($26 million sales in the first nine months of 2011), Solesta could represent more commercial potential. Salix expects Solesta to achieve peak sales of more than $500 million.

Outperform on Salix

We currently have an Outperform recommendation on Salix, which carries a Zacks #1 Rank (short-term Strong Buy rating). Salix is well-positioned for growth in the gastrointestinal market. We believe Xifaxan will continue to experience solid growth. We were pleased to see Xifaxan gain approval for the hepatic encephalopathy indication as we believe that the main potential for Salix lies in gaining approval for additional indications for Xifaxan. Meanwhile, we are pleased to see the company expanding its pipeline by entering into in-licensing and other deals.