Salix Pharmaceuticals (SLXP)

Salix Pharmaceuticals is focused on drugs used in the treatment of a variety of gastrointestinal diseases. The company is facing difficult times thanks to the FDA's approval to three generic versions of lead product, Colazal. As such, we expect 2008 to be an extremely challenging year for the company, with a significant decline in top-line growth. Moreover, we expect the company to post a loss in 2008 and 2009.

We believe that the main potential for the company lies with the approval of additional indications for Xifaxan, particularly the irritable bowel syndrome [IBS] indication. However, we were disappointed to hear that Salix expects to file the NDA [new drug application] for the IBS indication in mid-2010, a significant delay from the previously announced timeline of late 2008 / early 2009.

While new product approvals should help restore investor confidence, the possibility of a patent challenge for Xifaxan will remain an overhang on the shares in the coming quarters. While new product launches and new indications for Xifaxan should support a recovery in revenues in 2009, we do not expect earnings to recover prior to 2010. We maintain a Sell rating with a target price of $5.