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Salix Pharmaceuticals, Ltd. (SLXP - Analyst Report) posted second quarter 2013 earnings of 68 cents per share, above the year-ago earnings of 56 cents. Excluding the impact of stock-based compensation expense, the company reported second quarter earnings of 76 cents per share, up 33.3% from the year-ago quarter but below the Zacks Consensus Estimate of 85 cents.

Second quarter revenues increased 30.1% to $235.4 million and surpassed the Zacks Consensus Estimate of $227 million.

Quarter in Detail

Key product Xifaxan (rifaximin) posted sales of $150.6 million, up 29% from the year-ago period. Growth was driven by Xifaxan 550 mg, which gained FDA approval in Mar 2010 for hepatic encephalopathy. Strong formulary coverage and encouraging data should help drive Xifaxan 550 sales further.

Salix is working on the development of a next generation rifaximin - rifaximin soluble solid dispersion (SSD). A phase II, double-blind, placebo-controlled, dose-ranging study was initiated in Jun 2013 for the prevention of complications of early decompensated liver cirrhosis.

Salix is also looking to develop an extended intestinal release (EIR) version of rifaximin for Crohn’s disease. Patient enrolment in two phase III studies is expected to commence in the second half of the year.

Salix’s purgatives, MoviPrep and OsmoPrep, generated revenues of $20.8 million, flat from the year-ago period. Apriso delivered sales of $39.2 million, up 80% from the year-ago period. Apriso scrips increased 45% during the quarter.

Salix’ sales force is promoting Relistor for the treatment of opioid–induced constipation (OIC) in patients with advanced illness who are receiving palliative care, when response to laxative therapy has not been sufficient. Relistor scrips increased 48% from the prior-year quarter with sales coming in at $8.5 million.

Salix is also promoting Solesta to physicians as an option to treat fecal incontinence in adult patients who have failed conservative therapy. Solesta sales were $1.5 million in the reported quarter. The company launched Fulyzaq during the quarter. Deflux sales were $5.9 million.

While research and development expenses increased 66.2% to $45.2 million during the quarter, Salix recorded a 23% increase in selling, general and administrative expenses which came in at $80.3 million. The increase in SG&A spend reflected higher personnel costs and increased marketing expenses related to new products and higher legal costs.

Pipeline Update

Salix is conducting a re-treatment study, TARGET 3, with Xifaxan 550 mg for the treatment of irritable bowel syndrome (IBS) with diarrhea. The company had received a Complete Response Letter (CRL) from the FDA for its supplemental New Drug Application (sNDA) for Xifaxan 550 in Mar 2011. With the TARGET 3 study commencing in Feb 2012, Salix could gain approval for the IBS indication in mid-2014.

The delay in Xifaxan 550 mg’s approval for the IBS diarrhea indication is disappointing for Salix. Xifaxan is the company’s primary growth driver.

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

Meanwhile, an FDA advisory panel will review Salix and Progenics Pharmaceuticals’ (PGNX - Snapshot Report) supplemental new drug application (sNDA) for Relistor for opioid-induced constipation (OIC) in patients with chronic pain. The FDA will act within 30 days of receiving an opinion from the panel. Details regarding the meeting should be available by next month. Salix and Progenics had received a CRL for their sNDA for Relistor last year for the chronic, non-cancer pain indication.

Salix is looking to seek FDA approval for budesonide foam for the treatment of active mild to moderate ulcerative proctitis or proctosigmoiditis by year end.

Revises 2013 Guidance

Salix changed certain aspects of its guidance for 2013. While the company expects Apriso sales to be stronger than originally expected, Fulyzaq and Solesta sales are expected to lag original expectations. Overall revenue guidance remained unchanged at $920 million. However, the company now expects earnings of $3.20 per share, below the earlier guidance of $3.37 per share reflecting lower gross margins and a higher share count. The Zacks Consensus Estimate is currently $3.42 per share, well above the new guidance.

Going by the current annualized run rate, Xifaxan, Moviprep/Osmoprep, Apriso, Relistor and other product sales are expected to be about $597 million (old guidance: $572 million), $93 million (old guidance: $111 million), $128 million (old guidance: $93 million), $45 million (old guidance: $44 million) and $49 million (old guidance: $47 million), respectively. The company expects R&D and SG&A spend of about $137 million and $267 million, respectively, in 2013.

Third quarter 2013 earnings are expected to be about 84 cents per share on product revenues of $238 million. The current Zacks Consensus Estimate is much higher at 92 cents per share.

Our Take

Salix’ second quarter results were mixed with the company beating on revenues and missing on earnings. While Apriso’s performance was strong, Xifaxan revenues were slightly soft on a sequential basis. Meanwhile, Solesta’s performance is disappointing – Salix expects sales to pick up in the second half of 2014.

Salix currently carries a Zacks Rank #5 (Strong Sell). We expect investor focus to remain on updates on Relistor and data from TARGET-3 (due later this year/early next year).

Companies that currently look well-positioned include Pharmacyclics Inc. (PCYC - Analyst Report) and Questcor Pharmaceuticals, Inc. (QCOR - Analyst Report). Both are Zacks Rank #1 (Strong Buy) stocks.

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