Keeping a Sell on Salix Pharma

Salix Pharmaceuticals Ltd. (SLXP - Analyst Report) is a specialty pharmaceutical company engaged in acquiring, developing and commercializing prescription drugs used in the treatment of a variety of gastrointestinal diseases. The company suffered a major setback in December 2007 when the FDA granted approval to three generic versions of lead product, Colazal.

This is devastating news for Salix, as Colazal was a significant contributor to both the top-and bottom-lines. As such, we expect 2008 to be an extremely challenging year for the company with a significant decline in both revenues and earnings.

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. In order to make up for lost revenues, Salix is investing significantly in both R&D and SG&A. New product launches and new indications for Rifaximin should support a recovery in revenues from 2009 onwards.

We believe Salix will also seek suitable in-licensing opportunities in order to grow revenues. However, we do not expect earnings growth to resume prior to 2010. Salix Pharmaceutical shares fell significantly (12.5%) on the news regarding the approval of three generic versions of Colazal.

We believe that 2008 will be an extremely challenging year for the company. Although the approval of granulated Mesalamine and Metoclopramide Zydis, potentially later this year, should help restore confidence in the company, we believe the main potential for Salix lies in gaining approval for additional indications for Xifaxan.

Unfortunately, approval for the most significant Rifaximin indication, IBS, is not likely to come before mid-2010. In the meantime, we expect the stock to remain under pressure given the possibility of a generic company initiating a patent challenge for Xifaxan any time after May 25, 2008.

We maintain a Sell rating on the stock with a $5 target price. Our target price is based on 1.4x our 2008 sales estimate of $178 million.

Arpita Dutt, CA, contributed to this report.

Read the full analyst report on SLXP.

Read the full analyst report on SLXP