Pressures Keep Salix a Sell

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.

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.

Based on our new model, we see a significant decline in both earnings and revenues in 2008. While revenues should decline almost 34% to $178 million, we expect EPS to decline 234% to $1.19. Even if Salix succeeds in receiving FDA approval for the tablet version of Colazal in May 2008, we believe that the company will not meet with much success in converting users to the tablet formulation due to the presence of generic competition.

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 1.3x our 2008 sales estimate of $178 million.

Arpita Dutt, CA, contributed to this report.

Read the full analyst report on SLXP.