Challenges for Sell-Rated Salix

We maintain a Sell rating on Salix Pharmaceuticals, Ltd. (SLXP - Analyst Report), which suffered a major setback in last December when the FDA granted approval to three generic versions of its lead product, Colazal. We expect 2008 to be an extremely challenging year for the company with a significant decline in both revenues and earnings.

While Salix should see three product approvals - Colazal tablet, granulated mesalamine and metoclopramide Zydis - in 2008, we believe that the main potential for the company lies with the approval of additional indications for Xifaxan, especially the irritable bowel syndrome (IBS) indication. However, we were disappointed to hear that Salix expects to file the new drug application for the IBS indication in mid-2010, a significant delay from the previously announced timeline of late 2008 / early 2009.

Salix Pharmaceutical shares fell significantly (12.5%) on the news regarding the approval of three generic versions of Colazal. 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. We have a $5 target price on the stock, which 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