Salix Beats on Xifaxan Strength

Salix Pharmaceuticals, Ltd. (SLXP - Analyst Report) reported a net loss of 15 cents per share in the third quarter, which was significantly better than the Zacks Consensus Estimate of a net loss of 29 cents. The company reported a net loss of 11 cents in the year-ago period. Although revenue increased from the year-ago period, higher operating expenses led to the year-over-year increase in net loss.

Total product revenue was $65.7 million, up 53%. Xifaxan continued to perform well with revenue almost doubling to $42.7 million. We believe wholesaler stocking, price increases and prescription growth were responsible for the significant increase in Xifaxan revenue. Based on the current run rate, we expect Xifaxan revenue to exceed $115 million in 2009.

The bowel cleansing franchise, consisting of MoviPrep, Visicol and OsmoPrep generated revenue of $16.6 million in the third quarter of 2009, up 7.1% from the year-ago period. Gross margin on total product revenue declined to 79.9%, mainly due to a change in the product revenue mix. Gross margins are expected in the range of 79% to 80% in 2009.

With several products in different stages of clinical development in its pipeline, Salix recorded an increase in research and development expenses, which came in at $26.1 million. Selling, general and administrative expenses also increased to $29.6 million, mainly due to costs related to the launch of Apriso, sales force expansion and increased litigation costs associated with the MoviPrep and OsmoPrep patent challenges.

Salix maintained its financial guidance for 2009. The company expects to recognize a loss of 90 cents per share on product revenue of approximately $230 million in 2009. The company maintained its R&D and SG&A guidance for 2009 at $93 million and $120 million, respectively. Salix has hired a second sales force of 64 sales representatives for the promotion of Metozolv ODT, which is expected to hit the market in mid-November.

Salix expects to generate a loss of 14 cents per share on total product revenue of $68 million in the fourth quarter of 2009. New product launches and new indications for Xifaxan (rifaximin) should support a recovery in revenue from 2009. The promotion of Apriso and Metozolv ODT will also be a high priority for the company.

We believe Salix will also seek suitable in-licensing opportunities in order to grow revenue. While the recent approval of Metozolv ODT should help restore confidence in the company, we believe the main potential for Salix lies in gaining approval for additional indications for Xifaxan.

Xifaxan is currently under U.S. Food and Drug Administration (FDA) review for maintenance of remission of hepatic encephalopathy (HE). The FDA recently extended its action date by three months and a decision regarding the approvability status of Xifaxan for the HE indication should be out by March 24, 2010. We currently have a Neutral rating on Salix.

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