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Good News for Salix

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Salix Pharmaceuticals, Ltd.
received good news recently when the Food and Drug Administration's (FDA) Gastrointestinal Drugs Advisory Committee recommended the approval of Xifaxan (500 mg) for the maintenance of remission of hepatic encephalopathy (HE).

Xifaxan is currently the primary growth driver at Salix following the entry of generic versions of Colazal in December 2007. Xifaxan (200 mg) is indicated for the treatment of patients 12 years of age and older with traveler's diarrhea caused by non-invasive strains of E coli.

Approval for the HE indication would be a major boost for the company. The Committee voted 14 - 4 in favor of approval. While the FDA is not required to follow the Committee's recommendation, it usually does so.

A response from the FDA should be out by March 24, 2010. If approved, Xifaxan would be the first new option for the management of hepatic encephalopathy in more than 30 years.

In addition to the HE indication, Salix is working on developing Xifaxan for other indications, such as C. difficile-associated diarrhea (phase III), non-constipation irritable bowel syndrome (IBS), and the prevention of traveler's diarrhea (phase III).

We believe that the IBS indication represents significant commercial opportunity for the company. According to Salix, the IBS market is worth about $2.2 billion. The company intends to file for approval of the IBS indication in the first half of 2010.

Meanwhile, the HE indication, for which Salix has Orphan Drug status, should also have excellent incremental potential. Salix estimates that Xifaxan may be able to grab $200 million - $300 million of this market.

We currently have a Neutral recommendation on Salix. While we believe the main potential for the company lies in gaining approval for additional indications for Xifaxan, we remain concerned about the possibility of a generic company initiating a patent challenge for Xifaxan.

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