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Salix Misses on Both Counts

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Salix Pharmaceuticals, Ltd. posted fourth-quarter earnings of 71 cents per share, missing the Zacks Consensus Estimate of 80 cents and well below the year-ago earnings of $1.18. Fourth-quarter revenues, however, increased 27.7% to $198.2 million. Revenues were just shy of the Zacks Consensus Estimate of $200 million.

Salix reported full year earnings of $2.80 per share, down 0.7% from the year-ago period and well below the Zacks Consensus Estimate of $2.91 per share. Revenues increased 36.1% to $735.4 million, just below the Zacks Consensus Estimate of $736 million.

Quarter in Detail

Key product Xifaxan (rifaximin) posted sales of $147 million, up 37% from the year-ago period. Prescriptions grew 25% during the quarter. Growth was driven by Xifaxan 550 mg, which gained FDA approval in Mar 2010 for hepatic encephalopathy. Strong formulary coverage and encouraging data should help drive Xifaxan 550 sales further.

Salix is working on the development of a next generation rifaximin. The company is working on moving its next generation rifaximin candidate into clinical studies in the first half of 2013.

Salix’s bowel cleansing franchise, consisting of MoviPrep and OsmoPrep, generated revenues of $8.4 million. Apriso scrips increased 28% during the quarter with sales coming in at $13.7 million, up 24% from the year-ago period.

Salix’s sales force is promoting Relistor for the treatment of opioid–induced constipation (OIC) in patients with advanced illness who are receiving palliative care, when response to laxative therapy has not been sufficient. Relistor scrips increased 90% from the prior-year quarter.

While research and development expenses increased 91.6% to $36.6 million during the quarter, Salix recorded a 30.8% increase in selling, general and administrative expenses which came in at $70.9 million. The increase in SG&A spend reflected higher personnel costs related to the company’s institutional sales force and office-based sales force expansions and increased marketing expenses related to Xifaxan 550, Relista and Solesta as well as pre-marketing expenses for Fulyzaq and Giazo. R&D expenses increased due to the company’s investment in the phase III retreatment study of Xifaxan 550 for irritable bowel syndrome with diarrhea and higher personnel costs.

Pipeline Update

Salix is conducting a re-treatment study, TARGET 3, with Xifaxan 550 mg for the treatment of irritable bowel syndrome (IBS) with diarrhea. The company had received a Complete Response Letter (CRL) from the FDA for its supplemental New Drug Application (sNDA) for Xifaxan 550 in Mar 2011. With the TARGET 3 study commencing in Feb 2012, Salix could gain approval for the IBS indication in the first half of 2014.

The delay in Xifaxan 550 mg’s approval for the IBS diarrhea indication is disappointing for Salix. Xifaxan is the company’s primary growth driver.

The timely approval of Xifaxan 550 mg for the IBS diarrhea indication would have been a major boost for the company -- the IBS diarrhea indication represents significant commercial opportunity.

Meanwhile, there continues to be uncertainty regarding the path forward for the subcutaneous use of Relistor for the treatment of OIC in adult patients with chronic, non-cancer pain. Salix and Progenics Pharmaceuticals (PGNX - Free Report) had received a CRL for their sNDA for Relistor last year for the chronic, non-cancer pain indication. Salix had an end of review meeting in October in order to gain a better understanding of the CRL. Given concerns regarding a risk associated with the chronic use of new opioid antagonists in patients taking opioids for chronic pain, the company may be required to conduct a very large, well-controlled chronic administration trial.

According to Salix, currently available post-marketing, clinical and preclinical data could be enough to gain approval. We expect to hear more on the path forward in 2013.

Provides 2013 Guidance

Salix expects to earn $3.37 per share on product revenues of $920 million in 2013. Revenue guidance includes Xifaxan sales of about $555 million, Moviprep/Osmoprep revenues of approximately $117 million, Apriso revenues of $92 million, Relistor revenues of $45 million and other product sales of $40 million. The Zacks Consensus Estimate for earnings and revenues currently stands at $3.17 per share and $922 million, respectively.

Salix currently carries a Zacks Rank #2 (Buy). We expect Xifaxan to continue performing well in 2013. Meanwhile, investor focus will remain on the TARGET 3 study and the development path for Relistor for the chronic, non-cancer pain indication.

Companies like QLT Inc. and Lannett Inc. (LCI - Free Report) look more attractive with both carrying a Zacks Rank #1 (Strong Buy).

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