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Salix Pharmaceuticals, Ltd. / (SLXP – NASDAQ) / $7.63Note to Readers: All new or revised material since the last update ishighlighted.
Reason for Report: Launched Authorized generic of Colazalwith Watson(6/9 brks with cvrg.)
Prev. Ed.: December 11, 2007;Minor Estimate Changes
Brokers’ Recommendations: Positive: 77.8% (7 firms); Neutral: 11.1% (1);Negative: 11.1% (1); Prev. Ed.: 8; 1; 0
Brokers’ Target Price: $9.33 (↓ $5.09 last edition; 5 firms) Brokers’ Avg. Expected Return: 22.28%
Recent Events
On December 31, 2007, SLXP announced it has submitted to the FDA a New Drug Application (NDA) seeking approval to market granulated mesalamine.
On December 28, 2007, FDA announced approval of three generic versions of Colazal for ulcerative colitis. In addition, SLXP announced Watson Pharmaceuticals Inc (WPI) will market an authorized generic of Colazal.
Overview
Based in Morrisville, North Carolina, Salix Pharmaceuticals, Ltd. (SLXP) is engaged in the acquisition, development, and commercialization of prescription drugs used in the treatment of various gastrointestinal diseases. It offers Colazal capsules for the treatment of ulcerative colitis; Xifaxan, a gastrointestinal-specific oral antibiotic, for the treatment of traveler’s diarrhea; and Azasan, a drug that suppresses immune system responses and is indicated for preventing rejection of kidney transplants and treatment of severe arthritis. The company also offers Anusol-HC and Proctocort cream products, which are indicated for use in inflamed hemorrhoids and post irradiation proctitis, as well as an adjunct in the treatment of chronic ulcerative colitis and other inflammatory conditions. With the acquisition of InKine Pharmaceuticals in 3Q05, the company has also added Visicol and OsmoPrep, the next-generation Visicol, to its portfolio of branded products.
Brokerage firms have identified the following factors for evaluating the investment merits of Salix:
Key Positive Arguments / Key Negative ArgumentsThe launch of Salix’s important antibiotic, Xifaxan, is resulting in steady growth. / Salix shares are dependent upon the continued growth of Colazal and the antibiotic Xifaxan.
Brokerage firms expect Salix’s smaller drugs to add revenue incrementally to its operations. / Salix is highly dependent on the success of three or four products but a few products have limited patent protection.
The approval of Osmoprep and Moviprep signals Salix's advance into the bowel cleansing market. / Outside manufacturers provide products that account for all of Salix’s revenue. A disruption in manufacturing or a lack of compliance with regulatory standards could disrupt product supply and adversely affect Salix’s financial results.
The company’s website is
Note: The company’s fiscal year coincides with the calendar year.
November 16, 2007
Revenue
According to Zacks Digest, total revenue was $67.4 million in 3Q07, an increase of 31.5% YoY from $51.2 million in 3Q06. Other products generated revenue of $8.0 million in 3Q07 versus $1.7 million in 3Q06. The company indicated that the increase in other products revenue primarily reflects the contribution Pepcid OS.
In 2007, the company anticipates that it will be able to deliver strong revenue and EPS growth, while continuing to build its business. The company increased its FY07 total product revenue guidance from $260 million to $262 million.
Revenue ($ in millions) / 2006A / 1Q07A / 2Q07A / 3Q07A / 4Q07E / 2007E / 2008E / 2009ETotal Revenue / $208.5 / $59.8 / $68.9 / $67.4 / $67.5↓ / $263.3↓ / $250.1 ↓ / $318.9 ↓
Digest High / $208.5 / $59.8 / $69.2 / $67.4 / $68.8 ↓ / $264.8↓ / $320.0↓ / $392.0 ↓
Digest Low / $208.5 / $59.8 / $66.7 / $67.4 / $65.6 ↓ / $261.4 ↓ / $185.3 ↓ / $223.0 ↓
The pie chart analysis of revenue segments is given below:
Note: Recent significant developments are noted for those products marked with an asterisk (*).
Specific Products
Colazal
Indication: Treatment of mildto moderatelyactive ulcerative colitis
Stage of Development: Mature, widely sold and distributed.
Sales: According to Zacks Digest and the company, Colazal generated revenue of $31.1million in 3Q07 versus $27.0 million in 3Q06, up 15.1% YoY.
Competitors: The FDA’s approval of Shire Pharmaceutical’s Lialda provides direct competition to Colazal. Shire’s Lialda, being once-a-day pill, has a dosing advantage over Colazal, which must be taken thrice daily, but analysts feel the large size of the pill could limit its usage. Moreover, Colazal’s delivery mechanism is a differentiating factor, being unique in its category.
Generics: Colazal’s exclusivity including pediatric extension expiredon January 8, 2007,paving theway for generic entrants. On December 28, 2007, three companies received FDA approval for generic versions of Colazal 750 mg. Companies receiving approval for generic Colazal were Apotex, Mylan and Roxane. In addition, Salix announced that Watson Pharma will market and sell an authorized generic of Colazal, which will be launched immediately. Analysts in the Digest group believe that though an authorized generic will help Salix maintain a meaningful share of the market, the launch of the generics will have a significant adverse affect on Salix’s FY08 revenue. Accordingly, almost all the analysts have reduced their revenue estimates for FY08 and beyond.
Besides, in anticipation of potential generic Colazal competition, SLXP has developed a 1100 mg tablet formulation of balsalazide, aiming to switch a large portion of the capsule market to the tablet form before the emergence of generic capsules. Balsalazide tablet is currently pending approval at FDA, with a PDUFA of May 16, 2008. SLXP was expected to launch the tablet formulation (if approved) at a modest discount to branded Colazal to encourage managed care adoption and ensure a quick market transition. The presence of lower priced generics will likely impede the planned transition, according to some analysts (Thomas Weisel, Wachovia). Another analyst (Friedman, Billings) expects the tablets to be introduced in mid-2008.
Litigation Issues: In order to defend its franchise, Salix had filed a Citizen’s Petition(and amendments) asking FDA to prepare guidance for orally-administered,locally-acting gastrointestinal products prior to approval of generics. FDAruled against these Salix’s efforts. Though Salix has some legal options, thegenerics are being shipped and the damage, at least for 2008, has been done.
2006A / 2007E / 2008E / 2009E / Est. GrowthColazal Revenue / $103.5M / $123.0M↓ / $72.3M↓ / $87.4M↓ / -13.1%↓
Xifaxan
Indication: Treatment of patients (>12 years of age) with traveler’s diarrhea caused by non-invasive strains of E. coli.
Stage of Development: Mature, widely sold and distributed
Safety Issues: Xifaxan should not be used in patients with diarrhea complicated by fever or blood in the stool or diarrhea due to pathogens other than E.coli.
Sales: According to Zacks Digest and the company, Xifaxan revenue in 3Q07 was $16.1million, up 1.3% YoYfrom $15.9 million in 3Q06.
Partners: Xifaxan was licensed from an Italian company, Alfa Wasserman SpA, and has been in the market throughout Europe since 1998 under the brand names Normix and Rifacol.
Additional Studies: Salix is also working on additional indications, such as, infectious diarrhea, hepatic encephalopathy, Crohn’s disease, ulcerative colitis, irritable bowel syndrome, and small-bowel bacteria overgrowth. The company has initiated trials to evaluate the safety and efficacy of Xifaxan for the treatment of several indications like C. difficile-associated diarrhea (Phase III), hepatic encephalopathy (Phase III), and irritable bowel syndrome (Phase IIb). Salix intends to submit regulatory filings with the FDA on Xifaxan for the prevention of traveler's diarrhea, hepatic encephalopathy, and C. difficile associated diarrhea in 1H08, and for inflammatory bowel disease in 2H08. Meanwhile, the Phase II trial for Crohn’s disease is likely to commence in 2007.
Salix is also studying Xifaxan in combination with diarrhea drug Imodium for extended use. Analysts in the Digest group believethatthe positive results will support the development of Xifaxan for additional indications, which should help spur sales of the product.
Patents: Xifaxan is protected by both patent (U.S. Patent No. 7,045,620 )and regulatory exclusivity. The patent is set to expire May 22, 2024. Xifaxan also benefits from 5-year New Chemical Entity (NCE) exclusivity, which is set to expire on May 25, 2009. Under NCE exclusivity, a Para IV ANDA can be filed beginning at the 4-year point of the NCE exclusivity period, which in this case would be May 25, 2008. Actual approval of the ANDA would still be delayed until 5-yrs post marketing approval (expiration of NCE exclusivity), or in the likely instance of a lawsuit filing by the branded company, until 7 1/2 years post marketing approval (expiration of 30-month stay). FDA approval of generic Colazal could have a negative effect on XIfaxan. One of the arguments against potential generic competition for Colazal has been its low systematic absorption. The same applies for Xifaxan as well, since it is even less absorbed than Colazal. Hence, with low systematic absorption no longer an insurmountable barrier, an ANDA for filing becomes a high probability event.
2006A / 2007E / 2008E / 2009E / Est. GrowthXifaxan Revenue / $51.6M / $64.0M / $79.9M↓ / $95.3M↓ / 38.5%↓
Visicol OsmoPrep (INKP-102)
Indication: The FDA approved Visicol tablets for bowel preparation before a colonoscopy, and OsmoPrep tablets for cleansing of the colon as a preparation for colonoscopy in adults of 18 years or older.
Product Life Cycle Status: OsmoPrep was launched in June 2006.
Importance: OsmoPrep reduces the pill burden (32 tablets versus 40 tablets for Visicol) and meaningfully reduces total doses. Analysts, in general, expect OsmoPrep to cannibalize Visicol sales.
Competitors: Visicol is facing tough competition from HalfLytely (Braintree Laboratories), which was launched in September 2004, and quickly became a market leader. Salix now faces the task of re-accelerating growth for Visicol with the help of the expanded sales force. Further, Zeria Pharmaceutical Co., Ltd. of Tokyo, Japan has launched Visiclear tablets for colon cleansing. Visiclear tablets are marketed in the United States under the trade name Visicol.
Partners: In October 2007, Salix Pharmaceuticals announced it will license the French marketing rights to its bowel cleansing drug OsmoPrep, netting the company a potential $1 million in milestone payments plus royalties on sales.
Patents: Salix holds patents on OsmoPrep until 2013, and is seeking additional patents that would protect the treatment until 2024.
MoviPrep (formerly NRL944)
Indication: MoviPrep is a liquid purgative agent to be used in preparing patients for colonoscopy in adults of 18 years or older.
Product Life Cycle Status: MoviPrep received the FDA approval in August 2006 andwas launched in mid October, 2006. In January 2007, MoviPrep was granted patent coverage till September 2024.
Importance: With the addition of MoviPrep, Salix is in a position to provide patients with both a tablet formulation and a liquid formulation from its bowel cleansing portfolio. MoviPrep, unlike the current marketleading bowel prep, is the only 2liter purgative that eliminates the concomitant need for laxative bisacodyl.
Partners: Salix holds the exclusive selling rights to MoviPrep rom Norgine B.V. in the US. Salix made an upfront payment to Norgine. Salix will also pay 20% royalties on sales and reimburse Norgine for manufacturing costs.
Bowel Cleansing Franchise (OsmoPrep, Visicol, and MoviPrep) Revenue: According to Zacks Digest and the company, Visicol, OsmoPrep, and MoviPrep collectively generated revenue of $12.1 million in 3Q07.
In April 2007, the company sold the European marketing rights for its bowel cleansing product Diacol to Dr. Falk Pharma GmbH. Under the agreement terms, the companystands to receive as much as $4 million in milestone payments as well as royalties. In exchange, Falk has the exclusive right to sell Diacol in 28 European territories as well as the non-exclusive right to sell the product in France and Italy.
2006A / 2007E / 2008E / 2009E / Est. GrowthBowel Cleansing Franchise Revenue / $45.3M / $47.1M↓ / $61.9M↓ / $75.4M↓ / 129.8%↓
Pepcid OS and Diuril OS
Salix has acquired two hospital-based products, Pepcid OS and Diuril OS, from Merck & Co. Inc.
Indication: Pepcid OS is indicated for several gastrointestinal indications including the treatment ofduodenal ulcer, benign gastric ulcer and gastroesophageal reflux disease. Diuril OS is used as an adjunctive therapy in edema associated with several conditions including hepatic cirrhosis, and is also found useful in various forms of renal dysfunction.
Importance: Pepcid OS and Diuril OS, both liquid formulations of their solid dosage counterparts, compete in an approximately $150 million market that is concentrated in pediatric and hospitalized patient populations.
2006A / 2007E / 2008E / 2009EPepcid & Diuril Revenue / $0.0M / $18.6M / $22.6M / 23.3M
Others
Other products of the company include Azasan (azathioprine) immuno-suppressive therapy for renal homo-transplant rejection and rheumatoid arthritis, and Anusol/Proctocort (hydrocortisone) for the relief of inflammatory dermatoses and hemorrhoids.
Wilmington Pharmaceuticals has granted Salix the exclusive, worldwide right to Metoclopramide Zydis. Metoclopramide is indicated for short-term (4-12 weeks) therapy for adults with symptomatic documented gastroesphageal reflux who fail to respond to conventional therapy and for the relief of symptoms associated with acute and recurrent diabetic gastric stasis. A New Drug Application (NDA) for their Zydis formulation of metoclopramide was filed with the FDAon November 6, 2007. The product has patent protection until 2022, and additional patent protection pending, which, if issued, will provide patent protection until 2025.
Additionally, Salix has entered into a separate agreement with Catalent Pharma Solutions to supply the product. Catalent's Zydis technology is a unique, freeze-dried oral solid dosage form that disintegrates rapidly on the tongue and can be taken without water.
Pipeline Drugs
On December 31, 2007, Salix announced that it has filed an NDA for granulated mesalamine. Salix expects the FDA review of granulated mesalamine to last 10 months. This application is based upon results from two large, multicenter, 6-month, double-blind, randomized, placebo-controlled studies. These studies demonstrated a statistically significantly greater proportion of ulcerative colitis patients dosed once-a-day with 1.5 grams of granulated mesalamine remained relapse-free over 6 months of treatment than patients dosed with placebo.
In September 2007, SLXP announced the successful completion and outcome of its Phase II trial to assess the efficacy and safety of rifaximin in the treatment of patients with diarrhea associated irritable bowel syndrome. Top line results of the study demonstrate that the protocol specified, intent to treat, primary endpoint comparison of a 14 day course of rifaximin at 550 mg twice a day, provides a statistically significant improvement in both adequate relief of the symptoms and adequate relief of bloating, compared to placebo.
Salix and Debiopharm Group have signed an exclusive license agreement granting Salix the right to sell, market, and distribute Sanvar IR in the U.S. Debiopharm has developed Sanvar for the treatment of acute esophageal variceal bleeding (EVB), a life-threatening complication of late-stage liver cirrhosis. The product is currently undergoing a confirmatory Phase III trial in the U.S. for the treatment of EVB secondary to portal hypertension. The FDA has reviewed the protocol for this study under the Special Protocol Assessment (SPA) process. Sanvar has orphan drug status and received an approvable letter from the FDA. Additional Phase III trials on Sanvar havebeen completed in Europe. Under the agreement terms, Salix is responsible for upfront and milestone payments that could total up to $14 million as well as a transfer payment to Debiopharm for manufacturing the product, which puts the. gross margin on Sanvar for SLXP close to 75% upon launch
Please refer to the Zacks Research Digest spreadsheet on SLXP for more details on revenue estimates
Margins
According to Zacks Digest and the company,total cost of products sold was $13.1 million in3Q07,up 12.0% YoY. Gross margin on total product revenue was 80.6% in 3Q07 versus 77.2% for 3Q06.
According toZacks Digest and the company, R&D expense in 3Q07 was $16.0 million versus $10.3million in 3Q06, up55.4% YoY.
According to Zacks Digest and the company, SG&A expense in 3Q07 was $20.9 million versus $20.7 million in 3Q06.
Margins / 2006A / 1Q07A / 2Q07A / 3Q07A / 4Q07E / 2007E / 2008E / 2009EGross / 80.1% / 79.9% / 81.1% / 80.6% / 80.9%↓ / 80.6%↓ / 80.4%↓ / 80.8%↓
Operating / 14.7% / 4.2% / 17.0% / 22.2% / 24.7%↓ / 17.4%↓ / 8.5%↓ / 18.7%↓
Pretax / 15.9% / 5.7% / 17.6% / 24.3% / 26.4%↓ / 18.9%↓ / 12.8%↓ / 22.9%↓
Net / 15.3% / 4.7% / 14.8% / 21.1% / 22.8%↓ / 16.2%↓ / 6.7%↓ / 13.4%↓
The company has increased the R&D expenditures guidance to approximately 26% of revenue for the entire year of 2007 (previous guidance 25% of revenue). The company has decreased SG&A expense guidance 33–34% of revenue for 2007 (previous guidance 35% of revenue).
Note: The growth rate forecasted by the firms in the Digest group for SG&A expense is 23.4%, while for R&D expense, it is quite less than the company guidance at 12.7%. According to Zacks Digest, FY07 SG&A expense would be 33.1% of revenue, and R&D expense would be 26.3% of revenue.
Please refer to the Zacks Research Digest spreadsheet on SLXP for more details on margins.
Earnings per Share
As per Zacks Digest, the net income in 3Q07 was $14.2 million, up 101.6% YoY from $7.0million in 3Q06.
According to Zacks Digest and the company, EPS in 3Q07 was $0.29, up93.3% YoYfrom $0.15 in 3Q06. Net income in3Q07 was $14.2 million.
EPS / 2006A / 1Q07A / 2Q07A / 3Q07A / 4Q07E / 2007E / 2008E / 2009EDigest High / $0.67 / $0.06 / $0.21 / $0.29 / $0.32 / $0.88 / $1.10 / $1.45
Digest Low / $0.65 / $0.06 / $0.21 / $0.29 / $0.30 ↓ / $0.86 ↓ / ($0.37)↓ / $0.28 ↓
Digest Average / $0.66 / $0.06 / $0.21 / $0.29 / $0.32 / $0.88 / $0.38 ↓ / $0.85 ↓
The company believes that it will be able to generate fully diluted EPS of $0.88 (previous guidance was &0.85), assuming a 14% tax rate, in the year ending December 31, 2007. This 2007 EPS guidance represents a 50% increase, on a tax-adjusted basis, versus 2006 EPS of $0.65.
Following the approval of 3 generics of Colazal, many analysts have reduced their EPS estimates for 2008 and beyond.
Please refer to the Zacks Research Digest spreadsheet on SLXP for more details on EPS.
Target Price/Valuation
Of the nine brokerage firms currently reporting on the company, six have come out with target prices. The Digest average target price is $9.33 (↓ $5.09 fromthe previous report; 22.28% upside from current price). The target prices range from a low of $5.00(Piper Jaffray; 34.47% downside from current price) to a high of $13.50(Roth Capital; 76.93% upside from current price). Most brokerage firms in the Digest group have used P/E multiples and discounted forward earnings estimates to arrive at a price target for Salix.
Out of the nine analysts currently covering the stock, one analyst has rated the stock positive on its investment potential, seven firms have rated the stock neutraland one analyst has rated the stock negative.
Rating DistributionPositive / 11.1%
Neutral / 77.8%
Negative / 11.1%
Avg. Target Price / $9.33 ↓
Digest High / $13.50 ↓
Digest Low / $5.00 ↓
No. of Analysts with Target price/Total / 6/9
Please refer to the Zacks Research Digest spreadsheet on SLXP for more details on valuation.