We recently reiterated our Neutral recommendation on Salix Pharmaceuticals (SLXP). Salix posted a loss of 5 cents per share in the third quarter of 2010, narrower than the Zacks Consensus Estimate and the guidance provided by the company. Salix had reported a loss of 15 cents in the year-ago quarter. Higher revenues helped the company post a narrower loss in the reported quarter. Third quarter revenues increased 22.8% to $80.6 million, mainly due to strong Xifaxan sales.
Xifaxan (rifaximin) has taken over the role of the primary growth driver following the entry of generic versions of Colazal in December 2007. Salix is currently working on developing new indications for a 550 mg dosage formulation of Xifaxan.
While Salix launched Xifaxan 550 mg for the reduction of the risk of the recurrence of overt hepatic encephalopathy (HE) in adult patients in May 2010, Xifaxan 550 mg is currently under US Food and Drug Administration (FDA) review for the treatment of non-constipation irritable bowel syndrome (IBS) and IBS-related bloating. A response from the FDA should be out by March 7, 2011.
We believe that the IBS indication represents a significant commercial opportunity for the company. According to Salix, the IBS market is worth about $2.2 billion. 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.
Xifaxan 550 mg for the HE indication is off to a good start with the product gaining strong formulary coverage. Salix could increase its sales force for the promotion of the IBS indication. The company could also strike a deal with a large pharma company for the promotion of the product.
Another candidate that could contribute significantly to revenues is crofelemer, which is being developed for the treatment of chronic diarrhea in HIV patients. The approval of crofelemer could allow Salix to establish a strong position in the HIV-associated diarrhea market which could represent an incremental opportunity in the range of $300 million. The company is looking to file a new drug application for the candidate in mid 2011.
Longer-term, we remain concerned about the possibility of a generic company initiating a patent challenge for Xifaxan. With Xifaxan contributing approximately 51% to 2009 revenues, the entry of generic versions of Xifaxan would be a setback for the company.
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