Salix Gains on Destocking Initiatives, Gives 2-Year Outlook - Analyst Blog

Shares of Salix Pharmaceuticals Ltd. (SLXP) jumped 6.9% after the company announced that it would expedite its inventory issues related to three key drugs earlier than expected. The company also provided preliminary guidance for 2015 and 2016.

Acceleration of Inventory Reduction by 2015 End

Salix revealed plans to reduce inventory levels of 3 of its products, namely, Xifaxan 550, Apriso and Uceris, to approximately three-month levels by the end of 2015, which is about a year ahead of what it had initially guided. We remind investors at the time of presenting third quarter results Salix had announced its intention to cut wholesaler inventory levels of Xifaxan 550 (from approximately 9 months), Apriso (approximately 9 months) and Uceris (approximately 5 months) to approximately 3 months at or before the end of 2016.

Salix now intends to sell lesser amounts of Xifaxan 550, Apriso and Uceris to its wholesalers in the fourth quarter. As a result, the company withdrew its previously provided guidance for the fourth quarter and full year 2014. Meanwhile, the company continues to expect its distribution services agreements (DSAs) with its principal wholesalers to be finalized and become effective from the first quarter of 2015.

As per the company, Oct 2014 prescription demand for Xifaxan 550, Apriso, Relistor and Uceris increased approximately 24%, 12%, 31% and 64%, respectively, compared to Oct 2013.   

Xifaxan FDA Action Date Extended by Three Months

Salix also informed that the FDA has extended the review date for the company's resubmitted supplemental New Drug Application (sNDA) for Xifaxan 550 for the treatment of irritable bowel syndrome with diarrhea (IBS-D) by three months. The regulatory body will now announce its decision by May 27, 2015, instead of Feb 28, 2015.

Preliminary Guidance for 2015 and 2016

Based on its decision to fix inventory issues by the end of 2015 and the expectation of finalizing DSAs with principal wholesalers in the first quarter of 2015, the company provided a preliminary outlook for 2015 and 2016. The guidance does not include any contribution from Xifaxan 550 IBS-D.

The company expects to earn $3.10–$4.10 per share on total revenues of $1.25 billion to $1.35 billion in 2015. Revenue guidance was well below the current Zacks Consensus Estimate of $1.49 billion.

For 2016, the company expects to earn $8.50–$9.50 per share on total revenues of $1.9 billion to $2 billion.

Our Take

We are encouraged by the company's efforts to work down inventory levels by year-end 2015, a year ahead of expectations. Meanwhile, the FDA's extension of Xifaxan 550's review period by 3 months should not be a matter of major concern considering the company did not say anything about the agency requiring additional studies.

Salix currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the health care sector include Biodel Inc. (BIOD), Lannett Company, Inc. (LCI) and Sucampo Pharmaceuticals, Inc. (SCMP). All three carry a Zacks Rank #1 (Strong Buy).


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