Tuesday, January 05, 2010

Salix Pharmaceuticals (NASDAQ:SLXP): Top Pick for 2010; raising target to $58 - Piper (Actionable Call Alert!)

Piper Jaffray is out with a major call on Salix Pharmaceuticals (NASDAQ:SLXP) this morning calling the stock their Top Small Cap Pick for 2010 and raising target to $58 (prev. $29).

The firm believes that Street estimates (including their own) have been significantly underestimating the pricing power associated with Xifaxan in its expansion markets. They are raising their Xifaxan estimates to better reflect pricing expectations cited by SLXP at its analyst day in November 2009. As such, they are raising their price target to $58 from $29. Piper remains confident that Xifaxan,with label expansions on the way in hepatic encephalopathy (HE) and non-constipation irritable bowel syndrome (IBS), will emerge as a blockbuster product and would continue to be enthusiastic buyers of SLXP shares.

Significant Xifaxan pricing power justified in both HE and IBS settings. Piper recalls that SLXP at its analyst day in November 2009 cited a price of up to $23 for the 550 mg pill that will become available for the new indications. In HE, this translates into a daily cost of $46 (1,100 mg per day) and an annual cost near $16,600. This is reasonable in their view given the significant potential for reduced HE-related hospitalizations. In non-constipation IBS, the daily cost could be as high as $69 per day (a daily dose of 1,650 mg) and a cost of $966 for 14-day treatment course. Three 14-day courses per year translates into an annual cost of near $2,900. They also believe this is reasonable. Firm notes that other GI agents such as Shire's Lialda and Warner Chilcot's Asacol can cost as much as $5,000 per year.

Raising Xifaxan sales estimates; over $1B in sales by 2014. Piper's EPS estimate rises to $7.55 by 2014, up from $3.42. With a relatively concentrated GI prescriber audience, and therefore modest sales force expansion requirements, they believe that margin expansion over the long-term could be compelling. SLXP has suggested that it can reach 70% of the IBS prescriber audience (plus the entire HE audience) with a sales force of 400 reps (it is already expanding its sales organization to 240 reps).

Confident in positive outcome for 2/23/10 FDA panel meeting for Xifaxan in HE. Piper believes that the panel meeting will go smoothly for a number of reasons:

1) compelling efficacy from Phase III showing a reduction in the risk of a breakthrough HE episode of over 50% for Xifaxan relative to placebo;

2) a relatively clean safety profile in Phase III HE study and in its experience on the
market both in the U.S. and overseas; and

3) lack of documented antibiotic resistance. On this last point, Xifaxan has been available overseas for well over a decade and is approved in 10 countries for HE. As such, the lack of documented antibiotic resistance over its lengthy commercial life overseas should give the panel greater comfort in this respect.

With Xifaxan peak sales in excess of $1.0B realistic, Piper Jaffray believes Salix is the most
compelling small-cap growth story in the specialty pharma space. They base their $58.00 price target (up from $29) on their 2014 EPS estimate of $7.55 (up from $3.42), times a P/E of 12x, discounted at 15% (up from 11%, and better reflecting greater commercial risks associated with their higher estimates).

Notablecalls: Actionable Call Alert! - this call is the one that makes the tiny hairs on the back of my neck tingle with excitement. And that, my dear readers hasn't happened in a while!

So, what makes this one so special?

- Piper analysts David Amsellem & Michael Dinerman are raising their estimates for Xifaxan way-way past every firm on the Street. Their revenue estimates are now almost double of their peers. I'm sure others will need to catch up & will do so in the n-t.

- The $58 price target from Piper is the new Street high. The previous Street high was $36.

- Take a look at the chart on this one. It's ready to break to new highs. There is nothing stopping it. Nothing!

Right now people are looking for these kind of plays that have potentially big upside for 2010. They don't care about buying the DNDN's and HGSI's of the world. There isn't enough upside there. They WANT the SLXP's.

I must say this one has big upside for today. It will likely trade up above the $28 level today and I would not be surprised to see $29.

This baby wants $30 in the n-t. It wants it and I don't see anything stopping it. This is the type of call that will make the stock trade up for days. This one is a game-changer.

PS: This one has a 18% short interest - phew! The pain. The PAIN. I didn't realize the number that that high.

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