Why Salix Pharmaceuticals' Good Data Wasn't Great

Investors in Salix Pharmaceuticals (NASDAQ: SLXP  ) might have had some upset stomachs in the days leading up to today's announcement of positive results from the TARGET-3 study of Xifaxan in IBS-D. Although a medical journal review from mid-2012 had suggested that Xifaxan would pass this study of long-term retreatment, there are hundreds of millions of high-margin incremental sales riding on Salix ultimately securing FDA approval for a drug that has had a tough route to approval for this large indication.

A little background
Xifaxan is Salix's biggest drug and likely to make up about 50% of normalized sales this year. The drug is already approved for hepatic encephalopathy and traveler's diarrhea and the FDA has laid out challenging clinical endpoint requirements for bioequivalence (adding another layer of defense to future generic competition).

Xifaxan has been shown to be effective in reducing the symptoms of IBS-D, an undertreated condition characterized by pain, bloaing, discomfort, and diarrhea (another form, referred to as IBS-C, causes constipation). IBS patients have a suicide rate that is two to four times the norm, and this is thought to be due in part to a lack of effective treatments – Novartis withdrew Zelnorm from the market in 2007 at the FDA's request and Lotronex (originally marketed by Glaxo, now owned by Prometheus Labs was pulled in 2000 before being reintroduced in 2002 on a highly restricted basis.

Analysts believe that as much as 25% to 50% of Xifaxan's sales may be for off-label use in IBS-D, but formal FDA approval would allow the company to actively market the drug for that indication and would improve the reimbursement process significantly. All told, FDA approval could potentially add $400 million to $700 million in incremental annual sales and allow Salix to leverage the primary care sales force acquired with Santarus even more effectively.

The data
I'd love to say that the TARGET-3 data were great and support not only clear-cut FDA approval but a strong competitive profile against would-be competitor Furiex Pharmaceuticals and its drug eluxadoline (and Forest Labs (NYSE: FRX  ) is acquiring Furiex). I'd love to say that, but I cannot as the company provided virtually no data at all.

What Salix said today was that the study was a success and that the drug showed a statistically significant response (versus placebo) in a 14-day retreatment period for IBS-D patients. Combined with the earlier TARGET-1 and TARGET-2 studies, this should answer the FDA's questions and support approval.

I would expect more data at the company's July 9th investor/analyst day, including guidance on the regulatory process from here. The company could likely file a supplemental NDA within a couple of months, allowing for approval in 2015. Once approved, I expect Salix to move quickly on the marketing side to maximize the value of this new indication.

Insofar as competition with eluxadoline goes, I would note that a critical factor in the competitive profile of eluxadoline is how the FDA schedules the drug (it is mu and delta opioid receptor agonist). More restrictive scheduling (treating the drug like a controlled substance) would create some limitations and obstacles with prescribing physicians and pharmacists and would help Salix gain share.

The bottom line
Salix shares had been moving up nicely in April, in part I believe on expectations for this clinical update and a desire to get long ahead of it. As the 13% move after the news suggests, though, not all of the optimism was fully in the shares. There is some risk that the actual data will disappoint and certainly a risk that the FDA will find a new quibble, but Xifaxan looks to be in good shape as a labeled drug for IBS-D and an incremental high-margin growth opportunity for Salix in 2015.

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