Salix Pharma (SLXP) Updates on Efforts to Reduce Wholesaler Inventory; Issues Light FY15 Outlook

Salix Pharma (NASDAQ: SLXP) announced that it is working cooperatively with its principal pharmaceutical wholesalers to accelerate the reduction of wholesaler inventory levels of XIFAXAN® 550, APRISO® and UCERIS® to the Company’s target of approximately three months by the end of 2015 – one year earlier than previously announced.

In order to effect this plan, Salix intends to sell to its wholesalers minimal amounts of XIFAXAN® 550, APRISO® and UCERIS® during the fourth quarter of 2014. Salix continues to expect that its distribution services agreements (“DSAs”) with its principal wholesalers will be finalized and become effective in the first quarter of 2015.

“By accelerating the reduction of our inventory to targeted levels, we can more quickly focus on the underlying strength of our business and return sales growth to demand-based levels,” said Carolyn Logan, President and Chief Executive Officer of Salix. “As part of this effort, we are working with our wholesale partners to more aggressively work down their inventories. While this effort will impact Salix’s revenue in the fourth quarter of 2014 and the full year 2015, we believe this one-time reduction over a defined period of five quarters is the right decision for the business long-term.”

As a result of Salix’s decision to accelerate the reduction of wholesaler inventory levels and sell minimal amounts of XIFAXAN® 550, APRISO® and UCERIS® during the fourth quarter of 2014, the Company is withdrawing its previously-issued guidance for the fourth quarter of 2014 and full year 2014.

The Company also announced that October 2014 prescription demand for XIFAXAN® 550, APRISO®, RELISTOR® and UCERIS® increased approximately 24%, 12%, 31% and 64%, respectively, compared to October 2013.

Ms. Logan concluded, “With our continued strong prescription growth, attractive pipeline of new products and our second-to-none sales force, Salix continues to be a market leader in gastroenterology. The Board and management have determined that the decision to accelerate the reduction of wholesale inventory levels, which reflects the views expressed by our largest shareholders, best positions Salix for future success.”

Extension of PDUFA Action Date for XIFAXAN® 550 for IBS-D

Salix also announced that on December 15, 2014, the Food and Drug Administration (the “FDA”) provided written notice to the Company that it has extended the Prescription Drug User Fee Act Action Date for XIFAXAN® 550 for the treatment of irritable bowel syndrome with diarrhea, or IBS-D, to May 27, 2015. The Company remains confident that FDA approval for XIFAXAN® 550 for the treatment of IBS-D will be obtained, and it maintains its previously-announced peak year sales estimate for this product of approximately $2.1 billion. However, there is no assurance that FDA approval will be obtained in a timely manner or at all.

Preliminary Financial Outlook for 2015 and 2016

Based on the Company’s accelerated inventory reduction plan and the expectation of finalizing the DSAs with its principal wholesalers in the first quarter of 2015, Salix is providing preliminary financial guidance for the full years 2015 and 2016.

Consistent with the Company’s historical practice, the following financial projections do not include revenues or expenses associated with products for which FDA approval has not yet been received, including XIFAXAN® 550 for the treatment of IBS-D. The Company does anticipate, however, that assuming XIFAXAN® 550 for the treatment of IBS-D is approved by the FDA, sales of this product in this indication during the first four full quarters following approval will be between approximately $125 million and $150 million, and related SG&A costs during that period will be between approximately $80 million and $90 million.

For the full year 2015, Salix expects:

• Year-over-year prescription demand growth for XIFAXAN® 550, APRISO®, RELISTOR® and UCERIS® of approximately 18%, 10%, 67% and 47%, respectively;
• Total net product revenue of between approximately $1.25 billion and $1.35 billion. (The Street sees revs of $1.51 billion.);
  • Salix believes total net product revenue would increase by approximately $400 million to $450 million if the Company sold its products based on prescription demand in 2015;
• Gross margins of approximately 80%;
• Gross-to-net adjustments of between approximately 30% and 32%;(1)
• EBITDA of between approximately $360 million and $440 million;
  • Salix believes EBITDA would increase by approximately $315 million to $355 million if the Company sold its products based on prescription demand in 2015, which represents the net product revenue increase discussed above reduced by approximately 20% for cost of goods sold;
• Cash income tax rate of approximately 3%;
• Earnings per share of between approximately $3.10 and $4.10. (The Street is at $4.49.); and
• Fully diluted shares of 77 million.(2)

For the full year 2016, Salix expects:

• Year-over-year prescription demand growth for XIFAXAN® 550, APRISO®, RELISTOR® and UCERIS® of approximately 13%, 9%, 16% and 25%, respectively;
• Total net product revenue of between approximately $1.9 billion and $2.0 billion;
• Gross margins of approximately 80%;
• Gross-to-net adjustments of between approximately 28% and 30%;(1)
• EBITDA of between approximately $865 million and $945 million;
• Cash income tax rate of approximately 14%;
• Earnings per share of between approximately $8.50 and $9.50; and
• Fully diluted shares of 77 million.(2)

In arriving at its guidance for 2015 and 2016, Salix assumed:

• Minimal sales of XIFAXAN® 550, APRISO® and UCERIS® during the fourth quarter of 2014;
• Completion of arrangements with its principal wholesalers providing for wholesaler inventory levels of XIFAXAN® 550, APRISO® and UCERIS® of three months by the end of 2015 and continuing at three months through 2016; and
• Wholesaler inventory levels of GLUMETZA® of one month by the end of 2015 and declining thereafter as a generic competitor enters the market in 2016.

(1) Includes XIFAXAN® 550, APRISO®, MOVIPREP®, GLUMETZA® 500, GLUMETZA® 1000, UCERIS® and RELISTOR®. Inclusive of projected total fees plus discounts to wholesalers (including prompt payment discounts).

(2) Represents the projected average fully diluted shares for 2014, communicated in the Company’s press release dated November 6, 2014, for comparability only. Diluted shares are variable with share price.

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