Stock of the day 27/02/2015 – Salix Pharmaceuticals Ltd

It’s been a very interesting 6 months for Salix Pharmaceuticals, and its fourth quarter and full year 2014 earnings release next Monday will cap a tumultuous period which the company is only now just exiting.

After steady gains in 2013, Salix opened last year at $89.44, effectively its 2014 low. The company posted gradual, but unfaltering, growth between January and August, rising to around $139 in that period. A spike the in the middle of August led to the stock reaching its yearly peak of $172.94 by the end of September; however, trouble had crept in by the start of November.

A 34% drop at the start of that month was caused by a disappointing third quarter result. The stock shot back down to $90 after the company missed its sales targets by $50 million, alongside a 40 cent miss in its earnings per share. Salix claimed that an inventory build-up, exacerbated by inadequate distribution services, was the primary cause of the missed targets, and the entire debacle led to the resignation of the CFO and doubt thrown over the previous numbers Salix had reported. Whilst this issue will have long-term issues for its revenue, investors quickly got back on board with the stock, opening 2015 at $114.81. And following the news that Valeant Pharmaceuticals had successfully bought Salix, the company is now trading at $156.95.



Salix cost the Canadian company $14.5 billion, including debts, with Valeant beating out Endo and Shire in the process. Valeant claimed it was interested in the ever-growing gastrointestinal market and the portfolio Salix has in relation to this sector. With the purchase to be completed in Q2, the joint company will become the market leader in gastrointestinal medical development, with the takeover reveal causing Valeant itself to rise by 15% to $201.41 per share.

It isn’t all good news for Salix, however. The company announced in December that it was still working to reduce the inventory levels of certain products. This led CEO Carolyn Logan to confirm that this reduction push will have an effect on not only the fourth quarter revenues, but the entirety of 2015, with the upshot that the damage will be less long lasting as first feared.

Given that the statement on Monday will likely include revised figures for full year 2013 as well as the first to third quarters of 2014, this earnings release may be more difficult for investors to digest than most. The reaction following the release will be determined by how much the Valeant news plays a part in the statement, and the full extent to which the inventory issues have eaten into Salix’s revenue.