Can Valeant Overcome The Rifymicin Threat?

Management has sold VRX bulls on the Salix growth story. The question remains, “Where is the growth?” Total Salix revenue was up only 3% Y/Y, yet EBITDA was practically flat. Salix’s top three selling drugs are Xifaxan (65% of Salix revenue), Apriso (8% of Salix revenue) and Uceris (9% of Salix revenue). Each of these are faces serious headwinds. Xifaxan’s Q4 revenue was up 10% Y/Y but declined 4% sequentially. This compares unfavorably to Allergan’s (AGN) Viberzi. Viberzi competes with Xifaxan for the treatment of irritable bowel syndrome; Viberzi’s Q4 2017 revenue of $43 million was up 13% and up 5% sequentially, albeit from a much smaller base compared to Xifaxan’s $275 million.

An approval of Rifamycin could potentially reduce Xifaxan’s market share, hurt its average sale or further stymie its revenue growth. Competition from both Rifamycin and Viberzi could be daunting for Xifaxan; the drug is also Valeant’s top selling drug and represents 13% of the company’s total revenue. Any headwinds for Xifaxan could challenge the narrative of Salix being the company’s second catalyst for growth. Salix’s Apriso (ulcerative colitis) and Uceris (mild to moderate ulcerative colitis) are facing LOE which could materialize by the second half of this year. That would imply that over 80% of Salix’s revenue could be at risk of additional competition or LOE. This could destroy Valeant’s growth story and could punish the stock.

Conclusion

VRX is up over 40% Y/Y on the company’s survival prospects and the potential for Bausch & Lomb and Salix to provide engines for growth. Salix’s revenue is currently stagnant. The potential approval of Rifamycin could create additional headwinds for Xifaxan which represents 65% of Salix’s revenue. VRX trades at 10x run-rate EBITDA and any threat to Salix could destroy Valeant’s growth story. I believe a Rifamycin threat could be difficult for Valeant to over come. VRX remains a sell.

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