Salix: Gastro Powerhouse

02/25/2014 8:00 am EST

Focus: STOCKS

Timothy Lutts

Publisher, Cabot Heritage Corporation

Our latest featured recommendation is a powerhouse in gastroenterology; the company is a drug and medical device company that specializes in ailments of the gastrointestinal tract, explains Timothy Lutts, editor of Cabot Stock of the Month.

The biggest product from Salix Pharmaceuticals (SLXP) is Xifaxan, a treatment for traveler's diarrhea that contributed 65% of trailing 12-month revenues.

But it has a slew of other products either on the market, or in various stages of development.

The company has products for cleansing of the colon as a preparation for colonoscopy in adults; the maintenance of remission of ulcerative colitis; the treatment of opioid-induced constipation; and the treatment of fecal incontinence.

Among its many other products are a treatment for diarrhea in adult patients with HIV/AIDS on anti-retroviral therapy and products for the treatment of gastroesophageal reflux disease (GERD), such as Pepcid.

Interestingly, Salix is not big on developing drug research. Instead, the company likes to acquire GI-focused products in late-stage development and shepherd them through the regulatory process. Then it markets the heck out of them!

In fact, last November, Salix announced the $2.6 billion acquisition of Santarus, and, in the process, acquired five more drugs—an anti-Parkinson's agent, a fibric acid derivative for treating high cholesterol, a Type 2 diabetes treatment, a treatment for ulcerative colitis, and a heartburn treatment.

As a result, the company is projecting that revenue growth will accelerate in 2014, with total product revenue topping $1.6 billion and earnings topping $6 per share.

The leader of this high-functioning company is Carolyn Logan, who's been CEO since 2002, and has grown revenues from under $100 million to over $700 million in that time. So, the prospects for the company are good.

Technically, the trend remains clearly up, and the buyers, rather than the sellers, are still in charge of this stock.

But the downside potential is not to be ignored—the stock's 200-day moving average is down at $72, which represents a potential drop of 25%. So, if you invest here, be sure to practice good risk management.

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