Analysts with RBC Capital Markets have rated Salix Pharmaceuticals outperform in their first research note on the Raleigh company.
RBC initiated coverage with a target price of $53 for Salix shares. The stock is currently trading around $46 per share.
"While the company experienced some pipeline setbacks over the past two years, we believe these are already well reflected in the stock price," the analysts wrote.
Salix sells drugs to treat gastrointestinal ailments. Much of the RBC analysts optimism about the stock relates to their belief that revenue from Xifaxan, Salix's best selling drug, will grow significantly in the future.
The RBC analysts believe that results from the ongoing studies of the effectiveness of using Xifaxan for the treatment of irritable bowel syndrome are likely to be positive, and will pave the way for approval in 2014.
"We conservatively model a 35 percent probability of approval but see significant upside to the stock ($66) in this scenario," they wrote.
They also believe investors are underestimating the growth in using Xifaxan as a treatment for treatment of hepatic encephalopathy, a rare liver condition. Xifaxan is already approved for such treatment, and is also approved to treat traveler's diarrhea.
Salix is now seeking approval from the FDA for two new drug applications: The use of Xifaxan to treat irritable bowel syndrome and the use of the drug Relistor to treat constipation in patients taking pain medicines. The FDA has delayed ruling on both applications as it gathers more information.
On Jan. 1, regulators did approve Salix's request to use the drug Fulyzaq for treating chronic diarrhea in HIV/AIDS patients.