Fair Value on Auxilium Pharma

Auxilium Pharmaceuticals Inc.’s (AUXL - Analyst Report) only approved product is Testim, for treatment of low testosterone levels.  It also possesses a clinical-stage candidate in Xiaflex, under development for Dupuytren’s Contracture, Peyronie’s Disease, and Frozen Shoulder Syndrome. The most advanced indication is for Dupuytren’s Contracture which recently offered up positive data from two phase III trials.

Sales of Testim are performing above expectations and commercialization of Xiaflex represents significant upside to the investment story. We have, admittedly, underestimated Testim all throughout 2007. Based on recent data presented at the American Urological Association, we now see over 30 percent market share of Testim as achievable. However, the overall size of the testosterone-replacement market remains only around $500 million in our view, so significant growth for Testim beyond 30 percent market share is unlikely.

Given the eventual slowdown in Testim, the future of Auxilium relies heavily on the development of Xiaflex. We model Auxilium reaching profitability in 2010. The stock looks expensive at this level based on future earnings and the current price / sales [P/S] ratio. The biotech average P/S is between 7-8x, whereas Auxilium currently trades at nearly 12x. Based on our 2011 EPS forecast of $2.79, the stock is trading at 12.5x earnings. That is a premium to the peer-group, which currently trades at only 10x 2011 EPS.

The fundamentals at Auxilium are solid, but the lofty valuation keeps us from recommending the name at this level. We would be buyers of the name on a pull-back into the mid-to-high $20s. Thus, we rate the stock a Hold with a $36 target.

Read the full analyst report on AUXL