Auxilium a Buy at $20

Auxilium Pharmaceuticals, Inc. (AUXL - Analyst Report) reported financial results for the first quarter 2009 on May 6, 2009. Total revenues for the first quarter were $34.7 million, an increase of 28% over the first quarter in 2008.

Revenues consisted of approximately $32.5 million in U.S. sales of Testim, up 20% year-over-year, $1.3 million in milestone recognition from Ferring International S.A. on ex-U.S. Testim activities, and $0.9 million in amortization from the previous upfront payment from Pfizer (PFE - Analyst Report). This was slightly lower than expected by about $2.0 million based on lower sales of Testim.

Management noted that managed-care changes and inventory de-stocking negatively impacted sales. Also, the difficult economic environment had a negative impact on Testim sales during the first quarter. Net loss for the first quarter totaled $13.2 million, or $0.31 per share. This was a slightly greater loss than expected based on lower sales of Testim and higher SG&A costs ahead of the Xiaflex launch.

Auxilium exited the first quarter 2009 with $90.2 million in cash and investments. Based on our financial model, this is enough cash to fund operations until Auxilium attains profitability in 2010.

On March 2, 2009, Auxilium submitted a biologic license application (BLA) to the U.S. FDA for Xiaflex seeking approval for the treatment of Dupuytren’s contracture. The BLA submission is based on data from a total of 1082 treated Dupuytren's contracture patients and over 2600 injections of Xiaflex during the clinical program.

There are currently no treatment options available for Dupuytren’s contracture. The BLA filing represents a major milestone for the company and, if approved, would put the company squarely on the path to sustained profitability. The FDA accepted the application and granted it priority review in late April 2009.

The PDUFA action date has been set for August 28, 2009. Prior to that time we expect an advisory panel meeting with the FDA’s division of anesthesia, analgesia, and rheumatology (DAARP), perhaps in July 2009. The FDA will also inspect the manufacturing facility at some point over the summer as well.

Management has hired a handful of regional medical liaisons (RMLs) to begin engaging though leaders in the Dupuytren’s Contracture market. Sales representatives have also been identified and management plans to hire 75 to 100 post-approval. Once approved, Auxilium should be in position to launch Xiaflex in roughly 60 days. The CORD-I data has been submitted to a medical journal for peer-review, and management expects the to-be-hired sales force will have the full data in hand by year-end 2009.

Meanwhile, we were pleased to see management strike a deal with Pfizer for the development and commercialization of Xiaflex in 46 European and Eurasian countries. This deal has not only brought a significant upfront payment along with backend royalties, it will also help fund the U.S. launch.

Management is now looking for partners in other non-European and non-North American countries for Xiaflex. With the positive CORD data now in hand and the Pfizer deal in place, talks should greatly heat up.

We think the fundamentals are looking strong at Auxilium. We are continuing to review the CORD-I data, but at this point we are feeling confident about approval in August 2009.

We would be buyers of the stock below $20. Our price target is $26 per share. This is 20x our 2012 EPS estimate of $2.61, discounted back at 20%.