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Eli Lilly and Company (LLY - Analyst Report) and partner Acrux recently announced good news in the form of US Food and Drug Administration (FDA) approval for Axiron. The FDA approved Axiron for use as a replacement therapy in men for certain conditions associated with testosterone deficiency or absence.

Eli Lilly acquired exclusive worldwide rights to commercialize Axiron earlier this year. Per the terms of the deal, Eli Lilly made an upfront payment of $50 million and $3 million on the transfer of manufacturing assets. With Axiron having gained FDA approval, Acrux now stands to receive a milestone payment of $87 million from Eli Lilly. Acrux could receive up to $195 million in commercialization milestones, and royalty payments on global sales of the product.

The addition of Axiron has helped boost Eli Lilly’s men’s health product offerings. Eli Lilly’s lead product in this category is Cialis, which is indicated for erectile dysfunction. Cialis, which posted sales of $1.6 billion in 2009, competes primarily with Pfizer’s (PFE - Analyst Report) Viagra and GlaxoSmithKline’s (GSK - Analyst Report) Levitra.

The hypogonadism market represents a nice niche opportunity for Eli Lilly. Hypogonadism is a disorder that affects approximately 39% of men over age 45. According to data from IMS Health, Inc. global sales of testosterone therapies have increased to more than $1 billion per year, with sales of testosterone gels in the US comprising $700 million.

Currently marketed therapies include Abbott’s (ABT - Analyst Report) AndroGel and Auxilium Pharmaceutical’s (AUXL - Analyst Report) Testim. Additional competition could be in the form of BioSante Pharmaceuticals/Teva Pharmaceutical Industries Ltd.’s /(TEVA - Analyst Report) Bio-T-Gel, and Repros Therapeutics’ (RPRX - Snapshot Report) Androxal.

Neutral on Eli Lilly

We currently have a Neutral recommendation on Eli Lilly, which is supported by a Zacks #3 Rank (short-term “Hold” rating). The company is facing a major patent cliff in late 2011 when it is slated to lose exclusivity on key product, Zyprexa.

We expect the top-and bottom-line to remain under pressure from late 2011 as the contraction in Zyprexa sales more than offsets growth in Cymbalta, diabetes and new product sales. Barring significant cost-cutting efforts or additional revenue catalysts, 2013 will be the beginning of a very challenging period with Cymbalta losing US patent protection during the year.

On the flip side, strong performance of the diabetes business should offer some downside support. The ramp of Effient and upside from the ImClone deal could also result in a short-term boost to revenue. We are also pleased to see Eli Lilly pursuing small acquisitions and in-licensing deals to boost its pipeline.

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