Lilly's Axiron Launched in the U.S.

Eli Lilly and Company (LLY - Analyst Report) recently announced the availability of Axiron in pharmacies across the US. Axiron gained approval from the US Food and Drug Administration (FDA) in November 2010 for use as a replacement therapy in men for certain conditions associated with testosterone deficiency or absence.

Axiron Rights Acquired in March 2010

Eli Lilly acquired exclusive worldwide rights from Australian company, Acrux, to commercialize Axiron in March 2010. Per the terms of the deal, Eli Lilly made an upfront payment of $50 million and $3 million on the transfer of manufacturing assets. The FDA approval of Axiron triggered 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.

Men’s Health Portfolio Boosted by Axiron Deal

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 $1.7 billion in 2010, 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 the 2010 US Census Bureau estimates, about 58.7million men (45 years and older) suffered from hypogonadism with the incidence being on the rise. According to IMS, the total number of prescriptions in the testosterone replacement therapy market has increased from 1million to 4.4million in 10 years (2000-2010).

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 Endo Pharmaceutical’s (ENDP - Analyst Report) Aveed, BioSante Pharmaceuticals/Teva Pharmaceutical Industries Ltd.’s (BPAX)/(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 supported by a Zacks #3 Rank (short-term “Hold” rating). We expect the company’s 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, the ramp of Effient and upside from the ImClone deal should offer some downside support. We are also pleased to see Eli Lilly pursuing small acquisitions and in-licensing deals to boost its pipeline.