Patent Challenge for Auxilium Pharma

Auxilium Pharmaceuticals, Inc. (AUXL - Analyst Report) and FCB I LLC ("FCB") recently announced that Watson Laboratories, Inc. is seeking US Food and Drug Administration (FDA) approval for its generic version of Auxilium Pharma’s 1% testosterone gel, Testim. Watson Lab is challenging nine US patents which are slated to expire in the 2023-2025 timeframe.

Testim is the lead product at Auxilium Pharma. Testim sales came in at $207.9 million in 2011, accounting for 78.6% of the company’s revenues. Testim’s prescription share of the gel market was 20% in December 2011. However, Testim faces stiff competition from Abbott Labs’ (ABT - Analyst Report) AndroGel. We expect Testim sales to slow down given the entry of additional competitors like Endo Pharmaceutical’s (ENDP - Analyst Report) Fortesta and Eli Lilly’s (LLY - Analyst Report) Axiron.

The testosterone gel market will become even more competitive from 2015 when generic versions of AndroGel are scheduled to enter the market. The availability of a cheaper generic testosterone gel product could impact Testim’s market share as well as its formulary status.

Our Take

We expect Auxilium Pharma and FCB to file a patent infringement lawsuit against Watson Labs. The filing of the lawsuit within 45 days from the date of receipt of notice from Watson Labs will ensure that the FDA cannot grant final approval to Watson Labs’ generic for up to 30 months or the court’s decision, whichever is earlier. With Testim sales expected to slow down in the next few years, we do not expect the filing of the patent challenge to have a major impact on the company.

Given the eventual slowdown in Testim growth, Auxilium Pharma’s future relies heavily on Xiaflex. With Auxilium Pharma working on driving sales of the product, we expect investor focus to remain on the successful commercialization of Xiaflex/Xiapex, and label expansion of the product for additional indications. We currently have a Neutral recommendation on Auxilium Pharma, which carries a Zacks #3 Rank (short-term ‘Hold’ rating).