Neutral on Auxilium Pharma

We recently reiterated our Neutral recommendation on Auxilium Pharmaceuticals, Inc. ( AUXL - Analyst Report ) which carries a Zacks #3 Rank (short-term ‘Hold’ rating).

Auxilium Pharma’s lead product Testim, a 1% testosterone gel, continues to put in a solid performance. We expect Testim revenues to continue growing based on encouraging clinical data and price increases.

We are also positive on Auxilium Pharma’s co-promotion agreement with GlaxoSmithKline ( GSK - Analyst Report ) for Testim. With urology being a key focus area at Glaxo, Testim sales should benefit from the additional promotional effort. Glaxo’s sales force started promoting Testim from mid-July 2012. Auxilium Pharma believes that the additional sales effort will increase the target audience to the top 25% of high-volume gel writers. Meanwhile, reach to primary care physicians, urologists and endocrinologists will increase with the additional detailing. Testim revenues, which came in at $193 million in 2011, are expected in the range of $245 - $255 million (old guidance: $225 - $235 million) in 2012.

Auxilium Pharma’s second marketed product, Xiaflex, is an injectable enzyme (clostridial collagenase for injection) that received approval in February 2010 from the FDA for the treatment of Dupuytren’s Contracture (DC), a condition that affects the connective tissue in the palm known as palmar fascia.

Xiaflex’ approval represents a major milestone for the company. Xiaflex is being studied for additional indications like Peyronie’s disease (PD). Auxilium Pharma expects to file for approval for the PD indication by year end. Meanwhile, Auxilium Pharma commenced a phase Ib study in January 2012 for the treatment of cellulite (edematous fibrosclerotic panniculopathy) - top-line results are expected by year end. Xiaflex is also being evaluated for the treatment of frozen shoulder syndrome with top-line results from the phase IIa study expected in the first quarter of 2013. Xiaflex is also being studied for the treatment of canine lipomas (phase II) and human lipomas (phase I) with results due in the first half of 2013.

While pleased with Testim’s performance, we note that the product faces stiff competition from Abbott’s ( ABT - Analyst Report ) AndroGel worldwide. Moreover, Testim is facing a patent challenge. The entry of a generic version of Testim, which accounted for 78.6% of Auxilium Pharma’s revenues in 2011, would be a major blow for the company.

With Testim facing a patent challenge, Auxilium Pharma’s future is heavily dependent on Xiaflex. Xiaflex' sales ramp, however, has been disappointing so far. The company cut its 2012 Xiaflex global sales guidance by $3 million to $65 - $77 million. The reduction in Xiaflex’ guidance reflects lower sales expectation from ex-US markets due to reimbursement issues in some EU countries. The unsuccessful commercialization of Xiaflex and inability to gain approval for additional indications would weigh heavily on the stock.

We expect investor focus to remain on the commercialization of Xiaflex and its label expansion.