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Auxilium Pharmaceuticals, Inc. (AUXL - Analyst Report) reported a loss of 21 cents per share in the third quarter of 2012, wider than the year-ago loss of 8 cents and the Zacks Consensus Estimate of a loss of 6 cents. Lower-than-expected revenues and higher costs led to the disappointing results. Revenues, which increased 6.4% to $71.0 million, were well below the Zacks Consensus Estimate of $80 million.

Quarter in Detail

Performance of lead product, Testim, was weak in the third quarter with sales coming in at $55.4 million, up 3%. Testim revenues in the US increased 3% to $54.6 million. Auxilium Pharma attributed the weakness in Testim’s performance to challenges in the managed-care environment and operational disruption resulting from the company’s co-promotion agreement with GlaxoSmithKline (GSK - Analyst Report). Glaxo started co-promoting Testim in the US from July.

Testim is facing additional competition in the testosterone replacement therapy (TRT) gel market. Auxilium Pharma noted that prescription growth was below expectations. The TRT gel market is growing at a slower rate and this will affect sales going forward. Testim also lost some volume during the quarter due to additional pressure from payers.

Meanwhile, Xiaflex sales grew 20% to $15.7 million, including contract and ex- US revenues. US revenues increased 29% to $13.2 million. However, ex-US Xiaflex net revenues decreased 12% in the third quarter of 2012 – the year ago period included cumulative catch-up revenue adjustments totaling $1.0 million which did not occur in the reported quarter.

Auxilium Pharma’s partner, Actelion (ALIOF) is planning to launch Xiaflex in Canada in the first half of 2013. Actelion also intends to seek approval for Xiaflex in Brazil, Australia and Mexico over the next 15 months.

Auxilium Pharma is working on creating and increasing awareness among physicians and patients about Xiaflex. The company continues to present data on the clinical profile of Xiaflex.

Auxilium Pharma is working on expanding Xiaflex’ label. In June 2012, the company presented impressive top-line results from two phase III studies conducted for the Peyronie's disease indication. Auxilium Pharma is currently seeking US Food and Drug Administration (FDA) approval for this indication.

Although Auxilium Pharma has sought priority review status, it expects the FDA to grant standard review. This means a response regarding approval should be out by September 2013. News as to whether the FDA will grant priority review status should be out by the end of January.

Meanwhile, Auxilium Pharma initiated a phase Ib study in Jan 2012 for the treatment of cellulite (edematous fibrosclerotic panniculopathy) – top-line results are expected by year end. Xiaflex is currently in a phase IIa study for the treatment of frozen shoulder syndrome with top-line results expected in the first quarter of 2013. BioSpecifics Technologies Corp. , Auxilium Pharma’s licensor, has initiated a phase II study in canine lipoma and a phase I study in human lipoma.

Research and development expenses for the reported quarter declined 25.4% to $10.6 million due to lower spending on the Peyronie’s studies. Selling, general and administrative expenses grew 27.7% to $55.3 million mainly due to higher spending and a change in the timing of spend on Xiaflex and Testim.

Pfizer Agreement Terminated

Apart from announcing third quarter results, Auxilium Pharma said that its collaboration agreement with Pfizer (PFE - Analyst Report) for Xiapex in the EU and a few other European and Eurasian countries will come to an end by April 24, 2013. As a result, the company expects to recognize deferred revenues of $94 million in the fourth quarter of 2012 and deferred costs of $9 million.

As of September 30, 2012, the company had $103.4 million of deferred revenues on its balance sheet under the Pfizer agreement and $9.3 million of deferred costs (payment to BioSpecifics Technologies). While a major part of these amounts will be recognized in the fourth quarter of 2012, the balance will be recognized in the first half of 2013.

Guidance Revised

With the company now expecting to recognize deferred revenues of $94 million under the Pfizer agreement in 2012, revenue guidance has shot up to $388 - $408 million from $310 - $332 million.

Although Xiaflex global sales guidance is now $153 - $163 million, significantly above the earlier guidance of $65 - $77 million, we note that the $94 million deferred revenue accounts for the increase. In fact, the company has reduced its 2012 outlook for Xiaflex sales in the US to $52 - $60 million (old guidance: $55 - $65 million). Testim sales guidance was cut by $10 million to $235 - $245 million.

Auxilium Pharma also adjusted its operating expenses guidance. The company narrowed its R&D guidance to $45 - $50 million from $45 - $55 million. Meanwhile, SG&A guidance was cut by $15 million to $185 - $195 million (old guidance: $200 - $210 million).

Auxilium now expects 2012 net income of $85-$90 million instead of $0-$5 million.

Our Take

Auxilium Pharma’s third quarter results were disappointing considering the weak Testim sales. The shares were down on the weak results and the termination of the Pfizer agreement. Although the company expects Testim sales to improve, we expect some weakness in the shares until Testim shows signs of sustainable improvement.

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