The following excerpts explain why Zacks senior pharma industry analyst Jason Napodano, CFA remains neutral on Auxilium Pharmaceuticals (AUXL), the biotech company:
'Auxilium Pharmaceuticals is a specialty pharmaceutical company focused on treating diseases and conditions that accompany aging. The company's only approved product is Testim, a 1% testosterone gel indicated for the treatment of hypogonadism. Auxilium also possesses a clinical stage candidate in Xiaflex, under development for Dupuytren's Contracture, Peyronie's Disease, and Frozen Shoulder Syndrome. The most advanced indication is for Dupuytren's Contracture in two phase III trials.
'Sales of Testim are performing above expectations and commercialization of Xiaflex represents significant upside to the investment story. Sales of Testim exceeded our expectations for the third quarter 2007, coming in at $26.2 million vs. our estimate of $24 million. We note there was a slight inventory build of $0.8 million during the quarter, so the adjusted results were a tad closer to our thinking. We originally believed that Testim market share gains would peak-out at around 20%. Based on recent data presented at the American Urological Association (AUA) in May 2007, we have now adjusted our expectations and see 30-40% market share of Testim as easily achievable.
'However, the overall size of the testosterone-replacement market remains only around $500 million in our view, so significant growth for Testim beyond 40% market share is unlikely. The future of Auxilium relies heavily on the development of Xiaflex. Manufacturing issues relating to the melt-back of lyophilized cake seen earlier in 2007 seem to have been worked through. Upside to our Xiaflex forecasts could come from positive development in Peyronie's Disease or Frozen Shoulder Syndrome.
'We model Auxilium reaching profitability in 2011. The stock looks expensive at this level based on future earnings and the current price/sales ratio. The biotech average P/S is between 7-8x, whereas Auxilium currently trades at nearly 13x. Based on our 2011 EPS forecast of $1.09, the stock is trading at 28.5x earnings. That's a premium to the peer-group, which currently trades at only 12.5x 2011 EPS. As such, we now rate the shares Hold, with a $33 price target. The lofty valuation keeps us from recommending the name.'
Read the full analyst report on AUXL.
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