Auxilium Pharmaceuticals, Inc. (AUXL), AbbVie Inc (ABBV), Eli Lilly & Co. (LLY): Is The Risk Worth The Large Potential Reward?

Auxilium Pharmaceuticals, Inc. (NASDAQ:AUXL) stock has a lot of negative sentiment priced into the shares, maybe too much at this point. Often when the Street has bearish outlook on a stock, interest in it falls off and the shares overshoot fair value. This can create opportunities for investor.

Auxilium is a biopharmaceutical company that develops and markets products to two specialized markets. The company currently markets Testim testosterone gel and Xiaflex, an injectable collagenase the company licensed from BioSpecifics.

On April 1, 2013 a lawsuit from Upsher-Smith Laboratories was dismissed by a Federal Judge. Upsher-Smith filed suit to make Testim’s US patents invalid. The stock reacted positively following the news although there was not too great of a concern Upsher-Smith’s claim would prevail.

The patent on Testim currently is set to expire in 2023 and the dismissal of the suit highlights the unlikelihood of a generic reaching the market before that time. Other similar generic products are expected to enter the market starting in 2015. Androgel from Teva and Perrigo is one such product. The stock has priced in significant loss of market share to this and other potential generics. Auxilium Pharmaceuticals, Inc. (NASDAQ:AUXL) has responded by developing a follow up to Testim (1.6% concentration vs. 1%) that will advance to Phase III trials later in 2013 which could extend the life of the product line.

Xiaflex Missing from Valuation?

The company recently had positive results from its Phase IIa trials with Xiaflex used in the treatment of frozen shoulder syndrome. Using the injection for this purpose would add another revenue stream for Auxilium Pharmaceuticals, Inc. (NASDAQ:AUXL). The timeline of a Phase III trial is still uncertain, but if it shows efficacy there, it could act as a positive catalyst for the stock.

Additionally, the FDA is expected to rule on Xiaflex for the treatment of Peyronies disease. Analysts have indicated a two-thirds chance of approval and believe this is not reflected in the current valuation of Auxilium.

Competition Winning so far in 2013

Currently, other products for men with low testosterone exist. Androgel is currently offered by AbbVie Inc (NYSE:ABBV) and Eli Lilly & Co. (NYSE:LLY) has Axiron. The total market for this product is estimated at $2 billion. Category prescription performance of testosterone replacement therapies is up 13% so far in 2013 whereas prescriptions for Testim are down by 14%. This has also led to underperform for the shares of Auxilium Pharmaceuticals, Inc. (NASDAQ:AUXL). The Auxilium stock is off 14.5% YTD compared to the NASDAQ Biotech index which is up 19% for the same period.   Eli Lilly is up 16.3% YTD and AbbVie is up over 25% since it was spun-off early this year.  It is hard to know where the bottom is but Auxilium’s stock is trading at 9.1x TTM earnings and 2x sales, typically a cheap valuation for a biotech.  Eli Lilly & Co. (NYSE:LLY) and AbbVie Inc (NYSE:ABBV) are trading at 15.8x TTM and 13.5x TTM or 2.8x and 3.8x sales.