Back To “Hurry Up And Wait” With Lexicon (NASDAQ:LXRX)

The frustrating reality for a lot of biotech shareholders is that while these stocks can enjoy strong runs on thesis-altering data announcements, a lot of time as a biotech investor is spent waiting. Such is the case for Lexicon Pharmaceuticals (LXRX) today. Whatever commercial sales potential remains in Xermelo for its current on-label indication of carcinoid-related diarrhea, it’s going to take time to develop. Likewise with follow-on opportunities in neuroendocrine tumors (or NET) and biliary tract cancer, new drug opportunities like LX9211 in pain, and whatever management may try to advance from its preclinical assets.

The “but” is that Lexicon’s clock is ticking. The company has the cash to see if there’s something to the idea of using Xermelo in those expanded oncology indications and LX9211 in pain, and management still has some cards to play with sotagliflozin at the FDA. On top of that, perhaps management will find some alternatives for restructuring debt maturities in 2021 and 2022. The shares do still have speculative value, but it’s tied to largely to the clinical development process now.

A Small Beat For Q1

It would seem that Xeremelo expectations have ratcheted down to a more sustainable level, as Lexicon’s performance in the first quarter was a little better than expected. Overall revenue declined 13% as reported, but core U.S. Xermelo sales rose 17%. Although Xermelo sales are below second half 2019 levels, it’s not uncommon for less established drugs to see weaker performance in Q1 (insurance reauthorizations, Medicare coverage gaps, and so on).

Looking at the other financial data, Xermelo is clearly an exceptionally profitable drug on a gross margin basis, with a margin north of 90% – typically anything above 90% is exceptional. While SG&A costs seem under control, the surge in R&D from $12M to $55M highlights the impact of the Sanofi (SNY) partnership termination and the reason why Lexicon cannot afford to continue and complete the long-term outcome studies for sotagliflozin.

I also want to note the weak royalty income streams from Xermelo in Europe. While Ipsen (OTCPK:IPSEY) still gives Xermelo mention its investor presentations, the reality is that the drug barely sells – the company owes Lexicon royalties starting in the 20%’s and royalty income this quarter was only a little more than $100K. Given challenges like drug pricing (which contributed to a writedown at Ipsen in 2018), I can’t really see Ipsen re-marshalling assets to push this drug substantially more than it already has.

Lexicon ended the quarter with $249M in cash and is due to receive another $26M from Sanofi in September. Significant debt maturities loom late in 2021 and 2022, but this is enough cash to get at least preliminary reads on the efficacy of its current pipeline (Xermelo in NET and biliary tract cancer, LX9211 in diabetic neuropathic pain).

Another Option For Sotagliflozin?

Management made it fairly clear on the first quarter earnings call that they regard any Type 2 diabetes opportunities for sotagliflozin as “on the shelf” for the time being, and I believe that is a prudent decision. Not only has the drug not shown the hoped-for differentiation, it would be very late to market and Lexicon has had no luck finding a partner willing to pick up the program after Sanofi’s departure.

Management is less willing to let go of the Type 1 indication. Management made a somewhat cryptic reference to pursuing “some additional steps inside the agency (the FDA)” once the Covid-19 crisis eases, and I think they might be referring to a formal dispute resolution process. I’ve seen companies successfully use this process in the past to get rejections overturned, but the success rate is typically only around 15% to 16%. Still, as the process doesn’t cost all that much money, and there is an argument to be made that the FDA is being excessively stubborn regarding the proposed risk management strategy with sotagliflozin in Type 1 diabetes, it is an avenue worth pursuing.

Should the FDA ultimately reverse its decision on sotagliflozin, that doesn’t mean smooth sailing for Lexicon. Management has consistently said that they believe they could launch the drug in the U.S. on their own, but I disagree. They could get some sales, yes, but I think the company’s limited resources would create significant challenges. An FDA reversal would likely boost the share price enough to secure further funding, but I still would not underestimate the challenges that would go with an unpartnered launch in the U.S.

The Outlook

As I mentioned in a prior piece, the news that Xermelo appears highly effective in controlling NETs in patients prescribed the drug for carcinoid-related diarrhea is encouraging on multiple levels – it suggests the eventual studies in NET should be successful, it should encourage broader use, and it should encourage patients to stay on drug, even if the patient doesn’t respond particularly well to the on-label indication (reduction in diarrhea, pain, flushing, and other symptoms). That’s going to take time and effort, though – while a lot of retail investors like to believe that physicians actively read journals and stay up on the latest developments, that’s simply not the case. So it’s up to Lexicon to get this information in front of prescribing physicians, and that takes time.

Management indicated that enrollment of the first efficacy cohort of the Phase IIa TELE-ABC study of Xermelo in biliary tract cancer is complete and data should be available in the fourth quarter of this year. They also confirmed that a Phase II study of LX9211 in diabetic neuropathic pain should begin midyear.

In response to a question, management also confirmed that they are looking to go back into the company’s data archives for potential new clinical programs. As a reminder, Lexicon long ago was a genomics company that used large-scale knockout mouse genetics studies to identify potential drug targets. Way, way back in the day, the company had identified over 100 potential targets, and management may be able to go into the vaults and find some promising new candidates. Keep in mind, though, that cash on hand is very much still a limiting factor in this process.

The Bottom Line

Lexicon is a speculative call on better future on-label sales of Xermelo, expanded use through approved follow-on indications, other pipeline successes, and perhaps a successful resolution of the Type 1 diabetes rejection for sotagliflozin. This is also a company with a limited funding runway and a long history of lifting investors’ hopes only to see crushing setbacks later. I don’t think the shares are particularly cheap on a risk-adjusted basis, but a few clinical and/or regulatory success could meaningfully alter that risk adjustment and this does still have some speculative appeal.

Disclosure: I am/we are long LXRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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