Lexicon Pharmaceuticals, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Lexicon is a biopharmaceutical company commercializing XERMELO and developing sotagliflozin and other drug candidates.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $294.4 million | $7.0 million | $313.3 million | $46.1 million |
| Net product revenue | $8.4 million | $6.3 million | $23.8 million | $19.1 million |
| Operating income (loss) | $224.7 million | ($22.9 million) | $188.7 million | ($90.9 million) |
| Net income (loss) | $226.1 million | ($27.4 million) | $181.3 million | ($103.8 million) |
| Diluted earnings (loss) per share | $1.95 | ($0.26) | $1.59 | ($0.98) |
- Collaboration revenue was $285.9 million in Q3 and $289.2 million year to date, primarily reflecting $260 million recognized under the Sanofi termination and settlement agreement.
- Q3 research and development expense was $26.7 million, up 94% year over year as sotagliflozin development activity resumed under Lexicon. Nine-month R&D expense fell 42% to $51.3 million. SG&A declined 11% in Q3 and 10% year to date.
- A $28.6 million impairment charge for the LX1031/LX1033 irritable bowel syndrome programs was recorded in Q3; a related $6.0 million income tax benefit was recognized. The charge followed a decision to redirect resources toward sotagliflozin.
- Cash and cash equivalents were $170.2 million and short-term investments $126.1 million at September 30, 2019, totaling $296.3 million, versus $160.1 million in cash and investments at year-end 2018. Net working capital was approximately $318.8 million.
- Operating cash flow was $138.2 million for the first nine months, versus cash used of $121.5 million in 2018. Investing activities used $46.5 million and financing activities used $1.9 million. The filing attributes the operating cash flow improvement largely to the period’s income, while operating asset and liability changes partly offset it.
- Total debt, net of issuance costs, was approximately $245.1 million, including $11.3 million of current mortgage debt. Debt includes 5.25% convertible notes due December 2021 and a 9% BioPharma term loan due December 2022. The mortgage has a $10.3 million balloon payment due August 2020. Nine-month interest expense was $15.5 million.
Material developments and outlook
- Lexicon and Sanofi terminated their sotagliflozin collaboration effective September 9, 2019. Lexicon regained worldwide rights and assumed responsibility for development and commercialization in type 1 and type 2 diabetes. Sanofi agreed to pay $260 million: 80% upfront and 10% at each of six and twelve months after settlement. The filing reports $260 million of revenue recognized in Q3 and states no further payments are due under the former collaboration.
- Sotagliflozin is approved in the European Union for a defined group of adults with type 1 diabetes; the FDA issued a complete response letter for the U.S. type 1 diabetes application. Lexicon reported preliminary top-line results from the first three Phase 3 type 2 diabetes trials and is transitioning ongoing studies from Sanofi.
- Management expects substantial spending on XERMELO commercialization, sotagliflozin development and regulatory efforts, and other clinical programs. It believes current unrestricted cash and investments and expected collaboration and other revenues will fund operations for at least the next 12 months, but says additional financing may be needed thereafter if cash generation is insufficient.
- No specific earnings or revenue guidance is provided. Management cautions that results fluctuate and period-to-period comparisons are not necessarily indicative of future performance. Profitability depends on product commercialization, regulatory outcomes, clinical success, collaborations and access to financing.
Risks, contingencies and items to monitor
- A purported securities class action alleges misleading statements concerning sotagliflozin Phase 3 data and FDA approval prospects; Lexicon filed a motion to dismiss. The complaint seeks unspecified damages. The Sanofi disputes were settled through mutual releases.
- Key risks include timely transition and funding of sotagliflozin studies, obtaining U.S. approval for type 1 diabetes, completing type 2 diabetes development, and securing a new strategic commercialization partner. Other material exposures include XERMELO market acceptance, reimbursement, manufacturing and distribution reliance, clinical and regulatory uncertainty, debt covenants, and future capital needs.
- The company reports a maximum potential exposure of approximately $14.2 million under a Texas Enterprise Fund job-creation obligation before applicable credits; management believes credits fully offset the obligation. EU approval of Zynquista also triggers royalty payments totaling $4.5 million in three annual installments, subject to stated marketing conditions.
Important facts for investors to verify
- Timing and collection of the remaining Sanofi settlement installments, and the transition status and costs of sotagliflozin trials.
- U.S. regulatory prospects for sotagliflozin, and the clinical, regulatory and commercial milestones for its type 2 diabetes program.
- Whether Lexicon secures a new collaboration and how development and commercialization spending affects cash runway.
- XERMELO sales trends, reimbursement and market access, and Ipsen’s commercialization and royalty contribution.
- Developments in the securities litigation, the August 2020 mortgage balloon payment, and compliance with debt covenants.