Lexicon Pharmaceuticals, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Amounts below are in U.S. dollars.
Business context and reporting period
Lexicon is a biopharmaceutical company transitioning from collaboration-funded research toward product commercialization. It launched XERMELO in the United States in March 2017 after FDA approval for carcinoid syndrome diarrhea; Ipsen markets it in licensed territories outside the United States and Japan. Sotagliflozin is partnered with Sanofi, while LX2761 and LX9211 remained in Phase 1 development.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $90.3 million | $83.3 million |
| Net product revenue | $15.9 million | None reported |
| Collaborative-agreement revenue | $74.3 million | $83.2 million |
| Research and development expense | $156.8 million | $178.2 million |
| Selling, general and administrative expense | $66.2 million | $43.0 million |
| Operating loss | $136.7 million | $137.2 million |
| Net loss | $129.1 million | $141.4 million |
| Net loss per share | $1.23 | $1.36 |
| Cash, cash equivalents and short-term investments | $310.8 million | $346.5 million |
| Working capital | $197.9 million | $193.2 million |
Revenue rose 8%, reflecting initial XERMELO sales, partly offset by lower collaboration revenue. R&D expense fell 12%, primarily on lower external sotagliflozin development costs; SG&A rose 54% as Lexicon built its commercial organization. A $12.7 million income tax benefit helped reduce the reported net loss. The filing does not provide a clearly useful consolidated gross-margin or operating-margin measure for this collaboration- and development-oriented business.
Operating activities used $185.4 million of cash in 2017, versus $175.6 million in 2016. Financing activities provided $149.9 million, principally from the new loan; investing activities provided $50.5 million, mainly from net investment maturities. The company reported an accumulated deficit of $1.38 billion and stockholders’ equity of $52.1 million at year-end.
Year-end debt principal totaled approximately $251.6 million: $150 million drawn under a new 9% BioPharma term loan, $87.5 million of 5.25% convertible notes due 2021, and a $14.1 million mortgage due in April 2018. Debt carrying value, net of financing costs, was approximately $245.7 million. The mortgage was classified as current; management intended to refinance it. The loan is secured by substantially all company assets and includes restrictive covenants.
For fourth-quarter 2017, revenue was $33.0 million versus $23.0 million in fourth-quarter 2016; net loss was $28.4 million versus $32.4 million, and loss per share was $0.27 versus $0.31.
Material changes and operating developments
- XERMELO generated its first product revenue in 2017; net product revenue was $15.9 million. Its 2017 cost of sales was $1.9 million, including $1.5 million of intangible-asset amortization.
- Collaboration revenue declined 11% to $74.3 million, primarily because of lower revenue recognized under the Sanofi agreement, partly offset by Ipsen milestones. Sanofi and Ipsen accounted for 64% and 18% of 2017 revenue, respectively.
- Sanofi and Lexicon reported positive top-line results from three Phase 3 sotagliflozin trials in type 1 diabetes. Applications for U.S. and EU approval were being prepared, not yet approved. The trials reported more adjudicated diabetic ketoacidosis events in sotagliflozin arms than placebo arms in the studies described.
- Ipsen received European Commission approval for XERMELO in September 2017 and began launches in certain European markets.
- Lexicon completed a $150 million first draw under its new loan in December 2017. A further $50 million may be drawn by March 2019 only if XERMELO net sales exceed $25 million in the preceding quarter.
Outlook, risks and unusual items
Management expected available capital and anticipated cash and revenue sources to fund planned operations for at least the next 12 months. Planned work included continued U.S. XERMELO commercialization, preparing sotagliflozin type 1 diabetes regulatory submissions and a possible U.S. launch if approved, initiating XERMELO studies in cholangiocarcinoma and neuroendocrine tumors, and continuing LX2761 and LX9211 development. The filing gives no numerical product-sales, earnings or approval-date guidance.
- Lexicon continued to expect losses and substantial spending; future capital needs depend on XERMELO adoption, reimbursement, clinical outcomes, approvals and collaboration payments.
- Sotagliflozin approval and commercialization are uncertain. The disclosed type 1 diabetes trial results included increased DKA events in treatment groups, a safety and labeling issue investors should monitor.
- XERMELO commercial success depends on physician and payer acceptance, reimbursement and competition. The company also relies on sole-source commercial drug-product manufacturing and a single U.S. logistics provider.
- Debt service, collateral coverage, restrictive loan covenants and the April 2018 mortgage balloon create liquidity and refinancing risks. The additional loan tranche depends on a specified XERMELO sales threshold.
- The company reported a $12.7 million tax benefit in 2017, including release of a valuation allowance related to XERMELO and remeasurement of deferred tax liabilities following the 2017 Tax Act. Most deferred tax assets remained subject to a valuation allowance; tax attributes may face annual utilization limits.
- The filing describes ordinary-course legal claims that management did not expect to have a material adverse effect. It also identifies a potential Texas job-creation repayment exposure of up to approximately $14.2 million before applicable credits.
- Invus and affiliates owned approximately 59.3% of outstanding common stock, giving them substantial control over corporate matters.
Important facts for investors to verify
- Subsequent XERMELO sales, patient uptake, net pricing, payer coverage and whether the sales threshold for the second loan tranche is achieved.
- Regulatory review and final labeling for sotagliflozin, with particular attention to DKA risk, and the progress and results of Sanofi’s type 2 diabetes program.
- Cash burn, unrestricted liquidity and management’s runway assumptions, including the mortgage refinancing outcome and compliance with loan covenants.
- Future collaboration receipts and revenue concentration, especially dependence on Sanofi and Ipsen and the timing of milestones and royalties.
- Manufacturing backup arrangements for XERMELO and any material changes in supply continuity, product safety or reimbursement.