Lexicon Pharmaceuticals, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Lexicon is a clinical-stage biopharmaceutical company focused primarily on LX4211 for diabetes and telotristat etiprate (LX1032) for carcinoid syndrome. Unless otherwise stated, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $0.419 | $0.238 | $1.372 | $0.812 |
| Research and development expense | $24.108 | $25.400 | $69.248 | $69.419 |
| General and administrative expense | $4.617 | $4.716 | $15.423 | $13.709 |
| Net loss | $40.498 | $31.658 | $97.361 | $86.712 |
| Net loss per share | $0.08 | $0.06 | $0.19 | $0.17 |
| Cash used in operating activities | Not presented for quarter | $71.164 | $69.338 |
Revenue remained very small relative to operating costs; the filing does not provide a meaningful gross margin figure. Q3 operating loss was $40.336 million, versus $31.216 million a year earlier. For the nine months, operating loss was $96.919 million, versus $85.395 million.
- At September 30, cash and cash equivalents were $26.775 million and short-term investments were $31.094 million, totaling $57.869 million, down from $129.128 million at December 31, 2013.
- Operating cash outflow was $71.164 million for the nine months. Investing activities provided $62.297 million, primarily from net investment maturities; financing activities used $1.857 million.
- Total debt was $20.609 million, the outstanding mortgage balance, classified as current because management intended to repay it upon sale of the collateralized facilities. The mortgage bears fixed interest of 8.23%; its stated maturity was April 2017.
- Total assets were $187.522 million and total equity was $77.824 million at September 30. Accumulated deficit was $1.101 billion.
Material changes and unusual items
- Lexicon recorded a $13.102 million impairment loss in Q3 after classifying its buildings and land as held for sale. The assets were valued at approximately $23.8 million, net of estimated selling costs. A letter of intent supported the estimated sale price; the company expected a transaction to close within the next year.
- In January 2014, Lexicon decided to narrow its strategic focus to late-stage programs and reduce its workforce by approximately 125 employees, or about 50%. It expected approximately $5.7 million in cash restructuring charges; $5.6 million had been incurred through September 30.
- R&D expense for the first nine months was nearly flat year over year, as higher external clinical and preclinical costs were offset by lower personnel and facility expenses. G&A expense rose 13%, partly reflecting severance and commercialization-preparation consulting costs.
- The fair value of the Symphony Icon purchase liability increased $0.518 million over the first nine months, compared with a $3.079 million increase in the prior-year period. The liability was $28.228 million at September 30 and is based on significant unobservable assumptions.
Outlook, risks and contingencies
- Management stated that current unrestricted cash and investments, together with expected collaboration and other revenues, should fund operations for at least the next 12 months. This is an estimate, not a guarantee; the company warned it may need additional financing and that financing may be unavailable or dilutive.
- On October 21, 2014, after quarter-end, Lexicon entered a license and collaboration agreement with Ipsen for LX1032 outside the United States, Canada and Japan. The agreement provides for a $23 million upfront payment, up to approximately $30 million in regulatory and commercial-launch milestones, up to €72 million in sales milestones, and tiered royalties. The filing describes the upfront payment as payable; it does not establish that it had been received by September 30. Lexicon retains certain clinical-trial responsibilities and costs.
- Payments under the Ipsen agreement trigger contingent payment obligations to former Symphony Icon holders. The arrangement provides for up to $45 million in additional contingent payments, generally tied to a share of licensing consideration, subject to its terms.
- Lexicon disclosed potential Texas Enterprise Fund repayment exposure if specified job-creation obligations are not met: maximum aggregate exposure of approximately $14.2 million before credits, including $1.5 million through 2014. The company may receive credits that reduce the amount owed.
- Other risks include clinical-trial and regulatory uncertainty, dependence on collaborators and third-party manufacturing, future financing needs, commercialization and reimbursement challenges, intellectual-property disputes, and potential product liability. The company reported no legal proceedings it believed would have a material adverse effect.
- No quantified earnings or revenue guidance was provided. Management cautioned that results may fluctuate and that period-to-period comparisons are not necessarily indicative of future performance.
Important facts for investors to verify
- Whether and when the facility sale closes, its final proceeds and costs, and repayment of the $20.609 million mortgage.
- Receipt and timing of the Ipsen $23 million upfront payment, and the clinical, milestone, royalty and Symphony Icon payment terms affecting net economics.
- Cash burn, collaboration revenue and financing needs relative to management’s stated at-least-12-month liquidity expectation.
- Progress and outcomes of LX4211 and telotristat etiprate development, including regulatory milestones and associated costs.
- Potential Texas job-creation repayment obligations and any applicable credits, as well as remaining restructuring payments.