Business context and reporting period
Lexicon Pharmaceuticals, Inc. is a biopharmaceutical company. This Form 10-K covers the fiscal year ended December 31, 2018; quarterly figures below include the three months ended December 31, 2018. Its principal commercial product is XERMELO for carcinoid syndrome diarrhea. Key development programs are sotagliflozin for diabetes, LX9211 for neuropathic pain, and LX2761 for diabetes.
Lexicon commercializes XERMELO in the United States and licenses commercialization outside the United States and Japan to Ipsen. Sanofi holds rights to develop and commercialize sotagliflozin worldwide except Japan; Lexicon shares U.S. type 1 diabetes commercialization costs under its co-promotion arrangement.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $63.2 million | $91.7 million |
| Operating loss | $103.3 million | $130.6 million |
| Net loss | $120.5 million | $123.0 million |
| Net loss per share, basic and diluted | $1.14 | $1.17 |
| Research and development expense | $100.2 million | $152.2 million |
| Selling, general and administrative expense | $63.8 million | $66.1 million |
Revenue fell 31%, primarily as collaboration revenue declined 52% to $36.3 million; net product revenue rose 67% to $26.6 million, reflecting a full year of XERMELO sales. R&D expense decreased 34%, mainly due to lower external sotagliflozin development costs. Net loss narrowed modestly; interest expense rose to $20.8 million from $7.0 million.
Fourth-quarter 2018 revenue was $17.1 million and net loss was $16.8 million, versus revenue of $34.0 million and net loss of $26.6 million in fourth-quarter 2017, as revised in this filing. The filing does not provide a clearly stated consolidated gross margin; cost of sales was $2.5 million for 2018.
Cash, cash equivalents and short-term investments totaled $160.1 million at year-end, down from $310.8 million. Operating activities used $148.6 million; investing activities provided $169.6 million, principally from net investment maturities; financing activities used $2.2 million. Working capital was $136.6 million, versus $216.5 million a year earlier. Lexicon said available resources and expected revenues would fund planned operations for at least 12 months, while warning that additional financing may be needed thereafter.
Debt carrying value was approximately $245.0 million, net of financing costs, at year-end; scheduled principal payments totaled $249.9 million. Debt includes $150 million of BioPharma term borrowing at 9% due in 2022, $87.5 million of 5.25% convertible notes due in 2021, and a mortgage with a $10.3 million balloon payment due in August 2020. The BioPharma loan is secured by a first lien on substantially all company assets, subject to stated exceptions, and contains restrictive covenants.
Material changes, outlook and key risks
- Pipeline and regulation: Sanofi submitted U.S. and EU applications for sotagliflozin in type 1 diabetes. The FDA advisory committee voted 8–8 on whether benefits outweighed risks; the FDA was expected to decide by March 22, 2019. After year-end, the EMA committee issued a positive opinion recommending use in a restricted group of adults with BMI of at least 27 kg/m²; a European Commission decision was expected in the second quarter of 2019. These were pending decisions at the filing date.
- Clinical safety: Phase 3 type 1 diabetes trials showed glycemic benefits, but diabetic ketoacidosis events were more frequent with sotagliflozin than placebo in the reported trial arms. Regulatory approval, labeling, market uptake and safety remain uncertain. Sanofi’s type 2 diabetes Phase 3 program also remains a development risk.
- Other programs: Lexicon reported positive top-line Phase 1a data for LX9211 and was conducting Phase 1b. LX2761 Phase 1 results included reduced post-meal glucose, while diarrhea was a common adverse event; further development was under evaluation. A Phase 2a telotristat study in biliary tract cancer was ongoing.
- Reporting controls and revisions: The company identified a material weakness in controls over estimated clinical-trial pass-through costs. A vendor’s revised estimates showed costs payable were $19.0 million below prior estimates. Prior periods were revised; the company said the corrections were immaterial to those previously issued statements but would have been material if recorded entirely in 2018. Management’s controls assessment was ineffective, and the auditor issued an adverse opinion on internal control over financial reporting while issuing an unqualified opinion on the financial statements. Remediation was in progress.
- Legal and operating risks: A securities class action filed January 28, 2019 alleges misleading statements about sotagliflozin trial data and FDA prospects; damages sought are unspecified. Lexicon also depends on partners, third-party manufacturers and a single U.S. logistics provider, and reported sole-source finished-product manufacturing exposure for XERMELO.
- Concentration and profitability: Lexicon has a history of losses and a $1.47 billion accumulated deficit. Sanofi represented 53% of 2018 revenue; two specialty pharmacies represented 25% and 14%. The filing warns that XERMELO adoption, reimbursement, collaboration milestones and future financing could materially affect results.
Management provided no specific revenue or earnings guidance. It expected to continue funding XERMELO commercialization, sotagliflozin regulatory and potential launch activities, and clinical development. The company has never paid cash dividends and does not anticipate doing so in the foreseeable future.
Important facts for investors to verify
- Subsequent FDA and European Commission decisions on sotagliflozin, including any restrictions, warnings or required post-approval studies.
- XERMELO sales growth, net pricing, reimbursement, market access and Ipsen’s commercial performance.
- Cash burn, available liquidity, debt service and covenant compliance, including the 2020 mortgage balloon and 2021 convertible notes.
- Completion and effectiveness of remediation for the clinical-trial accrual material weakness, and whether further revisions are required.
- Progress and safety results for sotagliflozin, LX9211, LX2761 and the telotristat biliary tract cancer trial, as well as the status and potential impact of the securities litigation.