Lexicon Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017. The unaudited filing covers a biopharmaceutical company commercializing XERMELO and developing drug candidates with collaborators. Unless stated otherwise, dollar amounts are in millions.
Business context and key developments
- Lexicon launched XERMELO in the United States in March 2017 after FDA approval in February for carcinoid syndrome diarrhea in eligible adults. Ipsen markets it outside the United States and Japan; the European Commission approved it in September.
- Sanofi holds worldwide rights to sotagliflozin excluding Japan and is conducting Phase 3 development for type 2 diabetes. Lexicon reported positive top-line results from three Phase 3 trials in type 1 diabetes and has elected to co-promote the drug in the United States, funding 40% of related co-promotion costs.
- Lexicon’s other highlighted candidates, LX2761 and LX9211, were in Phase 1 development.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $26.9 | $27.7 | $57.3 | $60.3 |
| Net product revenue | $5.8 | $0 | $10.4 | $0 |
| Collaborative-agreement revenue | $21.1 | $27.7 | $46.8 | $60.2 |
| Research and development expense | $39.1 | $52.5 | $109.7 | $137.8 |
| Selling, general and administrative expense | $16.7 | $12.3 | $50.1 | $29.1 |
| Operating loss | $(29.5) | $(34.9) | $(105.9) | $(105.8) |
| Net loss | $(30.7) | $(36.0) | $(100.7) | $(109.0) |
| Net loss per share, basic and diluted | $(0.29) | $(0.35) | $(0.96) | $(1.05) |
- Q3 revenue declined 3%; nine-month revenue declined 5%. Collaborative revenue fell primarily because of the timing of Sanofi clinical-trial activities. XERMELO and bulk tablet sales to Ipsen generated the new product revenue.
- R&D expense fell 26% in Q3 and 20% year to date, principally due to lower external sotagliflozin development costs. SG&A rose 36% in Q3 and 72% year to date, largely reflecting the XERMELO commercial launch and increased sales and marketing staffing.
- Cost of sales was $0.6 million in Q3 and $1.4 million year to date. The filing does not provide a consolidated gross margin; it notes that costs incurred before XERMELO approval were expensed as R&D and pre-commercial inventory is expected to lower per-unit cost of sales for about two years.
- The nine-month net loss includes an $8.7 million deferred tax benefit from a change in the treatment of XERMELO-related intangible assets; this was not operating cash generation.
Cash, liquidity and debt
- At September 30, 2017, cash and cash equivalents were $83.3 million and short-term investments were $113.5 million, totaling $196.8 million, down from $346.5 million at December 31, 2016. Current assets were $214.0 million and current liabilities $128.7 million.
- Operating activities used $151.7 million in the first nine months, compared with $126.8 million in the prior-year period. Investing activities provided $186.3 million, mainly from net investment maturities; financing activities provided $2.1 million.
- Reported debt carrying value was approximately $100.1 million: $14.6 million current and $85.5 million long term. This includes the 5.25% convertible notes due December 2021 and the mortgage. The mortgage had $14.7 million principal outstanding and a balloon payment due April 2018. The notes’ disclosed fair value was $141.6 million.
- Management said available cash and investments, along with expected product and collaboration revenues, should fund operations for at least 12 months. It cautioned that additional financing may be needed thereafter and may be unavailable on acceptable terms.
Outlook, risks and unusual items
- Lexicon expects significant ongoing R&D and commercialization spending and stated it needs substantially higher revenues to become profitable. Results may fluctuate, and management cautioned that period-to-period comparisons are not a reliable indicator of future performance.
- Key revenue uncertainties include XERMELO market acceptance, reimbursement and commercial execution; clinical and regulatory outcomes for sotagliflozin and other candidates; and the timing and achievement of collaboration milestones and royalties. Sanofi’s agreement includes potential milestones and tiered royalties, but future milestone revenue is uncertain and is not recognized until earned.
- Lexicon recorded a $5.1 million Ipsen milestone in 2017; Ipsen’s European approval also earned a further milestone received in October 2017. Future Ipsen regulatory and sales milestones remain contingent.
- Lexicon paid the remaining $21.0 million Symphony Icon obligation in March 2017, using $10.5 million cash and issuing approximately 660,000 shares. The liability was zero at September 30.
- The company disclosed potential Texas Enterprise Fund repayment exposure of up to approximately $14.2 million, subject to job-creation credits and other offsets. It also identified dependence on third-party manufacturers, a logistics provider and two specialty pharmacies, as well as clinical, regulatory, reimbursement, intellectual-property, product-liability and financing risks.
- Controls and procedures were deemed effective. Lexicon implemented processes and controls for product revenue, cost of sales and inventory following the XERMELO launch, which it described as material changes to internal control over financial reporting.
Important facts for investors to verify
- Subsequent XERMELO sales, market uptake, reimbursement and the accuracy of sales-allowance estimates.
- Cash burn, cash and investment levels, and the ability to address the April 2018 mortgage balloon and other financing needs.
- Clinical and regulatory progress for sotagliflozin, including Sanofi’s development plans and the costs Lexicon must fund.
- Timing and amount of collaboration milestones, royalties and other contingent payments, including the Ipsen milestone earned after quarter-end.
- Potential Texas Enterprise Fund repayment after applying eligible job credits and offsets.