Lexicon Pharmaceuticals, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Lexicon is a biopharmaceutical company with five drug programs in clinical development. It reported that substantially all revenue came from collaborations, licenses, subscriptions, grants, and related activities—not a diversified product-sales base.
Financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $0.372 million | $0.355 million | $0.871 million | $1.506 million |
| Research and development expense | $19.192 million | $19.655 million | $61.584 million | $63.721 million |
| Symphony Icon liability revaluation expense | $5.844 million | $2.336 million | $10.087 million | $5.198 million |
| General and administrative expense | $4.396 million | $4.055 million | $13.123 million | $13.340 million |
| Operating loss | $29.060 million | $25.691 million | $83.923 million | $80.753 million |
| Net loss | $29.539 million | $26.103 million | $85.338 million | $82.370 million |
| Net loss per share | $0.06 | $0.08 | $0.18 | $0.24 |
| Operating cash used | Not reported quarterly in the supplied filing text | $74.028 million | $65.447 million |
At September 30, cash and cash equivalents were $20.759 million and short-term investments were $186.089 million, for combined cash, cash equivalents, and investments of $206.848 million. Total current assets were $216.085 million versus current liabilities of $19.051 million. Debt totaled approximately $23.826 million, primarily the facility mortgage, with a fixed 8.23% rate and $23.8 million principal outstanding. Accumulated deficit was $875.0 million. Gross margin is not a meaningful measure for the reported collaboration-based revenue and expense profile.
Material changes versus the prior comparable periods
- Q3 revenue rose 5%, but nine-month revenue fell 42%. Collaborative research revenue declined, principally due to reduced U.S. Army research and functional genomics contract revenue; subscription and license fees increased, primarily from technology license fees.
- Nine-month R&D expense decreased 3%, with lower personnel and facilities costs partly offset by higher external preclinical and clinical development spending.
- Net loss increased by $3.436 million for Q3 and $2.968 million for the nine-month period. The larger Symphony Icon liability revaluation expense was a significant factor. Per-share losses were lower than the prior year, alongside a substantially higher weighted-average share count.
- Cash, cash equivalents, and investments declined from $281.692 million at year-end 2011 to $206.848 million at September 30, 2012. Cash and cash equivalents alone fell from $186.309 million to $20.759 million, while short-term investments increased.
Outlook, risks, and unusual items
- Management expected existing unrestricted cash and investments, together with anticipated collaboration and license revenues and other sources, to fund operations for at least 12 months. It also stated that future capital requirements would be substantial and additional financing might be needed; financing may not be available on acceptable terms and equity issuance could dilute shareholders.
- Lexicon expected continued significant R&D costs and ongoing losses, and said revenue depends on securing collaborations and on uncertain milestones, royalties, and collaborator development and commercialization outcomes. No specific earnings or revenue guidance was provided.
- In July 2012, Lexicon satisfied a $35 million Symphony Icon base payment obligation by issuing 13,237,519 common shares. The company also recorded a $10.087 million nine-month increase in the fair value of the related purchase consideration liability, including $4.3 million of accelerated expense associated with the stock payment. Up to $45 million of additional contingent payments may be due under specified licensing or approval conditions.
- Subsequent to quarter-end, Lexicon sold 17.5 million shares at $2.25 per share in an October public offering, generating approximately $37.2 million in net proceeds.
- The company identified clinical and regulatory uncertainty, reliance on collaborators and third parties, intellectual-property and commercialization risks, potential financing needs, and stock-price volatility. It reported routine legal proceedings that it did not believe would have a material adverse effect. Management stated disclosure controls were effective and reported no significant changes in internal controls.
Important facts for investors to verify
- Cash burn, remaining runway, and the effect of the October offering on liquidity and fully diluted share count.
- Progress and funding needs for the five clinical programs, and any milestones, licensing transactions, or partner decisions that could produce revenue.
- Assumptions behind the Level 3 Symphony Icon liability valuation, and the timing and potential size of remaining contingent payments.
- Mortgage repayment terms, lease obligations, and whether collaboration revenue can support the company’s planned R&D spending.
- Clinical, regulatory, intellectual-property, commercialization, and financing risks that could delay or prevent product development or future revenue.