Lexicon Pharmaceuticals, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Lexicon is a biopharmaceutical company focused on drug discovery and development, with four programs that had completed or were undergoing Phase 2 clinical trials. The filing was signed November 1, 2011.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $0.36 million | $0.78 million | $1.51 million | $3.66 million |
| Operating expenses | $26.05 million | $25.03 million | $82.26 million | $76.95 million |
| Operating loss | $25.69 million | $24.25 million | $80.75 million | $73.29 million |
| Net loss | $26.10 million | $27.51 million | $82.37 million | $78.78 million |
| Net loss per share | $0.08 | $0.08 | $0.24 | $0.27 |
- Revenue fell 55% in Q3 and 59% year to date, primarily reflecting lower collaborative research revenue, including reduced receipts from the U.S. Army research activity and Taconic; subscription and license fees also declined.
- Research and development expense rose 4% in Q3 and 6% year to date, mainly due to higher external preclinical and clinical research costs. General and administrative expense declined 18% and 14%, respectively, partly following a February 2011 workforce reduction.
- Net loss improved year over year in Q3 but widened year to date. The 2010 comparison included Symphony Icon purchase-option amortization and investment-related items.
- Revenue was very small relative to operating expenses; the filing does not report a meaningful gross margin measure.
Cash, liquidity and debt
- At September 30, 2011, cash and cash equivalents were $30.5 million and short-term investments were $113.6 million, totaling $144.2 million, versus $211.1 million at December 31, 2010.
- Operating activities used $65.4 million in cash in the first nine months, compared with $63.0 million in the prior-year period. Investing activities provided $51.9 million, mostly from net investment maturities; financing activities used $3.2 million, primarily for debt repayment.
- Total debt was approximately $25.2 million, including the current portion. The mortgage carries a fixed 8.23% rate; $2.4 million of principal was paid using proceeds from a building sale.
- Total assets were $294.7 million; accumulated deficit was $755.8 million. No conventional profitability or positive operating cash flow was reported.
Outlook, risks and unusual items
- Management stated that available unrestricted cash and investments, together with expected cash and revenues from collaborations and other sources, should fund operations for at least the next 12 months. It expects substantial continued R&D spending and said additional financing may be needed thereafter if operating cash is insufficient; financing may not be available on acceptable terms and could dilute shareholders.
- Lexicon’s business depends on a limited number of collaboration and license sources, uncertain milestone and royalty receipts, clinical and regulatory success, and its ability to establish new agreements. Management cautioned that operating results fluctuate and period-to-period comparisons are not a reliable indicator of future performance.
- The fair-value estimate of the Symphony Icon purchase consideration liability increased by $5.2 million year to date, recorded as expense; the liability was $53.5 million at September 30. The estimate uses significant unobservable inputs.
- An $0.8 million building impairment was recorded in the first nine months; the building was sold in June with an immaterial additional loss. The company disclosed ordinary-course legal matters it did not expect to materially affect results, financial condition or liquidity.
- Invus held rights, subject to specified terms and timing, to require a pro rata rights offering of up to approximately $163 million. The company also disclosed restrictions related to issuing shares below $4.50 per share during the relevant period.
Key facts for investors to verify
- Whether cash burn and collaboration receipts support management’s stated minimum 12-month liquidity outlook.
- Clinical, regulatory and funding milestones for the four most advanced drug programs, and the timing and terms of any new collaborations or licenses.
- The status and potential cash or share impact of Symphony Icon base and contingent payments, including valuation assumptions.
- Invus rights, related issuance restrictions and the potential dilution or availability of future financing.
- Revenue concentration, the pace of R&D spending, and the disclosed building impairment and other commitments.