Lexicon Pharmaceuticals, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
Lexicon is a biopharmaceutical company commercializing XERMELO for carcinoid syndrome diarrhea and developing drug candidates. Its key programs include sotagliflozin for type 1 and type 2 diabetes, LX2761 for diabetes, and LX9211 for neuropathic pain. Sanofi holds worldwide rights to develop and commercialize sotagliflozin, excluding Japan; Ipsen commercializes XERMELO outside the United States and Japan.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $13.8 | $12.1 | $39.0 | $30.3 |
| Net product revenue | $7.3 | $3.9 | $12.8 | $4.6 |
| Collaborative agreement revenue | $6.4 | $8.1 | $26.0 | $25.7 |
| Operating expenses | $44.2 | $45.9 | $107.4 | $106.7 |
| Loss from operations | $(30.4) | $(33.9) | $(68.4) | $(76.4) |
| Interest expense | $5.2 | $1.6 | $10.3 | $3.2 |
| Net loss | $(34.7) | $(35.1) | $(76.8) | $(70.0) |
| Net loss per share, basic and diluted | $(0.33) | $(0.33) | $(0.73) | $(0.67) |
- For the quarter, revenue rose 14% and net loss narrowed slightly. For the six-month period, revenue rose 29%, while net loss increased; the prior-year period included an $8.7 million tax benefit that did not recur, and 2018 interest expense was higher following the BioPharma term loan.
- Research and development expense was $26.6 million in Q2 and $74.4 million for six months; selling, general and administrative expense was $16.8 million and $31.6 million, respectively. No gross margin percentage is stated in the filing.
- Cash and cash equivalents were $15.0 million and short-term investments were $194.6 million at June 30, totaling $209.7 million, down from $310.8 million at December 31, 2017. Operating activities used $99.3 million in the first half; investing activities provided $54.4 million, mainly from net investment maturities.
- Current assets were $220.2 million and current liabilities $81.3 million. Total liabilities were $338.0 million, exceeding total assets of $332.9 million; stockholders’ equity was negative $5.1 million.
- Carrying value of current and long-term debt was approximately $245.1 million, net of issuance costs. Debt includes 5.25% convertible notes due 2021, a 9% BioPharma term loan due 2022, and a mortgage with a $12.9 million balloon payment due October 2018.
Material changes and unusual items
- XERMELO product revenue grew 88% in Q2 and 177% for the first six months versus the respective 2017 periods, reflecting U.S. sales and bulk tablet sales to Ipsen. Q2 collaborative revenue declined 22%, largely due to timing of Sanofi clinical-trial activities; first-half collaborative revenue was broadly unchanged.
- The company adopted the new revenue recognition standard on January 1, 2018. Adoption produced a $14.2 million cumulative-effect adjustment to accumulated deficit and a corresponding reduction in deferred revenue, related to the TIGM agreement. Management reported no change to the timing or amount of product revenue recognized.
- The first-half 2017 results included a $2.1 million increase in the fair value of the Symphony Icon purchase liability; no such expense was reported in 2018.
Outlook, risks and contingencies
- Management stated that available unrestricted cash and investments, together with expected collaboration cash and revenues, should fund operations for at least the next 12 months. The company expects substantial ongoing spending on XERMELO commercialization, sotagliflozin regulatory and commercialization preparation, and clinical development. No specific revenue, earnings or cash-burn guidance was provided.
- Sanofi had submitted U.S. and EU applications for sotagliflozin in type 1 diabetes and was conducting Phase 3 development in type 2 diabetes. Regulatory outcomes, clinical results, commercialization, market acceptance, reimbursement and collaboration milestones remain uncertain.
- Lexicon intended to refinance the $12.9 million mortgage before its October 2018 balloon payment. The BioPharma loan is secured by a first lien on substantially all company assets and includes restrictive covenants and events of default.
- Lexicon is responsible for up to $100 million of specified type 2 diabetes development funding under the Sanofi collaboration and 40% of commercialization costs for its type 1 diabetes U.S. co-promotion activities. The filing also describes a maximum potential TIGM job-obligation exposure of approximately $14.2 million, before credits; management concluded its obligation had been met.
- Management cited dependence on XERMELO and collaboration partners, ongoing losses, substantial debt, need for future capital if operating cash is insufficient, clinical and regulatory uncertainty, third-party manufacturing and distribution reliance, and pricing and reimbursement risks. Ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Progress and regulatory decisions for sotagliflozin, and any resulting milestones, royalties or commercialization obligations.
- XERMELO sales growth, payer coverage, pricing, and the company’s commercialization costs and cash requirements.
- Whether the October 2018 mortgage balloon was refinanced, and compliance with BioPharma loan covenants and repayment terms.
- Cash burn, investment balances, and whether management’s stated funding runway remains adequate as development and commercialization spending continues.
- The assumptions and potential obligations related to collaboration revenue recognition, Sanofi cost sharing, and the TIGM exposure.