Lexicon Pharmaceuticals, Inc. — Q1 2015 Form 10-Q
Business and period: Biopharmaceutical company focused on drug discovery and development; reporting covers the three months ended March 31, 2015. Its lead programs were telotristat etiprate for carcinoid syndrome, then in Phase 3, and sotagliflozin for type 1 diabetes, then in Phase 3. The company said it would not continue sotagliflozin development for type 2 diabetes unless it obtained a collaboration partner.
Financial performance
- Revenue: $1.8 million, up from $0.3 million in Q1 2014, primarily from the Ipsen collaboration. Revenue remained small and collaboration-dependent.
- Expenses and loss: Research and development expense was $20.9 million, down 13% from $24.0 million; general and administrative expense was $5.7 million, essentially unchanged. Operating loss was $26.5 million versus $30.5 million. Net loss was $28.1 million, or $0.04 per share, compared with $30.8 million, or $0.06 per share.
- Cash flow: Operating cash use was $23.5 million, versus $30.3 million in Q1 2014. Investing activities used $71.0 million, mainly for investment purchases; financing activities used $0.8 million. Cash and cash equivalents declined to $42.0 million from $137.3 million, while short-term investments rose to $273.1 million from $202.1 million.
- Liquidity: Cash, cash equivalents and investments totaled $315.1 million at March 31, versus $339.3 million at year-end. Management expected available resources and anticipated receipts to fund operations for at least 12 months, but said further financing could be needed thereafter if operating cash generation is inadequate.
- Debt and balance sheet: Total liabilities were $187.1 million and equity was $257.6 million. Debt included $87.5 million of 5.25% convertible notes due 2021 and a $19.7 million mortgage balance, classified as current because management intended to repay it upon sale of the collateralized facilities. The notes’ initial conversion price was $1.206 per share.
Material changes, outlook and risks
- Revenue increased substantially year over year due to Ipsen-related license and collaboration revenue; R&D costs fell, principally reflecting lower personnel and facilities costs, partly offset by higher external clinical-development spending. Interest expense increased to $1.7 million from $0.5 million.
- Under its Ipsen agreement for telotristat etiprate outside the United States and Japan, Lexicon had received $24.5 million through March 31. It recognized $1.7 million of agreement revenue in Q1 and could receive additional regulatory and sales milestones and tiered royalties, which were uncertain and not recognized until earned. The arrangement also triggers contingent payments to former Symphony Icon holders.
- A $1.8 million noncash increase in the fair value of the Symphony Icon purchase liability was recorded as expense, compared with $1.1 million in Q1 2014. Lexicon paid a further $0.75 million to the former holders on April 24, 2015, after quarter-end.
- The company’s facilities were classified as held for sale at an estimated $23.8 million net fair value. Management intended to repay the related mortgage from the sale proceeds.
- Key risks include continuing losses and substantial R&D needs; dependence on collaborators, milestone achievement and future financing; clinical and regulatory uncertainty; debt obligations and potential dilution from note conversion. The filing also describes possible Texas Enterprise Fund repayment exposure of up to approximately $14.2 million if specified job-creation obligations are not met, subject to credits.
- After quarter-end, Lexicon announced a 1-for-7 reverse stock split, anticipated to become effective May 20, 2015, with authorized common shares to be reduced from 900 million to 225 million. Management reported disclosure controls were effective and no significant internal-control changes.
Investor facts to verify
- Whether telotristat etiprate’s Phase 3 development and the Ipsen collaboration generate regulatory approvals, milestones, royalties or further contingent payments.
- Cash burn, investment balances and the assumptions supporting management’s stated 12-month funding outlook.
- Timing and proceeds of the facility sale, repayment of the mortgage, and any effect on liquidity.
- Clinical progress and partnering prospects for sotagliflozin, particularly the type 2 diabetes program.
- Potential dilution and repayment obligations under the convertible notes, and exposure tied to the Texas job-creation commitments.