Business context and reporting period
Lexicon Pharmaceuticals, Inc. is a clinical-stage biopharmaceutical company. This unaudited Form 10-Q covers the three and nine months ended September 30, 2015; balance-sheet comparisons are with December 31, 2014. Its principal development programs were telotristat etiprate for carcinoid syndrome and sotagliflozin for diabetes.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $0.6 million | $0.4 million | $2.7 million | $1.4 million |
| Research and development | $23.1 million | $24.1 million | $64.7 million | $69.2 million |
| General and administrative | $5.4 million | $4.6 million | $17.4 million | $15.4 million |
| Operating loss | $33.7 million | $40.3 million | $86.9 million | $96.9 million |
| Net loss | $35.3 million | $40.5 million | $91.4 million | $97.4 million |
| Net loss per share | $0.34 | $0.55 | $0.88 | $1.32 |
Revenue remained small relative to research and development spending, so conventional profit margins are not meaningful. Collaborative revenue growth was primarily attributable to the Ipsen agreement. Revenue from Ipsen recognized in the first nine months was $2.3 million.
Operating cash use was $81.1 million in the first nine months of 2015, compared with $71.2 million in 2014. Investing activities provided $7.1 million, mainly from net investment maturities; financing activities used $1.6 million. Cash and cash equivalents were $61.7 million at September 30, while cash, cash equivalents and short-term investments totaled $256.4 million, down from $339.3 million at year-end 2014. Current assets were $288.9 million and current liabilities $51.8 million.
Total debt was approximately $106.3 million: $87.5 million principal on 5.25% convertible notes due 2021 and an $18.8 million mortgage balance classified as current because management intended to repay it upon sale of the collateralized property. The notes’ reported fair value was $129.8 million. Nine-month interest expense was $5.0 million.
Material changes and unusual items
- Nine-month revenue rose 99% to $2.7 million, mainly from Ipsen; R&D expense fell 7%, while G&A expense rose 13%.
- Net loss narrowed year over year for both the quarter and nine-month period. The prior-year periods included larger building impairment charges: $13.1 million in the first nine months of 2014 versus $2.3 million in 2015.
- The Symphony Icon contingent purchase liability increased in fair value by $5.1 million in the first nine months of 2015, including $3.4 million in Q3. The company attributed the increase to a higher likelihood of telotristat milestones following positive top-line results from the pivotal TELESTAR Phase 3 trial.
- Buildings and land were classified as held for sale, with estimated net fair value of $21.5 million at September 30. The company completed a one-for-seven reverse stock split effective May 20, 2015; per-share and share data in the filing reflect the split.
Outlook, risks and contingencies
Management stated that available unrestricted cash and investments, together with expected collaboration and other revenues, should fund operations for at least 12 months from the filing’s assessment. The company expected substantial continuing R&D spending and acknowledged possible need for additional financing, which might be unavailable or dilutive. This outlook preceded the Sanofi agreement described below.
On November 5, 2015, after quarter-end, Lexicon signed a worldwide sotagliflozin collaboration and license agreement with Sanofi. It provides for a $300 million upfront payment, subject to the applicable HSR waiting period, up to $430 million in development and regulatory milestones, up to $990 million in sales milestones, and tiered royalties. Lexicon will continue type 1 diabetes development and may co-promote in the United States; it will share specified type 2 development costs up to $100 million over three years. The agreement was not yet effective as of the filing date pending the waiting period.
Other notable exposures include up to $45 million in potential Symphony Icon contingent payments, generally triggered by qualifying licensing proceeds or specified U.S. regulatory approval; potential Texas Enterprise Fund repayment obligations tied to job creation, with a stated maximum aggregate exposure of approximately $14.2 million before credits; and a guarantee of a New Jersey office lease with maximum potential future payments of $4.2 million. The company reported ordinary-course legal matters that it did not believe would materially affect results, financial condition or liquidity.
Key risks include continued losses and financing needs, clinical and regulatory uncertainty, reliance on collaborators and third-party manufacturers, commercialization and reimbursement challenges, intellectual-property disputes, and substantial indebtedness. Management reported disclosure controls as effective and no significant subsequent changes in internal controls.
Important facts for investors to verify
- Whether the Sanofi agreement became effective after HSR review, and the timing and accounting for its upfront payment, development-cost commitments and any co-promotion decision.
- Telotristat’s regulatory progress after the positive TELESTAR result, and the potential timing and amount of related Symphony Icon contingent payments.
- The timing and proceeds of the property sale, repayment of the $18.8 million mortgage, and whether the recorded held-for-sale value is realized.
- Cash burn and liquidity runway against planned clinical spending, including the filing’s forecast that resources would fund at least 12 months.
- Potential Texas job-creation repayment exposure and other collaboration, lease and debt obligations.