Lexicon Pharmaceuticals, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
Lexicon is a biopharmaceutical company focused on drug discovery and development. Its programs include LX9211 for neuropathic pain and sotagliflozin (Zynquista) for diabetes and other indications. In September 2020, Lexicon sold XERMELO and related assets to TerSera, which assumed responsibility for its continued development and commercialization.
Financial performance and liquidity
- Revenue: Q3 revenue was $6.6 million, down 98% from $294.4 million in Q3 2019. Nine-month revenue was $23.8 million, down 92% from $313.3 million. The prior-year periods included substantial Sanofi collaboration and termination-agreement revenue; Q3 2019 alone included $260 million related to the Sanofi termination agreement. Q3 2020 net product revenue was $6.5 million, versus $8.4 million a year earlier, reflecting the XERMELO sale late in the quarter.
- Profit and unusual items: Q3 net income was $82.6 million ($0.71 diluted EPS), compared with $226.1 million ($1.95 diluted EPS) in Q3 2019. The 2020 quarter included a $132.8 million gain on the XERMELO sale; without that gain, operating expenses exceeded revenue. Nine-month net loss was $53.1 million ($0.50 per share), versus net income of $181.3 million ($1.59 diluted EPS) in 2019.
- Expenses: Nine-month R&D expense increased to $152.6 million from $51.3 million, primarily because Lexicon assumed sotagliflozin development costs after the Sanofi collaboration ended. Nine-month SG&A decreased to $40.8 million from $42.3 million. The company recorded a $1.6 million building impairment and approximately $5.5 million in severance costs through September 30.
- Cash flow: Operations used $108.7 million in cash during the first nine months of 2020, versus providing $138.2 million in 2019. Investing provided $336.7 million, including $160.4 million of XERMELO sale proceeds and net investment maturities. Financing used $211.8 million, principally for debt repayments.
- Liquidity: Cash, cash equivalents and short-term investments totaled $111.4 million at September 30, 2020, down from $271.7 million at year-end 2019. Management said available resources and expected cash and collaboration revenues should fund operations for at least 12 months; additional financing may be needed thereafter if operating cash generation is insufficient.
- Debt: Balance-sheet debt, net of issuance costs, was approximately $20.3 million at September 30, compared with $245.2 million at year-end 2019. Lexicon repaid its $150 million BioPharma term loan following the asset sale and exchanged $67.1 million principal of convertible notes in September. In October, it exchanged a further $8.8 million principal. The remaining notes mature in December 2021.
Material changes, outlook and risks
- The XERMELO sale generated $160.4 million upfront consideration, subject to a working-capital adjustment. Lexicon may receive up to $65 million in development, regulatory and sales milestones and mid-teens royalties on sales for biliary tract cancer; these contingent amounts were not recognized because achievement was uncertain.
- The sale prompted a reduction in force of approximately 50% of the workforce. Expected severance charges were approximately $5.7 million in total, with $5.5 million incurred through September 30.
- Lexicon said it was conducting a Phase 2 trial of LX9211 in diabetic peripheral neuropathic pain and preparing a second Phase 2 trial in post-herpetic neuralgia. The company was also closing out sotagliflozin Phase 3 studies in type 2 diabetes, heart failure and chronic kidney disease. The FDA had issued a complete response letter for U.S. approval of sotagliflozin in type 1 diabetes, and the company reported that two appeals were denied.
- Sanofi withheld approximately $23.2 million from a final $26 million payment, asserting offsets for costs. Lexicon disputes the offsets and initiated arbitration on October 16, 2020, seeking up to $23.2 million plus interest and costs.
- In October, Lexicon agreed to sell its Texas facilities for $11.9 million, subject to customary conditions and a potential buyer termination right. The sale was not completed as of the filing.
- On October 30, 2020, Lexicon entered an at-the-market agreement allowing it to offer up to $50 million of common stock. It is not obligated to sell shares; commissions are 3% of gross proceeds. Potential issuance could dilute existing shareholders.
- Key risks include clinical trial delays or failure, regulatory uncertainty, costs and timing of sotagliflozin study close-out, dependence on TerSera’s development of XERMELO, need for future capital, and the outcomes of the Sanofi arbitration and securities-litigation appeal. COVID-19 could also disrupt clinical trials and operations.
Most important facts for investors to verify
- How much, if any, of the disputed Sanofi payment Lexicon ultimately recovers and when.
- Cash burn and available liquidity relative to the company’s stated 12-month funding outlook, including any share sales under the $50 million ATM program.
- Remaining convertible-note principal, maturity obligations and any further exchanges after the October transaction.
- Progress, cost and timing of sotagliflozin study close-out and LX9211 clinical trials, as well as relevant regulatory developments.
- Whether TerSera achieves XERMELO milestones or sales that could generate future contingent payments to Lexicon.
- Completion and net proceeds of the proposed Texas facility sale, and the final severance costs associated with the workforce reduction.