Lexicon Pharmaceuticals, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a quarterly report; selected unaudited data is provided for Q4. Lexicon is a biopharmaceutical company commercializing XERMELO and developing sotagliflozin and LX9211.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $322.1 million | $63.2 million |
| Net product revenue | $32.3 million | $26.6 million |
| Collaborative agreement revenue | $289.2 million | $36.3 million |
| Operating expenses | $180.6 million | $166.5 million |
| Operating income (loss) | $141.4 million | $(103.3) million |
| Net income (loss) | $130.1 million | $(120.5) million |
| Diluted earnings (loss) per share | $1.16 | $(1.14) |
| Cash, cash equivalents and short-term investments at year-end | $271.7 million | $160.1 million |
| Working capital at year-end | $272.4 million | $136.6 million |
- Revenue rose 410%, primarily because of the Sanofi collaboration termination and settlement, not a comparable increase in recurring product sales. Sanofi represented 89% of 2019 revenue.
- Net cash provided by operating activities was $113.8 million in 2019, versus $148.6 million used in 2018. Investing activities used $155.9 million, mainly reflecting net purchases of investments; financing activities used $2.2 million.
- At year-end, total debt was $248.6 million in scheduled principal obligations; balance-sheet debt, net of financing costs, was approximately $245.2 million. Contractual debt and interest obligations totaled $298.6 million.
- Scheduled principal payments were $11.1 million in 2020, $87.5 million in 2021 and $150.0 million in 2022. The mortgage includes a $10.3 million balloon payment due August 2020. Convertible notes bear 5.25% interest and mature December 2021; the BioPharma term loan bears 9% and matures December 2022.
- The filing does not provide a meaningful recurring operating margin: 2019 operating income was substantially affected by the Sanofi settlement revenue. No sustainable profitability is established; the company reported an accumulated deficit of $1.34 billion.
Material changes and notable items
- Sanofi termination: In September 2019, Lexicon regained worldwide rights to sotagliflozin and assumed responsibility for its development and commercialization. Sanofi paid $208 million in September 2019 and was to pay a further $26 million in March 2020, less specified offsets, with another $26 million due within 12 months of the settlement date. Lexicon recognized $260 million of termination consideration as revenue in 2019 and recognized remaining deferred revenue associated with prior performance obligations.
- Reported profit was unusual: Q3 2019 revenue included the $260 million Sanofi termination amount. Q4 2019 revenue was $8.7 million and net loss was $51.1 million, compared with Q4 2018 revenue of $17.1 million and net loss of $16.8 million.
- Impairment: Lexicon recorded a $28.6 million impairment of acquired in-process research and development assets after discontinuing certain irritable bowel syndrome programs. The charge reduced the affected asset’s remaining book value to zero.
- Research and development expense fell 8% to $91.9 million, mainly from lower external development costs and professional fees. Selling, general and administrative expense fell 11% to $56.8 million.
- Lexicon agreed in January 2020 to sell its Woodlands, Texas facilities for $15 million, subject to closing conditions and a leaseback arrangement. The mortgage on the property remained outstanding at year-end.
Pipeline, outlook and risks
- XERMELO: Commercialized in the United States for carcinoid syndrome diarrhea; Ipsen commercializes it outside the United States and Japan. U.S. net product revenue increased 22% to $32.3 million. Lexicon is also conducting a Phase 2a study in biliary tract cancer.
- Sotagliflozin: The FDA issued a complete response letter for the U.S. type 1 diabetes application in March 2019 and denied two appeals, most recently in March 2020. The drug was approved in the EU for a restricted type 1 diabetes population but had not been commercially launched there. Lexicon reported mixed preliminary results across type 2 diabetes Phase 3 trials and was conducting further studies, including long-term heart failure and kidney disease outcomes trials.
- LX9211: Following two Phase 1 studies, Lexicon was preparing a Phase 2a trial for diabetic peripheral neuropathic pain.
- Management said existing resources and expected cash and revenues should fund planned operations for at least 12 months. However, Lexicon stated its existing capital was insufficient to complete the long-term sotagliflozin outcomes studies without additional funding or a collaboration; absent funding, it could delay, reduce or wind down those studies.
- Key risks include dependence on XERMELO and uncertain product uptake and reimbursement; regulatory and clinical-trial uncertainty; substantial debt and financing needs; reliance on third-party manufacturers, including sole-source finished-product suppliers; competitive products; and the potential operational effects of COVID-19.
- A securities class action concerning statements about sotagliflozin trial data and U.S. approval prospects was pending; damages sought were unspecified. Lexicon said ordinary-course claims were not expected to have a material adverse effect. Invus and affiliates held approximately 60.8% of outstanding common shares, giving them substantial control.
Investor verification priorities
- Separate the $260 million Sanofi termination revenue from recurring product and royalty revenue, and confirm the timing, amount and offsets for the remaining Sanofi payments.
- Assess XERMELO sales trends, payer access and reimbursement, and Ipsen’s commercialization performance.
- Review the FDA’s latest feedback on sotagliflozin, the status and funding of its outcomes trials, and the DKA safety profile reported in type 1 diabetes studies.
- Confirm liquidity and debt-service capacity, especially the 2020 mortgage balloon and 2021–2022 principal maturities, and whether additional financing or a partnership is secured.
- Track the securities litigation, the proposed property sale and leaseback, and exposure to sole-source manufacturing and distribution arrangements.
The consolidated financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2019.