Lexicon Pharmaceuticals, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The company is a biopharmaceutical developer focused principally on telotristat etiprate for carcinoid syndrome and sotagliflozin for type 1 and type 2 diabetes. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $20.1 | $0.4 | $32.6 | $2.2 |
| Research and development expense | $48.2 | $20.8 | $85.2 | $41.6 |
| General and administrative expense | $8.4 | $6.3 | $16.8 | $12.0 |
| Operating loss | $(37.0) | $(26.7) | $(70.9) | $(53.2) |
| Net loss | $(38.1) | $(28.1) | $(73.0) | $(56.2) |
| Net loss per share | $(0.37) | $(0.27) | $(0.70) | $(0.54) |
Revenue was primarily collaboration revenue under the Sanofi agreement. The filing does not present a gross-profit figure or gross margin. Operating and net losses widened as clinical development spending increased.
Cash, liquidity, debt, and balance sheet
- Cash, cash equivalents, and short-term investments totaled $429.4 million at June 30, 2016, down from $521.4 million at December 31, 2015. Cash and cash equivalents alone were $38.4 million; short-term investments were $391.0 million.
- Operating cash use was $91.6 million in the first half; investing cash use was $72.1 million, mainly net investment purchases; financing cash use was $0.9 million. Cash and cash equivalents decreased by $164.6 million.
- Total assets were $558.1 million and total liabilities were $340.8 million. Working capital was approximately $308.5 million, based on current assets of $439.5 million and current liabilities of $131.0 million.
- Debt carrying value was approximately $102.2 million, including $17.3 million of mortgage debt classified as current and $84.9 million of long-term debt. The mortgage has an 8.23% fixed rate and a balloon payment due in April 2017; Lexicon said it intends to refinance. The $87.5 million principal amount of 5.25% convertible notes matures in December 2021. Their reported fair value was $159.8 million at June 30, 2016.
- Management stated that available cash and investments and expected collaboration receipts would fund operations for at least the next 12 months.
Material changes and business developments
- First-half revenue rose to $32.6 million from $2.2 million, chiefly from Sanofi agreement revenue. The $300 million Sanofi upfront payment is being recognized across allocated deliverables: $126.8 million was recognized for the license in 2015, with amounts allocated to development services and funding recognized over expected performance through 2020.
- R&D expense more than doubled year over year for the first half, mainly due to higher external clinical research and development costs, which reached $70.1 million.
- G&A expense increased 40% for the first half, primarily reflecting higher professional fees, including commercialization preparation for telotristat etiprate.
- Telotristat etiprate had positive top-line results in two Phase 3 trials; Lexicon had submitted a U.S. marketing application and was preparing for a possible U.S. launch. Ipsen had submitted an EU application. Sotagliflozin was in Phase 3 development for type 1 diabetes, with Phase 3 type 2 development being prepared with Sanofi.
- The company reported an accumulated deficit of $1.2 billion. First-half Symphony Icon purchase-liability revaluation expense was $1.4 million.
Outlook, risks, and contingencies
- No specific revenue, earnings, or cash-burn guidance was provided. Lexicon expects substantial ongoing R&D and commercialization spending and said additional financing may be needed if operating cash is insufficient after the stated 12-month period.
- Under the Sanofi agreement, Lexicon is eligible for up to $430 million in development and regulatory milestones and up to $990 million in sales milestones, plus tiered royalties; these amounts are contingent and are not recognized until earned. Lexicon also agreed to fund up to $100 million of type 2 diabetes development costs over three years and remains responsible for type 1 diabetes clinical development. It has an option to co-promote U.S. type 1 diabetes sales, which would require funding 40% of related commercialization costs.
- Lexicon’s Ipsen agreement covers telotristat etiprate commercialization outside the U.S. and Japan. Further milestone and royalty receipts depend on regulatory, commercial, and sales outcomes. Payments received under this arrangement can trigger contingent payments to former Symphony Icon stockholders; the related liability was $24.3 million at June 30, 2016.
- A January 2016 agreement to sell the Texas facilities for $21.2 million was terminated by the purchaser in March. The property remained classified as held and used; Lexicon said it would explore alternatives, potentially including another sale with a leaseback.
- Lexicon disclosed potential repayment exposure under a Texas job-creation award: maximum aggregate exposure was approximately $14.2 million if no qualifying jobs were created, including $6.4 million through 2016, before applicable credits.
- Key risks include clinical and regulatory failure or delay, commercial acceptance and reimbursement, dependence on collaborators and third-party manufacturers, financing needs and indebtedness, intellectual-property disputes, and possible dilution. The company reported no legal proceedings it believed would have a material adverse effect.
Important facts for investors to verify
- Regulatory review and launch timing for telotristat etiprate in the U.S. and EU, and associated launch costs and demand.
- Clinical progress, development spending, and cost-sharing obligations for sotagliflozin under the Sanofi collaboration.
- Cash burn relative to the $429.4 million liquid-resource balance and management’s 12-month funding assessment.
- Plans and financing terms for the April 2017 mortgage balloon, and progress on the Texas facilities strategy.
- Potential Symphony Icon contingent payments and exposure under the Texas job-creation award.