Lexicon Pharmaceuticals, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Lexicon is a biopharmaceutical company that launched XERMELO in the U.S. in 2017 and is developing sotagliflozin and other drug candidates. Unless otherwise noted, amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $12.1 | $20.1 | $30.3 | $32.6 |
| Net product revenue | $3.9 | — | $4.6 | — |
| Collaborative agreement revenue | $8.1 | $20.0 | $25.7 | $32.5 |
| Research and development expense | $26.9 | $48.2 | $70.5 | $85.2 |
| Selling, general and administrative expense | $18.5 | $8.4 | $33.3 | $16.8 |
| Net loss | $35.1 | $38.1 | $70.0 | $73.0 |
| Net loss per share | $0.33 | $0.37 | $0.67 | $0.70 |
- Six-month operating cash use was $117.7, versus $91.6 in 2016. Investing activities provided $99.2, principally from investment maturities; financing activities provided $2.6. Cash and cash equivalents declined to $30.7 from $46.6 at year-end.
- At June 30, cash, cash equivalents and short-term investments totaled $231.2, down from $346.5 at December 31, 2016. Current assets were $247.2 and current liabilities $133.2.
- Debt included $87.5 principal of 5.25% convertible notes due 2021 and a $15.2 mortgage balance. The mortgage was extended to April 2018; its full balance was classified as current because of the balloon payment.
- Accumulated deficit was $1.32 billion. The filing does not provide a company-wide profit margin; the company remained loss-making.
Material changes and unusual items
- Revenue fell 40% year over year in Q2 and 7% for the first half. Management attributed lower collaboration revenue primarily to the timing of Sanofi clinical-trial activities. XERMELO sales began in March and contributed $3.9 in Q2.
- Six-month R&D expense declined 17%, mainly due to lower external clinical-development costs for sotagliflozin. SG&A nearly doubled as Lexicon expanded sales and marketing and incurred commercialization-related costs for XERMELO.
- The $8.7 first-half income tax benefit was a deferred, noncash benefit resulting from reclassifying XERMELO-related intangible assets after FDA approval. It reduced the reported net loss but was not operating revenue.
- FDA approval triggered a $21.0 Symphony Icon buyout obligation, settled in March with $10.5 cash and $10.5 in stock. The liability was eliminated; its revaluation generated $2.1 of first-half expense.
- Cost of sales was $0.8 for the first half, including $0.6 of XERMELO intangible amortization. Lexicon said previously expensed pre-approval inventory costs would result in lower average unit costs for approximately two years.
Outlook, programs and risks
- Management believes available unrestricted cash and investments, together with expected product and collaboration receipts, will fund operations for at least 12 months. It expects substantial spending on XERMELO commercialization, sotagliflozin development and other candidates; further financing may be needed, and may not be available on acceptable terms.
- XERMELO was approved for carcinoid syndrome diarrhea in adults inadequately controlled by somatostatin analog therapy. Ipsen holds commercialization rights outside the U.S. and Japan and had filed for EU approval.
- Sotagliflozin was partnered with Sanofi worldwide excluding Japan. Lexicon reported positive top-line results from three Phase 3 type 1 diabetes trials; Sanofi was conducting Phase 3 development in type 2 diabetes. Lexicon remained responsible for type 1 development and expected to share up to $100 in type 2 development costs over three years. Future milestones and royalties are uncertain and are recognized only when earned.
- Key risks include XERMELO market acceptance, reimbursement and sales execution; clinical and regulatory uncertainty; reliance on Sanofi, Ipsen, contract manufacturers, a single logistics provider and two specialty pharmacies; continuing losses and financing needs; and debt obligations.
- Potential contingencies include up to approximately $14.2 of Texas Enterprise Fund repayment exposure, subject to job credits and obligations, and a maximum $3.5 of future payments under a guaranteed New Jersey office lease. Management said ordinary-course legal proceedings were not expected to materially affect the company.
Most important facts to verify
- Whether XERMELO sales, reimbursement and patient access support management’s commercialization expectations.
- Cash burn and liquidity trajectory relative to the stated 12-month funding horizon.
- Progress, costs and milestone timing for sotagliflozin under the Sanofi collaboration, including Lexicon’s development-funding commitments.
- The April 2018 mortgage balloon repayment or refinancing plan, and the potential Texas Enterprise Fund repayment exposure.
- Effects of product-return, rebate and other sales-allowance estimates on reported XERMELO revenue.