Lexicon Pharmaceuticals, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; financial statements are unaudited. Lexicon is a biopharmaceutical company developing and commercializing treatments for human disease. It received U.S. FDA approval for XERMELO in February 2017 and began U.S. sales in March. Key programs also include sotagliflozin, developed with Sanofi, and LX2761 and LX9211.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $18.3 million | $12.5 million |
| Operating expenses | $60.8 million | $46.4 million |
| Loss from operations | $42.5 million | $33.9 million |
| Net loss | $34.9 million | $34.9 million |
| Net loss per share | $0.33 | $0.34 |
| Net cash used in operating activities | $85.5 million | $43.7 million |
- Revenue rose 46%. Collaborative revenue increased 41% to $17.6 million, primarily from Sanofi; new XERMELO product revenue was $0.7 million.
- R&D expense increased 18% to $43.6 million, mainly reflecting higher external clinical development costs for sotagliflozin. Selling, general and administrative expense rose 77% to $14.9 million, largely due to XERMELO commercialization staffing and related costs.
- Net loss was approximately unchanged despite a larger operating loss, primarily because Q1 2017 included an $8.7 million deferred income tax benefit. The benefit resulted from reclassifying XERMELO intangible assets from indefinite-lived to finite-lived.
- Cost of sales was $0.2 million. Lexicon reported initial product sales but did not provide a meaningful overall gross-margin measure for its mixed product and collaboration revenue.
Balance sheet, cash flow and liquidity
- At March 31, cash and cash equivalents were $2.5 million and short-term investments were $257.3 million, totaling $259.7 million, down from $346.5 million at December 31, 2016. Current assets were $279.1 million and current liabilities were $137.1 million.
- Operating cash use was $85.5 million, including significant cash outflow from decreases in operating liabilities and deferred revenue. Investing activities provided $42.5 million, primarily from net maturities of investments; financing activities used $1.1 million.
- Long-term debt, net of issuance costs, was $101.0 million in total: $15.8 million current and $85.3 million noncurrent. The debt includes $87.5 million principal of 5.25% convertible notes due 2021 and a mortgage. The mortgage’s $15.8 million balloon balance was due in April 2017; in April 2017, its maturity was extended to April 2018 with payment and interest terms unchanged.
- Management said available cash, investments and expected receipts were sufficient to fund operations for at least the next 12 months. It cautioned that further financing may be needed if operating cash generation is inadequate and may not be available on acceptable terms.
Material changes, outlook and notable items
- XERMELO’s U.S. launch is a material shift from Lexicon’s prior reliance on collaborations and licenses. Future product revenue depends on market acceptance, reimbursement, and the effectiveness of commercialization and distribution.
- Sanofi is conducting Phase 3 development of sotagliflozin for type 2 diabetes; Lexicon continues Phase 3 trials for type 1 diabetes. Lexicon reported positive top-line primary endpoint data from two pivotal type 1 trials and was conducting a third pivotal trial.
- Lexicon recognized $17.0 million of Sanofi collaboration revenue in Q1 2017, versus $12.0 million a year earlier. Future milestone and royalty receipts are uncertain and are generally recognized only when earned.
- Following XERMELO approval, Lexicon settled its remaining Symphony Icon obligation of approximately $21.0 million, paying about half in cash and issuing 659,905 common shares for the remainder. The associated liability was eliminated.
- The company adopted new stock-compensation accounting guidance in January 2017; the filing reports a $2.0 million cumulative adjustment to accumulated deficit for its election to recognize forfeitures as they occur. It also implemented material changes to internal controls for recording product revenue, cost of sales and inventory after the launch.
- Principal risks include continued losses and cash burn, dependence on XERMELO’s commercial success, clinical and regulatory uncertainty, reliance on collaborators and third-party manufacturers/distributors, reimbursement risk, and substantial indebtedness. Lexicon reported an accumulated deficit of $1.3 billion.
Most important facts for investors to verify
- Whether XERMELO sales, reimbursement access and market adoption can grow sufficiently to offset commercialization costs.
- Cash burn and the composition and liquidity of the investment portfolio, especially given the sharp decline in total cash and investments during the quarter.
- Progress and outcomes of Lexicon’s type 1 diabetes trials and Sanofi’s type 2 diabetes development, including milestone timing and any partner decisions.
- Debt terms and repayment capacity, including the April 2017 mortgage extension and potential dilution or cash obligations associated with convertible notes.
- Potential effects of clinical, regulatory, supply, distribution and collaboration risks; the filing does not provide a specific revenue or profitability forecast.