Business context and reporting period
Lexicon Pharmaceuticals, Inc. is a biopharmaceutical company focused on developing and commercializing treatments for human disease. This unaudited Form 10-Q covers the three months ended March 31, 2018, with comparisons to the first quarter of 2017. Its commercial product is XERMELO; its lead partnered candidate is sotagliflozin, developed with Sanofi.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenue | $25.2 million | $18.3 million |
| Net product revenue | $5.5 million | $0.7 million |
| Collaboration revenue | $19.7 million | $17.6 million |
| Research and development expense | $47.8 million | $43.6 million |
| Selling, general and administrative expense | $14.9 million | $14.9 million |
| Operating loss | $38.0 million | $42.5 million |
| Net loss | $42.1 million | $34.9 million |
| Net loss per share | $0.40 | $0.33 |
| Operating cash used | $46.8 million | $85.5 million |
| Cash, cash equivalents and short-term investments | $262.3 million at March 31, 2018 | $310.8 million at December 31, 2017 |
At March 31, current assets were $273.2 million and current liabilities were $100.4 million. Total debt carrying value was approximately $245.4 million, including a $13.5 million mortgage balance classified as current and due in a balloon payment in October 2018. The mortgage bears 8.23% interest; the BioPharma term loan bears 9% interest. Stockholders’ equity was $26.2 million, and accumulated deficit was $1.4 billion. Cost of sales was $0.5 million; the filing does not report a separately stated gross margin.
Material changes versus the prior comparable period
- Revenue rose 38%, primarily reflecting higher XERMELO sales and increased Sanofi collaboration revenue, which management attributed mainly to the timing of clinical-trial activities.
- R&D expense increased 10%, largely from external clinical development costs for sotagliflozin and professional and consulting fees.
- Net loss widened despite a smaller operating loss: Q1 2017 included an $8.7 million income-tax benefit, while Q1 2018 had no tax benefit. Q1 2017 also included $2.1 million of expense from an increase in the fair value of the Symphony Icon liability; that liability had been settled in 2017.
- Interest expense increased $3.5 million year over year to $5.1 million, primarily due to the BioPharma term loan funded in December 2017.
- Cash, cash equivalents and investments declined $48.5 million from year-end. Operating cash use was lower year over year; financing cash use included $1.0 million of share repurchases and $0.6 million of debt repayments.
Outlook, commentary and risks
Management expects substantial ongoing spending on XERMELO commercialization, sotagliflozin regulatory and commercial preparation, and clinical development of XERMELO, LX2761 and LX9211. The company stated that available unrestricted cash and investments, together with expected collaboration and other receipts, should fund operations for at least 12 months. It may need additional financing thereafter if operating cash is insufficient; financing may be unavailable or dilutive.
Sanofi had submitted applications for approval of sotagliflozin for type 1 diabetes in the United States and European Union, while conducting Phase 3 development in type 2 diabetes. Lexicon reported positive top-line results from three Phase 3 type 1 diabetes trials. Future milestone and royalty revenue remains contingent on development, regulatory and commercial outcomes. Lexicon also expects to share up to $100 million of planned type 2 diabetes development costs over the first three years of its Sanofi collaboration and fund 40% of specified U.S. type 1 diabetes co-promotion costs.
The October 2018 mortgage balloon payment is a near-term liquidity item; management said it intends to refinance before maturity. Other key risks include XERMELO market acceptance and reimbursement, clinical and regulatory uncertainty, dependence on Sanofi and Ipsen, reliance on third-party manufacturing and distribution, substantial debt and loan covenants, and the company’s continuing losses. The filing reports no legal proceedings believed to have a material adverse effect.
Lexicon adopted the new revenue recognition standard on January 1, 2018. Adoption produced a $14.2 million cumulative-effect adjustment to accumulated deficit and reduced deferred revenue by the same amount, relating to TIGM; it did not change product revenue timing or amounts. The company said it had not completed its accounting for all tax effects of the 2017 Tax Act. Management reported disclosure controls were effective and noted material changes to revenue-recognition processes and related internal controls from the standard’s adoption.
Important facts for investors to verify
- Progress and outcomes of sotagliflozin regulatory reviews and type 2 diabetes trials, and any resulting milestones, costs or collaboration revenue.
- XERMELO sales growth, payer coverage, reimbursement, and commercial performance in the United States and through Ipsen abroad.
- Cash burn and the adequacy of liquidity, including the refinancing or repayment of the October 2018 mortgage balloon and compliance with BioPharma loan covenants.
- Whether collaboration payments, milestones and royalties materialize as anticipated; revenue is concentrated in a small number of products and partners.
- Potential dilution or financing needs if cash generated from operations and collaborations does not meet future capital requirements.