Lexicon Pharmaceuticals, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Lexicon is a biopharmaceutical company commercializing XERMELO and developing sotagliflozin, LX2761 and LX9211. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $6.9 | $26.9 | $45.8 | $57.3 |
| Net product revenue | $6.3 | $5.8 | $19.1 | $10.4 |
| Collaborative agreement revenue | $0.4 | $21.1 | $26.5 | $46.8 |
| Operating expenses | $29.9 | $56.5 | $137.3 | $163.2 |
| Operating loss | $(23.0) | $(29.5) | $(91.4) | $(105.9) |
| Net loss | $(27.5) | $(30.7) | $(104.3) | $(100.7) |
| Basic and diluted loss per share | $(0.26) | $(0.29) | $(0.99) | $(0.96) |
- Cash flow: Operating activities used $121.5 million in the first nine months, versus $151.7 million used in 2017. Investing activities provided $110.8 million, mainly from net investment maturities; financing activities used $2.1 million. Cash and cash equivalents declined by $12.8 million during the period.
- Liquidity: Cash, cash equivalents and short-term investments totaled $187.3 million at September 30, compared with $310.8 million at year-end 2017. Current assets were $198.4 million and current liabilities $68.5 million. Management said available funds and expected collaboration and other cash receipts should fund operations for at least 12 months.
- Debt and equity: Balance-sheet debt, net of issuance costs, was about $244.9 million ($1.1 million current and $243.8 million long-term). The company reported $339.6 million total liabilities and a stockholders’ deficit of $29.4 million. Its $150 million BioPharma term-loan tranche bears 9% interest and matures in December 2022; the $87.5 million convertible notes bear 5.25% interest and mature in December 2021. A refinanced mortgage had $12.4 million principal outstanding and a $10.3 million balloon payment due August 2020.
- Margins: Cost of sales was $0.6 million for Q3 and $1.9 million for the first nine months. The filing does not present a consolidated gross-margin measure.
Material changes and notable items
- Q3 revenue fell 75% year over year, primarily reflecting collaborative revenue of $0.4 million versus $21.1 million. Management attributed the collaboration decline to the timing of clinical-trial activities under the Sanofi agreement. Nine-month revenue declined 20%.
- XERMELO product revenue grew 8% in Q3 and 83% for the first nine months year over year. R&D expense fell 65% in Q3 and 20% for the nine-month period, primarily due to lower external sotagliflozin development costs. SG&A decreased 7% and 6%, respectively.
- Despite lower operating losses, nine-month net loss increased year over year, in part because interest expense rose to $15.6 million from $4.8 million following the BioPharma term loan. The 2017 comparison also included an $8.7 million income-tax benefit that did not recur in 2018.
- Adoption of the new revenue-recognition standard resulted in a $14.2 million cumulative-effect adjustment to accumulated deficit and an equal reduction in deferred revenue at January 1, 2018. Management said adoption did not change the timing or amount of product revenue.
Business outlook, risks and contingencies
- There is no quantified revenue, earnings or cash-flow guidance in the filing. Lexicon expects continued significant R&D spending and substantial capital needs; it says profitability will require significantly higher revenue. Management expects current resources and anticipated cash receipts to cover at least the next 12 months, but warns additional financing may be needed thereafter and may not be available on acceptable terms.
- XERMELO is marketed in the U.S.; Ipsen markets it outside the U.S. and Japan. Sanofi has submitted sotagliflozin applications for type 1 diabetes in the U.S. and EU and is conducting Phase 3 type 2 diabetes development. LX2761 and LX9211 are in Phase 1 development. Approval, commercialization, market acceptance, reimbursement and collaboration milestones remain uncertain.
- The Sanofi agreement includes potential development and regulatory milestones and royalties, but milestone revenue is constrained pending uncertain events. Lexicon also funds 40% of U.S. type 1 diabetes co-promotion costs and shares certain type 2 diabetes development costs.
- Key risks include continued losses and substantial indebtedness; dependence on XERMELO and collaborators; clinical and regulatory setbacks; product pricing and reimbursement; third-party manufacturing and distribution reliance; and possible dilution or limited access to capital. The filing identifies a potential Texas Enterprise Fund repayment exposure of up to approximately $14.2 million, before applicable credits; management says its related performance obligation has been met. Routine legal proceedings were not considered likely to have a material adverse effect.
Important facts for investors to verify
- Whether XERMELO sales growth and reimbursement support sustainable commercial revenue and whether Ipsen sales translate into royalties.
- Regulatory decisions and development progress for sotagliflozin, including the timing and terms of any milestones, royalties or co-promotion obligations.
- Cash burn, investment balances, debt service and covenants, and whether additional financing will be required after the stated 12-month runway.
- How collaboration revenue varies with clinical activity and milestone recognition, and whether the $14.2 million revenue-standard transition adjustment affects comparability.
- Potential dilution from the convertible notes and equity compensation, and any exposure under the Texas Enterprise Fund arrangement.