Lexicon Pharmaceuticals, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context
Lexicon is a biopharmaceutical company commercializing XERMELO in the United States and developing drug candidates including sotagliflozin (Zynquista), LX9211 and LX2761. Ipsen commercializes XERMELO outside the United States and Japan. Sanofi held rights to develop and commercialize sotagliflozin outside Japan, but its purported termination of that collaboration became a central dispute after quarter-end.
Financial highlights
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $9.7 | $13.8 | $18.9 | $39.2 |
| Net product revenue | $8.7 | $7.3 | $15.4 | $12.8 |
| Collaborative agreement revenue | $0.9 | $6.4 | $3.3 | $26.2 |
| Operating expenses | $28.2 | $44.1 | $54.9 | $107.2 |
| Operating loss | $18.5 | $30.3 | $36.0 | $68.0 |
| Net loss | $23.0 | $34.5 | $44.8 | $76.4 |
| Net loss per share | $0.22 | $0.33 | $0.42 | $0.72 |
| Cash used in operating activities | — | $52.5 | $99.3 |
- At June 30, cash and cash equivalents were $11.1 million and short-term investments were $94.9 million, totaling approximately $106.0 million. Total current assets were $122.5 million and current liabilities were $22.5 million.
- Reported debt, net of deferred issuance costs, was approximately $245.1 million, including $1.1 million current and $244.0 million long-term. Debt includes 5.25% convertible notes due 2021, a 9% BioPharma term loan due 2022, and a mortgage with a $10.3 million balloon payment due August 2020.
- Accumulated deficit was $1.5 billion. The filing does not provide a clear gross-margin percentage.
Changes versus the prior comparable period
- Q2 revenue declined 30%; first-half revenue declined 52%. Higher XERMELO product revenue—up 19% in Q2 and 21% for the first half—was outweighed by lower collaboration revenue, primarily because the prior-year periods included Sanofi-related clinical trial activity.
- Operating expenses fell 36% in Q2 and 49% in the first half. Research and development expense declined 52% and 67%, respectively, principally because of lower external clinical development costs, including sotagliflozin costs.
- Net loss narrowed to $23.0 million in Q2 and $44.8 million for the first half. Cash used in operations also declined year over year, though the company still used $52.5 million in the first half.
- Cash and investments declined from $160.1 million at December 31, 2018 to $106.0 million at June 30, 2019.
Outlook, risks and unusual items
- Management said available cash and investments, together with expected collaboration and other receipts, should fund operations for at least the next 12 months. It cautioned that additional financing may be needed thereafter and may not be available on acceptable terms.
- On July 25, 2019, Sanofi gave notice purporting to terminate the sotagliflozin collaboration after results from two Phase 3 type 2 diabetes studies. Lexicon disputed Sanofi’s right to terminate, asserted that contractual process and data-access requirements had not been followed, and referred the dispute for executive-level negotiations. The parties’ disagreement creates material uncertainty about sotagliflozin development, commercialization, and future collaboration revenue.
- Zynquista received European Union approval in April 2019 for a defined group of adults with type 1 diabetes. The U.S. FDA had issued a complete response letter for the U.S. type 1 diabetes application. Lexicon expects to make $4.5 million in royalty payments in three annual installments following the EU approval and specified marketing conditions.
- A purported securities class action alleges misleading statements concerning sotagliflozin type 1 diabetes trial data and FDA approval prospects; damages sought are unspecified. No loss estimate is provided in the filing.
- Other key risks include continued losses, substantial debt and covenant requirements, reliance on collaborators and third parties, product commercialization and reimbursement risks, and the need for additional capital. A prior material weakness related to clinical-trial expense accrual controls was addressed with processes and controls implemented during the first half; management reported disclosure controls were effective.
- No specific financial forecast or revenue guidance is provided. Management expects continued substantial investment in commercialization and development activities.
Important facts for investors to verify
- Current status and resolution of the Sanofi termination dispute, including effects on sotagliflozin rights, trial funding, and potential future milestone or royalty revenue.
- Whether cash burn, XERMELO sales growth, and collaboration receipts support management’s stated minimum 12-month liquidity outlook.
- Debt repayment and covenant terms, particularly the August 2020 mortgage balloon and the secured BioPharma term loan.
- Regulatory and commercial progress for Zynquista and the status of the U.S. type 1 diabetes application, alongside development progress for other pipeline candidates.
- Developments in the securities class action and any potential financial exposure, which the filing does not quantify.