Lexicon Pharmaceuticals Returning To Its Pre-Revenue Biotech Days (NASDAQ:LXRX)

Nothing about the Lexicon Pharmaceuticals (LXRX) story has been easy or conventional, and that includes the company’s somewhat surprising decision to sell off its sole commercial product, Xermelo, and effectively return itself to a pre-revenue stage with a single asset in the clinic (LX9211 for pain).

The decision to monetize Xermelo makes some sense, though there are some curious aspects to the deal, and I can’t say it dramatically increases the risk profile. That said, Lexicon’s funding situation is still less than ideal, and the company’s decision to put all of its near-term eggs in the pain basket is a risky one, given the industry’s experience with pain as a therapeutic target. While there’s some speculative appeal here again, everything rides on the clinical success of LX9211 at this point.

Farewell To Xermelo

Lexicon’s first approved drug, and the only one it has commercialized, Xermelo has had a frustrating and disappointing history. Due in part to an unpredictable efficacy profile (it works well for some, but not much at all for others) and a worse-than-expected reimbursement environment with fewer patients able to pay for their medication, Lexicon has never been able to generate close to the once-expected level of revenue from the drug. Moreover, it’s not just an issue with Lexicon and/or its sales execution; its European marketing partner Ipsen (OTCPK:IPSEY) hasn’t done much better.

Along with the second quarter earnings release, Lexicon management announced that it had reached an agreement to sell Xermelo to TerSera for up to $224M and future royalties. Lexicon will receive $159M upfront upon deal close and will be entitled to up to $65M in clinical milestones tied to the development of Xermelo as a treatment for biliary tract cancer, as well as mid-teens royalties.

Relative to my prior estimates of peak sales of Xermelo (and discounting back at a double-digit rate), the upfront cash Lexicon is getting is within 5% of my estimate of the value of the drug in carcinoid-related diarrhea. Likewise, the milestones and royalties for the biliary tract cancer indication are within 5% of my estimate of fair value on a risk-adjusted basis. The curious “but” is a lack of any royalties for any future neuroendocrine indications for the drug. Management had discussed putting the drug into studies for indications like neuroendocrine tumors, and there were some encouraging signs of efficacy, but under this agreement, it appears Lexicon is getting no stake in that future opportunity. That’s unfortunate for shareholders, as that could amount to something meaningful down the line.

Focused On LX9211

With Xermelo leaving and the sotagliflozin studies terminated, Lexicon is putting most of its near-term focus on LX9211 in pain. An inhibitor of adaptor-associated kinase 1 (AAK1), LX9211 works independently of the opioid pathway and could be a significant first-in-class non-opioid option for treating pain.

Lexicon has started patient screening for its Phase II RELIEF-DPN-1 study in diabetic neuropathic pain and should have results late in 2021. This study will enroll about 300 patients, and management estimates a cost of around $10 million. Management also intends to begin another Phase II study in the fourth quarter for herpetic neuralgia, and that study will likely be a little smaller (and cost correspondingly less).

Looking just at the diabetic neuropathy indication, this could be meaningful if Lexicon can demonstrate the requisite clinical efficacy and safety. The incidence numbers are all over the place, as there is a huge variance in diagnostic criteria, but the lowest number I’ve seen is an annual incidence of 2% in a prospective study done in the U.K., and the number could range as high as 10% to 12% of diabetics – not all of those people will have pain all the time, and not all will be severe, but it does at least establish some sense of scale relative to the 34M or so Americans believed to have diabetes (about 20% of which are currently undiagnosed).

Pricing is likewise difficult to estimate as there are so many generic options (with varying degrees of efficacy and safety). Looking at the low end of what Pfizer (PFE) was able to charge for Lyrica, it’s plausible to me that Lexicon could charge something in the neighborhood of $5,000 if the efficacy is there.

The “but” here, of course, revolves around the clinical odds. Pain is a therapeutic class littered with the bodies of failed compounds, and I will be using a more conservative set of assumptions regarding approval/commercialization until there are clinical data in hand.

The Outlook

Beyond LX9211 Lexicon’s cupboard is not bare. Management mentioned another drug similar to LX9211 that was IND-ready, as well as pre-clinical candidates in areas like fibrosis/NASH and metabolic disease. I expect we could hear more on those later. Management also indicated that they intend to “re-engage” with the FDA on a possible path forward for sotagliflozin in Type 1 diabetes in the U.S., but I believe the company’s options, and odds of success, are quite limited here.

Lexicon will be using the proceeds from the sale of Xermelo largely to repay a $150 million loan that was due in 2022. That leaves the company with a $88 million outstanding convertible maturing in December of 2021 that management lists at a current fair value of about $45 million. Lexicon ended the quarter with just under $202 million in cash and is still owed another $26 million from Sanofi (SNY).

With another $70 million in expected R&D expenses in 2020 and $20 million in cash SG&A, Lexicon will go into 2021 with enough cash to see if there’s something to LX9211, but I would expect further rounds of financing to fund ongoing clinical and R&D efforts.

On just the basis of LX9211 in diabetic neuropathy and herpetic neuralgia, it’s possible to support a fair value of around $2.50, and that’s with low assumed odds of clinical success (around 20%). While that is lower than the typical odds of success for a Phase II program, pain drug candidates have a worse-than-normal track record, so I believe it is fair to adjust the odds lower.

The Bottom Line

If Lexicon can demonstrate efficacy for LX9211, there’s definitely upside from here, as there are many sub-types of pain that still lack adequate safe treatments. Still, investors need to be aware of the above-average clinical risk that goes with pain drug candidates, as well as other risks like the need for future (likely dilutive) funding. Whether today’s discount to my estimated fair value is sufficient is up to readers to decide, but it doesn’t strike me as an exceptionally compelling opportunity yet.

Disclosure: I am/we are long LXRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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