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Shares of Lexicon Pharmaceuticals (NASDAQ: LXRX) extended gains by a whopping 15.71% higher on Monday following news that its phase II treatment for irritable bowel syndrome, known as LX1033, received fast track designation from the FDA.

The fact that LX1033 received fast track designation is very exciting for LXRX investors who are currently waiting on phase III results for Lexicon's furthest developed drug, telotristat etiprate (LX1032).

Telotristat etiprate is a carcinoid syndrome treatment that provided very good phase II data in October 2012, and is expected to present its phase III results in early 2014. This drug has also received fast track designation, and is an orphan drug. Carcinoid syndrome itself is caused by roughly 1 in 20 patients with carcinoid tumors (which includes tumors of the small intestine, appendix, colon, and bronchial tubes). This is one of the rarer forms of cancer, although it is not all that dangerous relative to other forms. Carcinoid syndrome is generally not dangerous either, with most cases resulting in diarrhea, although the FDA clearly believes that the unmet need is significant enough to warrant fast track designation.

After its recent rally, Lexicon has reached a hefty valuation of $1.13 billion. Investors now seem to think that telotristat etiprate is a virtual guaranteed approval (which could come sooner due to fast track status) although it's worth noting that Lexicon has had a real lack of momentum in recent trading.
Although the market has been very fond of orphan drugs in recent months, the actual market potential for telotristat is surely raising some concern, and shifting focus on the company's other projects. Consider that only a few thousand cancer patients are diagnosed with carcinoid tumors every year, which yields only a few hundred patients with carcinoid syndrome that would be viable for telotristat etiprate treatment.

This rarity is a result of the nature of carcinoid tumors, which generally don't produce unnaturally high levels of hormones. Although orphan drugs have monopolies that last seven years in the United States (according to PDUFA legislature), telotristat etiprate and its target population are just not large enough to drive a $1.13 billion pharmaceutical company.

Lexicon has five other drugs in its pipeline, including the IBS drug that was mentioned earlier (LX1033). The furthest developed one other than telotristat etiprate is the diabetes drug LX4211, which inhibits sodium-dependent glucose transporter 1 (or SGLT1) and SGLT2. Investors cheered the phase IIb results that were revealed for this drug back in June 2012 and brought the stock to a new 52-week high of $3.28/share, which shows that there is some faith that the drug stands a chance in the ultra-competitive realm of diabetes treatments. Without partnership with a larger pharmaceutical company, Lexicon runs the risk of having an enormous marketing budget that could backfire with weak sales for LX4211 after its likely approval in the distant future.

Bearish interest in Lexicon has been subsiding in recent months as the company continues to make progress with telotristat and its other pipeline candidates, although this could be a reaction to the generally strong developmental updates that the company has been providing throughout the second half of 2012. It's probably not so advantageous to read into this trend at this time.

Going forward, I think that LXRX investors should be far more concerned about the diabetes drug LX4211, which is targeting a much larger market and has real potential to justify the company's current market valuation. The diabetes drug moving into phase III trials this year after success with phase IIb results in 2012. LX1033, its IBS drug, has also proven to be a very important part of the company's valuation given that the news of its fast track status seemed to turn the stock around from a downtrend.

I think that LXRX can move substantially higher given strong phase III results for its diabetes drug LX4211, especially if the company can justify its claims of competitiveness against other SGLT inhibitors. This won't be for quite some time, so investors that are willing to extend LX4211 some faith in their late-stage trials should consider buying the stock on dips. This would be ideal if telotristat manages to make a big blunder of some sort, since I don't think the drug has much market potential anyway.

Source: Investors Wait On Developments For Lexicon Pharmaceuticals