Steady As She Goes For Lexicon Ahead Of Life-Changing Events

Summary

Investors should know in about a month or so whether Lexicon has a real shot at being a player in Type 1 diabetes with sotagliflozin.

Telotristat etiprate looks on target for a late November approval and a launch that should generate over $400 million in peak sales.

Lexicon have still has some pre-clinical assets of note, but telotristat and sotagliflozin are the value drivers now and still support a fair value above $25.

Life is going to get very interesting at Lexicon Pharmaceuticals (NASDAQ:LXRX) in the relatively near future. The company will know by the end of November whether the FDA will approve LXRX's lead drug telotristat etiprate ("telotristat"), and investors will get an initial look at top-line results of sotagliflozin in about one month.

Both of these qualify, in my opinion, as life-changing events for the company. Approval of telotristat is generally expected, and I believe the drug should generate over $400 million in peak sales, and accounts for about 60% of my estimated fair value. The remainder is tied to sotagliflozin, which has the potential to be a differentiated option for Type 1 and Type 2 diabetics and generate over $1 billion in peak sales. While I continue to believe that the telotristat opportunity is underappreciated by the Street, the reality is that strong sotagliflozin data is a "must have" for bullish sentiment on the stock at this point.

So Far, So Good For Sotagliflozin

Lexicon has seen the completion of two of three pivotal studies for sotagliflozin in Type 1 diabetes, and the first top-line data (safety and efficacy as measured by HbA1c) should be available in September. An earlier Phase II study showed a nearly 1% improvement at the highest dose with good safety and tolerability (GI side-effects are common) and a similar level of improvement will be needed for this to be a truly attractive commercial prospect.

Sanofi (NYSE:SNY) has yet to start its studies of the drug in Type 2 diabetes, but that is consistent with past expectations. Since biotech investing pretty much demands worst-case scenario thinking, I do think that Sanofi would reconsider its ongoing commitment if the Type 1 results are unexpectedly poor. At a minimum, you could be sure it'd go over those results with a fine-toothed comb to see just what happened before committing substantial additional funds to testing a drug that will be latecomer to the market (as broadly defined as SGLT-2 inhibitors, even though sofa is a dual SGLT-1/-2 inhibitor).

I continue to believe that one of the key marketable differentiating points for sotagliflozin will be its comparative safety in patients with renal impairment. Lexicon has already shown good safety and efficacy data in patients with Stage 3 and Stage 4 kidney disease, and about 30% to 40% of the diabetes market has some level of renal impairment. If Lexicon/Sanofi can get a labeling claim that its drug is safer/better in those patients, that could be an invaluable boost to its commercial prospects.

Telotristat In A Holding Pattern

Lexicon did get a Priority Review designation from the FDA for telotristat and a PDUFA date November 30. A panel meeting would be a big surprise at this point, and I think the lack of mention of such a meeting speaks well to the safety profile of the drug. Lexicon also announced that the European Medicines Agency (or EMA) has accepted partner Ipsen's (OTCPK:IPSEY) filing for telotristat for European marketing.

Management isn't saying all that much about telotristat right now that's useful. The company is building up its commercialization infrastructure ahead of anticipated approval, and although it wasn't completely clear to me whether it has already started discussions with payers, that is certainly high on management's priority list. Existing therapies for GI carcinoid syndrome can cost $50,000 or more and telotristat is meaningfully better in most (if not all) respects, so I expect a healthy premium.

And Then?

Right now, Lexicon has plenty on its plate getting telotristat through the FDA, getting insurers on board with reimbursement, and ensuring that the launch goes smoothly. Then, there is the added responsibility to manage the trial data from the pivotal Phase III studies of sotagliflozin and, hopefully, work toward filing in the United States. Other than kicking in funding, Lexicon has no direct responsibilities for the Type 2 sotagliflozin development program and Sanofi will take care of that.

Even though getting one drug on the market and getting a second to the FDA is plenty for most biotechs, "what's next" is still a fair question.

Honestly, I still think a sale of the company is a pretty likely outcome if the sotagliflozin pivotal data in Type 1 diabetes are good. Maybe Sanofi would wait to see a pivotal Type 2 readout, but I think a buyout would make a reasonable amount of sense.

If that doesn't happen, I do wonder if Lexicon will get its clinical pipeline moving again. The company has some partnerships with Bristol-Myers (NYSE:BMY) in the CNS and pain areas, but there's nothing for Lexicon to do there. The company does have some pre-clinical assets that could conceivably be moved toward human testing. The company has (or at least had) a delta-5 desaturase inhibitor program and there has been some scientific research (some published relatively recently) suggesting that desaturase inhibition can lead to positive therapeutic outcomes for obesity, diabetes, and/or atherosclerotic disease. Lexicon also has/had a pre-clinical program with L-proline transport inhibitors that could have applications to Alzheimer's.

With over $400 million in cash, Lexicon has some options. The company has the option to co-promote sotagliflozin in the U.S. for Type 1 diabetes while Sanofi has full rights to Type 2. Finishing the sotagliflozin development program and getting telotristat launched shouldn't consume all of that cash and perhaps not even most of it - whether the company goes in for co-promotion on Type 1 and needs to build a salesforce would be a key swing factor. If either the desaturase or L-proline programs have candidates reasonably close to an IND, it is possible that Lexicon could go back to being a biotech that does active drug R&D again (as opposed to just clinical development for existing compounds).

The Bottom Line

My fair value remains about $25.50, with telotristat worth about 60% of that total. There's still incremental potential upside to my sotagliflozin assumptions, but I need to see compelling clinical data first. Given that the Street is still lukewarm about the telotristat opportunity, I still see attractive upside in these shares from here.

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.