Is Lexicon Right For Your Long-Term Speculative Holdings?

With the recent takeover of Amylin (AMLN) by Bristol-Myers Squibb (BMY), companies selling or developing diabetes drugs are in the spotlight. There is an ongoing hostile takeover attempt by GlaxoSmithKline (GSK) for Human Genome Sciences, Inc. (HGSI), which may have a lot to do with the diabetes drug Albiglutide being developed jointly by the two companies (there is a discussion of Albiglutide in a Seeking Alpha article). A bidding war is possible. Human Genome Sciences has solicited other bids by July 16, 2012. It was reported late Friday July 6, 2012, by Reuters that there may be a possible bid from Celgene (CELG). Late Sunday July 8, 2012, The Street referencing an unnamed source disputed this claim. It will be interesting to see how this plays out between Reuters, a news agency and The Street, a financial media company.

New oral hypoglycemic drugs should achieve robust reductions in blood glucose levels (and HbA1c levels) and be well tolerated. Because of GlaxoSmithKline's Rosiglitazone (Avandia), the FDA may require that new diabetes drugs demonstrate cardiovascular safety in adequately powered clinical trials to detect differences in major cardiovascular events (OTCPK:MACE). Rosiglitazone use was associated with cardiovascular events and is available only under special use now. Ideally, new oral hypoglycemic drugs would also be associated with weight loss or at least weight neutral. A new class of drugs in clinical development appears to meet these criteria, the sodium-dependent glucose transporter inhibitors (see Chao, E. for a scientific review). SGLT2 is the primary glucose readsorption transporter in the kidneys, whereas SGLT1 is the primary transporter in the GI tract.

The SGLT inhibitor leading the pack is Dapagliflozin being developed by Bristol-Myers Squibb and AstraZeneca (AZN). It is a selective a SGLT2 inhibitor. On January 19, 2012, the FDA issued a complete repsonse letter which requested additional clinical data to allow a better assessment of the benefit-risk profile for Dapagliflozin. In the mean time, positive clinical data continues to roll in regarding the efficacy of Dapagliflozin. Safety data also looks acceptable, albeit there does seem to be increased incidence of urinary tract and genital infections in the Dapagliflozin groups. In Europe, the drug is closer to approval. The companies announced April 20, 2012 that the "Committee for Medicinal Products for Human Use (OTCQB:CHMP) of the European Medicines Agency (EMA) has recommended the approval of FORXIGA (Dapagliflozin) tablets for the treatment of type 2 diabetes, as an adjunct to diet and exercise, in combination with other glucose-lowering medicinal products including insulin, and as a monotherapy in Metformin intolerant patients". It is now under review by the European Commission, which could lead to the first approval of a drug in this class.

Lexicon's (LXRX) LX411 inhibits both SGLT1 and SGLT2 and is touted by Lexicon as the first dual inhibitor under development. Data from Phase 2 trials with LX411 so far demonstrates good efficacy associated with weight loss. Safety does not seem to be a significant issue. Lexicon also has another drug, Elotristat etiprate, entering phase 3 trials for metastatic carcinoid syndrome. Elotristat etiprate is also being evaluated in a Phase 2 trial in patients with ulcerative colitis.

Lexicon stock is trading higher in light of these recent developments.

Chart forLexicon Pharmaceuticals, Inc.

Chart from Yahoo Finance.

I am not confident that the odds of correctly predicting whether a drug completing phase 2 trials with favorable data will ultimately be approved are good, so I won't try. But LX411 is as promising as any drug at this stage and interest in the stock of companies developing drugs for treating the huge and growing diabetes market is high. The diabetes drug market is large and growing, both here in the US and worldwide. Biotech and pharmaceutical company investors should pay attention to the SGLT inhibitors over the coming years. The SGLT inhibitors so far demonstrate efficacy and reasonable safety and are correlated with weight loss. There is also clinical data demonstrating, at least for Dapagliflozin, that the SGLT inhibitors can be safely administered with other diabetes drugs. Coadministration with other drugs is important for treating type 2 diabetes as the disease is usually progressive.

As for immediate guidance on Lexicon, the stock has traded higher recently, but the market capitalization of $1.3 billion remains low enough for a long term speculative investment. But do keep in mind that LX411 may not be first in class to market even if it is approved by the FDA. There are other SGLT inhibitors are in development (for a list see SGLT inhibitors), notably Empagliflozin by Eli Lilly (LLY), AVE2268 by Sanofi-Aventis (SNY), and Canagliflozin by Jannsen (which is part of Johnson and Johnson (JNJ)). Lexicon has $280 million in cash and a quarterly burn rate currently of about $30 million. Catalysts for short term trading such as phase 3 clinical trial results await 2013 and beyond. For long term investing, a wait and see approach could also make sense. There may be a lower entry price or down the road a ways, data from phase 3 trials from Lexicon's two lead drugs may make the stock more attractive. If you wait for good news, the price may be higher, but the risk will be lower.

Disclosure: I am long HGSI.

Additional disclosure: I may initiate a position in CELG over the next 72 hours and may sell HGSI over the next 72 hours.