Lexicon: Expected FDA Approval And A High-Risk Commercialization Effort

The biotech sector has stabilized since a summer rally, but it is still a difficult market for smaller biotechs, and particularly those that the market is likely to need substantial further funding (which, honestly, is most of them…). That’s a challenging enough backdrop for Lexicon Pharmaceuticals (NASDAQ:LXRX) before considering challenges/issues like building a sales infrastructure to support the launch of sotagliflozin in congestive heart failure and the uncertain clinical and financial pathway for its pain drug LX9211.

My feelings on Lexicon remain mixed since I wrote in July. I do see significant commercial potential for sotagliflozin based upon the size of the market and the clinical efficacy of the drug, but the challenges of building a go-it-alone marketing infrastructure capable of maximizing the opportunity are not at all trivial. Likewise, I’m encouraged by the potential of LX9211, but there’s still a long road ahead to realizing that potential. I think a fair value estimate of $5.50/share is valid, but this remains a high-risk/high-reward sort of opportunity.

Management Once Again Showing Its Tenacity…

Fans of the movie Galaxy Quest may recall the catchphrase, “Never give up! Never surrender!”, and that’s certainly an apt description of how management has been pursuing the development of sotagliflozin – not just in heart failure, but in diabetes as well.

The most recent example is the company’s answer to the FDA’s rejection of the company’s request for a hearing in regard to the agency’s ongoing refusal to reverse its rejection of the company’s application to market sotagliflozin for Type 1 diabetes or even discuss the company’s proposed risk mitigation strategy (or REMS).

After an initial FDA rejection in March 2019 due to what the agency saw as an unfavorable risk/reward trade-off due to elevated risks of diabetic ketoacidosis (or DKA), and a subsequent FDA rejection of a company appeal in December 2019 as well as a denied appeal to CDER in 2020, the company continues to push on – recently filing a 53-page response to the FDA’s most recent rejection of a hearing in July 2022 to evaluate the DKA risk and the company’s proposed REMS.

I’ve discussed all of this in prior articles on Lexicon (you can read those here), but the gist is this – I have long thought that the FDA is overly conservative on the topic of DKA risk with SGLT-2 inhibitors in Type 1 diabetes, but the agency has a long and well-established record of significant (if not excessive) caution with respect to this issue. I applaud Lexicon’s efforts to force the FDA to reconsider the issue (and the company’s REMS), but I don’t expect it to lead to the FDA reversing its position. At best, I expect the FDA to insist on a clinical trial to validate Lexicon’s proposed REMS, and the cost of that trial would likely be a non-starter.

…But The Line Between Tenacious And Stubborn Can Be Blurry

I applaud Lexicon management for not giving up on the Type 1 diabetes indication for sotagliflozin, and I likewise applaud them for not simply throwing in the towel when Sanofi (SNY) abandoned its partnership and returned the drug to the company. Instead, the company has pushed on in its attempt to get the drug on the market for the sizable congestive heart failure opportunity (possibly worth over $20B/year).

Where I still have my doubts is in the company’s go-it-alone marketing strategy. Sotagliflozin is not yet approved for sale for congestive heart failure, but the company’s application should be answered in May 2023 (or before), and based upon the data from the SOLOIST and SCORED studies, I do expect FDA approval.

At that point, the challenges really begin. Drugs don’t sell themselves and investors sometimes have an overly optimistic view of how doctors really operate – data matters, and cardiologists don’t simply go along with whatever drug company sales reps say, but it’s optimistic at best to think that a majority of cardiologists will dive deep into the data to determine the best option for their patients.

The data from the sotagliflozin studies have been impressive next to the data from studies on AstraZeneca‘s (AZN) Farxiga (dapagliflozin), Boehringer Ingelheim/Lilly‘s (LLY) Jardiance (empagliflozin), and Johnson & Johnson (JNJ) Invokana (canagliflozin). Trials of sotagliflozin have shown advantages in both overall hazard ratio (the risk of subsequent hospitalization, heart attack, stroke, et al.) and in the onset of action – sotagliflozin shows a benefit on hospital readmission at 30 days (and 90 days) while empagliflozin doesn’t show statistical separation until 90 days.

Still, Jardiance has been on the market for heart failure with reduced ejection fraction (or HFrEF) since 2021 and for heart failure with preserved ejection fraction (or HFpEF) since February 2022, while Farxiga has been approved for HFrEF since 2020 and Invokana since 2021. Strong data can disrupt established players, but it takes time and resources, and Lexicon’s <$140M in cash will only be enough to get the ball rolling. It is an open question to me whether the company will be able to generate enough revenue quickly enough to fund the necessary build-out of the sales/marketing effort without significant dilutive capital-raising events.

I can question the wisdom of Lexicon’s go-it-alone strategy, but the truth of the matter is that I don’t know what the company’s options have been. Management used to talk about “inquiries” and “conversations” with potential partners before announcing their intentions to launch the drug themselves.

There’s no way for me to know if those conversations ever went beyond a casual “kicking the tires” level, and/or whether Lexicon was ever presented with a credible offer – I would hope that the company would have accepted a deal with some upfront payments and tiered royalties.

What I can say, though, is that the company’s commercialization of Xermelo was not particularly successful; the company blamed higher-than-expected reliance on company-funded patient assistance programs, but the reality is that the drug didn’t live up to its potential. The issues that led to Xermelo’s underperformance are different than the issues and challenges that the company faces in marketing sotagliflozin, but the fact remains that this isn’t a company with a strong track record of successfully marketing its own drugs.

Waiting For More Insight On LX9211

Investors should soon have another data point on the company’s prospective pain drug LX9211. Management previously said they’d have top-line Phase II data from the post-herpetic neuralgia (or PHN) indication before year-end, and as we’re about a third of the way into December, the data could come out any day now.

The results from the Phase II study in diabetic peripheral neuropathic pain (or DPNP) were equivocal. The low-dose study arm showed a statistically significant 1.4pt reduction in the Average Daily Pain Scale, while the high-dose arm showed a similar reduction (1.3 points), but just missed statistical significance (a p-value of 0.030 versus the 0.028 cut-off). Subsequent presentations have further underlined good safety/tolerability, relatively quick efficacy, and a reduction in the use of other painkillers.

Still, “just missed” is still a miss, and the placebo-adjusted reductions of 0.67 points (low-dose) and 0.55 points (high-dose) were lower than the results seen in pivotal studies of Lyrica and Cymbalta. A difference in the use of background painkillers complicates the comparisons, but the reality is that, as of now, LX9211 is a borderline candidate and a stronger set of results in the PHN study would certainly help.

Management has been talking about moving LX9211 into Phase III studies based upon successful Phase II results, but time will tell. If the PHN Phase II study is similarly equivocal, it may make more sense to do a second set of Phase IIb studies, particularly if the company hopes to attract a meaningful commercial partner.

The Outlook

My fundamental valuation drivers for Lexicon haven’t changed. While there have been some additional data releases on sotagliflozin and other SGLT-2 drugs (technically sotagliflozin is a dual SGLT-1/2 inhibitor), I wouldn’t call these thesis-changing updates. I do think the clinical data package for sotagliflozin is strong, and you can argue that the drug is superior to its rivals (I say “can” because cross-trial comparisons are inherently problematic), but the quality of the data for sotagliflozin has never been my primary concern or issue.

The biggest issue here in terms of valuation for Lexicon is the amount of money that the company will need to spend (and/or can afford to spend) to market the drug and what sort of market share the company will achieve. I’ve reduced my fair value estimate from a little over $7 to $5.50 solely on the assumption of more dilutive funding to support the commercialization of sotagliflozin.

I continue to believe that a market share around 10% is a reasonable assumption; the quality of the drug argues for more, but I think the commercialization challenges are meaningful. I do also see higher value potential for LX9211 if the next clinical update(s) are strongly positive.

The Bottom Line

I continue to believe that Lexicon shares should trade closer to $5.50/share on the basis of the value of sotagliflozin and LX9211, but the Street clearly disagrees. It’s absolutely fair to debate the market share that sotagliflozin can attain, the cost of the marketing effort, and the amount of dilution that the company will experience, and changing those drivers can lead to significant swings in the fair value.

At a minimum, I still consider this a high-risk high-reward candidate, and one where the Street very much seems content to wait for potential drivers like sotagliflozin approval (and the label the FDA allows) and initial commercialization before reconsidering the name.