Noctiluxx
Noctiluxx
Credit where due – while the Lexicon Pharmaceuticals (NASDAQ:LXRX) investment thesis still has significant execution risk, management is not sitting by idly and is instead actively working to create shareholder value. Time will tell whether the company’s marketing strategy for Inpefa (sotagliflozin) will succeed in building meaningful share in the large congestive heart failure (or CHF) market, but the company’s persistence with sotagliflozin in other indications could well pay dividends, as could the development of LX9211 in diabetic peripheral neuropathy.
News of a new sotagliflozin indication and a path forward in diabetes definitely improve the discounted (and risk-adjusted) fair value for Lexicon shares, but this improvement is at least partly offset by the dilution of a private placement. I’d also note that while Lexicon could be a double (or better) from here, there is still significant execution, clinical, and regulatory risk, and this is still only an appropriate stock for investors willing to take on elevated risk.
Lexicon reported fourth quarter results on March 11, and those results included $0.7M in Inpefa sales. While up substantially from the third quarter ($0.2M), this revenue total was still well below the $1.2M average sell-side estimate (an estimate that was at $3.9M back in early January).
I’m not that surprised or concerned about this shortfall. As I said when Inpefa was approved and launched, I wasn’t going to put a lot of emphasis on the first few quarters of Inpefa sales, as it takes time to build a sales effort, get into formularies, get doctors up to speed, and change prescribing patterns (far too few hospitalized CHF patients leave the hospital with a prescription for a drug like Inpefa, and this is where management is concentrating its marketing efforts).
Still, this launch trajectory has to improve for Lexicon to work as a stock. I’ve estimated peak revenue in excess of $550M ($550M to $650M is my base-case peak estimate, and, yes, I know many readers think this is too low of an estimate), and Lexicon still has a lot of work to get there. Once we get to the second and third quarters of 2024 (a year-plus beyond approval), that’s when I believe sales performance relative to expectations will matter significantly more.
Along with the Q4’23 earnings report, Lexicon announced potentially significant updates for its broader sotagliflozin program, including a potential new indication (hypertrophic cardiomyopathy, or HCM) and a path forward for the drug in a subset of Type 1 diabetes.
Starting with the latter, management announced an agreement with the FDA that will allow the company to submit an NDA for sotagliflozin in Type 1 diabetes with chronic kidney disease. This has been a long, arduous road for Lexicon – sotagliflozin was originally developed for both Type 1 and Type 2 diabetes, only to see the Type 1 opportunity blockaded by the FDA on safety concerns, while the Type 2 opportunity faded when Lexicon’s former partner Sanofi (SNY) abandoned their partnership in the face of Phase III results that didn’t adequately differentiate sotagliflozin from other options (drugs from the likes of AstraZeneca (AZN), Johnson & Johnson (JNJ), and Eli Lilly (LLY)/Boehringer Ingelheim) that were already well-established in the Type 2 space.
Management didn’t really offer any new information on how or why the FDA has changed its mind, but the company had been pursuing multiple channels to get the FDA to reverse its 2019 rejection of sotagliflozin in Type 1 diabetes (or T1D) – a decision that the FDA made on the basis of what it deemed as unacceptable safety concerns. Now the company is moving forward with a more limited target indication (Type 1 diabetes with chronic kidney disease, or T1D w/ CKD), and management expects a submission around mid-year, with an estimated six-month review period.
I have always found the FDA’s position on sotagliflozin’s risks to be questionable at best. While diabetic ketoacidosis can indeed be very serious, so too are the long-term consequences of inadequately-controlled diabetes. The good news here is that T1D w/ CKD is still a meaningful market. Around a third of T1D patients have CKD and the lifetime risk of developing CKD is estimated at over 50%.
Whether or not the FDA approves the drug this time is certainly up for debate. I don’t think management would go forward without some reasonable basis for optimism, but I have also seen the FDA be surprisingly stubborn when it comes to issues like this, and I’m using a conservative 50/50 assumption of success – I believe the data support higher odds, but the FDA’s track record here argues for caution.
In addition to the path forward in diabetes, management announced that it will be starting Phase III clinical studies of sotagliflozin in hypertrophic cardiomyopathy (or HCM). HCM is one of the most common genetic heart conditions, affecting perhaps as many as 1 in 200 people (old studies suggest 1 in 500, but newer diagnostic approaches are leading to more diagnoses).
HCM causes the walls of the heart to thicken and stiffen over time, particularly the left ventricle, and this makes the heart less efficient at pumping blood. While many cases of HCM are asymptomatic, in other patients it causes symptoms similar to heart failure, including shortness of breath and chest pain, as well as fatigue and fainting, and over time can lead to heart failure.
I’ve seen no data on sotagliflozin’s efficacy in HCM, but given its demonstrated efficacy in congestive heart failure and what I know about the biological activity of SGLT-1 in the heart (readers can find a summary here), it’s at least plausible that sotagliflozin could do some good here. Moreover, given that SGLT-1 is expressed in the heart (among other tissues), while SGLT-2 is expressed largely in the kidneys, it’s plausible to me that sotagliflozin’s dual SGLT-1/SGLT-2 inhibition could lead to a differentiated efficacy profile versus competing drugs (from AstraZeneca, Johnson & Johnson, Lilly, et al.) that work primarily through the SGLT-2 inhibition route (there’s some debate as to whether these drugs are “pure” SGLT-2 inhibitors and/or have some SGLT-1 inhibitory activity). This could be a real opportunity for Lexicon. If there are 500,000 or so patients in the U.S. symptomatic enough to merit pharmaceutical intervention, that’s likely an addressable market of over $2.5B. At present, I’m aware of only one drug developed specifically for HCM (Camzyos, or mavacamten, marketed by Bristol-Myers (BMY)), and while that drug can be effective for HCM patients, it does have meaningful side effects. Not only is there at least a possibility that sotagliflozin could become a clinically-differentiated option here, then, it’s one with meaningful commercial opportunity and one that should be complementary to the company’s existing marketing efforts in CHF (suggesting less incremental marketing expense for this launch).
In conjunction with the financial and clinical news, Lexicon announced a $250M private placement of convertible preferred shares that will convert into 115.2M shares of common stock (versus around 245M currently outstanding).
Given the considerable cost of marketing Inpefa (almost $33M in reported SG&A costs in Q4 alone) and the ending balance of $170M in cash, it’s not surprising that management looked to raise funds. And relative to the closing price of the shares before these announcements, the price (likely around $2.10 net of expenses) was not unreasonable. Still, this is considerable dilution.
Reading the prospectus, it is my understanding that the conversion of these shares is largely tied to a shareholder vote to increase the authorized number of shares outstanding. With that, I’d expect the conversion to happen relatively soon – I’d expect to see the company put the share authorization up for shareholder vote with the regular annual shareholder vote. Of course, I encourage readers who’ve read the prospectus and found different information to say so in the comments.
I’m not changing my Inpefa CHF estimates at this time. While readers commonly object to my conservatism, I believe this is very much a “show me story” with respect to Lexicon’s ability to both change clinical practice (more hospital-based prescriptions) and carve out meaningful share against better-established large pharmaceutical rivals.
I am adding in estimates for both the renewed T1D opportunity and the new HCM opportunity for sotagliflozin. My T1D w/ CKD estimate is based upon 600K patients in the U.S., while I assume 500K HCM patients with symptoms severe enough to merit pharmaceutical intervention.
With 50/50 odds of FDA approval, the T1D w/ CKD opportunity is worth around $2/share even after the dilution from the private placement. I’m currently using 40% odds of success with HCM – a little better than I’d assign for a Phase II drug, but less than I’d use for a typical Phase III candidate, as I just haven’t seen any clinical data (management may well use its upcoming April investor day as an opportunity to unveil more information). As is, the HCM opportunity adds another $0.75/share or so.
All told, my fair value moves up about $2 to a little over $6. And yes, there is considerable upside to that number if Inpefa gains more share than I expect in CHF (I assume 10%), not to mention upside from regulatory and clinical success with sotagliflozin in T1D w/ CKD and HCM and LX9211 in diabetic peripheral neuropathy (Phase IIb top-line data expected in Q2’25).
There’s still a lot for Lexicon to prove – not the least of which being whether management can build Inpefa into a real success – but I like what management is doing now. Attempting to maximize the value of sotagliflozin is a clear win for shareholders, and even if these new efforts don’t work out, they are chances worth taking. All told, this remains a high-risk story critically dependent on sales execution, but it’s hard not to feel a little better about the story today.